By Tim Knight
Whenever someone argues against short-selling, they often bring up two very scary words: Infinite Risk. In other words, the most you could lose on a long position is 100%. But there is no mathematical limit to short losses. You could short a stock at $10 and it opens the next day at – – what – – let’s say $500,000. Shriek, right?
Well, yeah, but that doesn’t happen. I think the most horrendous wipeout I ever suffered was a 50% gap up, and since my positions are typically 1% of my portfolio, it wasn’t devastating. If someone is going to argue against short selling, I think a far better and more realistic argument is not that losses are unlimited but that profits are limited.
In other words, the most you can possibly make on a short is 100% and, let’s face it, stocks never go to zero. Hell, I think even Lehman Brothers is still trading in some form to this day. A gain or 20% or 30% – – maybe 50% once in a blue moon – – is a terrific success.
However, the profits on long positions are unlimited. Making more than 100% – – be it 500%, 1000%, 5000%, or even 100,000% – – is absolutely possible, and it’s been done by people all over the world. The main ingredient is timing and patience.
I’ve used SlopeCharts to create some percentage charts below, to illustrate some long-term winners as Intel……
……..Amazon (and, yes, that is reading about 100,000%)………
……..and Home Depot. These are the stocks on which life-changing fortunes have been made, even by regular folks.
I will say one thing, however. Gains like these take many years, if not decades. Yet when a bear market does come – – and, hard as it is to believe, yes, they really do come – – the move down is dramatically faster than the move up. The exact same example we gave above, Intel, lost over 80% of its value in merely two years. Same company. Same stock. But a very different outcome if your entry or exit aren’t right.
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