Investing Book Review: The Art of Short Selling

January 6, 2009 | Comments (5)

The Art of Short Selling, by Kathryn Staley, is by no means about short selling. If I had to sum it up in a few words, I would say the book is focused on hardcore fundamental analysis. It points all readers in the direction of discovering and analysing fundamental problems with a company. The book clearly states that one should never short a good company with temporary issues or just because a company seems overpriced.

There is no mention of technical analysis, trends or volume. The true method of short selling described is based on an extremely detailed fundamental analysis, which is why I immediately purchased the book. The book describes everything that enterprising investors should do.


The Art of Short Selling Description

The Art of Short Selling

The Art of Short Selling

The Art of Short Selling – What Can You Learn?

The Art of Short Selling, by Kathryn Staley, is by no means about short selling. If I had to sum it up in a few words, I would say the book is focused on hardcore fundamental analysis. It points all readers in the direction of discovering and analysing fundamental problems with a company. The book clearly states that one should never short a good company with temporary issues or just because a company seems overpriced.

There is no mention of technical analysis, trends or volume. The true method of short selling described is based on an extremely detailed fundamental analysis, which is why I immediately purchased the book. The book describes everything that enterprising investors should do.

I watched a video of Kathryn Staley talk about short selling and what it involved and was blown away by how little I was doing in comparison. Did you know that she shorted the same company on and off for ten years! Now that’s confidence, conviction and an understanding of the company. Something that everyone, especially me, can benefit from.

The Art of Short Selling does not teach you how to short stocks. What it does try to show is what to look for in the industry, business, management and financial statements to detect a company that is on the verge of a fundamental breakdown.

Make Up of the Book

The book immediately starts off by stating that fundamental short sellers look for quality of earnings, quality of assets and quality of management. As fundamental long buyers, we probably don’t go beyond 1 or 2 of these.

The first part of the book describes the aspect of short selling, what it is, how opportunities exist, statistics and profiles of great short sellers such as Jim Chanos.

Part Two is made up of 7 chapters. It takes the reader through many examples and situations of which industries and businesses are attractive for short sellers. This whole section is one case study after another which helps the reader to understand what to look for and how the concepts were applied.

As I was reading chapter 9, I couldn’t help but be spooked of the similarities between what happened to American Continental in 1988 and the warning signs from that era and the current economy. The danger signs were clear for anyone to see. If I had read this book 1 year earlier, I certainly would have done things differently.

The final part of the book is dedicated to the characteristics a short seller must have, a brief history lesson on previous market controversies such as the South Sea Bubble and a checklist and guide for fundamental short selling such as where to look, the bare requirements for what you must read, how to determine quality, which ratios will help to detect financial shenanigans and a list of questions you need to ask yourself as you go through the proxies and statements.

As you can see, this is some serious analysis and why I now view true fundamental short sellers as such a scary bunch.

Opinion

I found the The Art of Short Selling to be very helpful in my learning process but this book certainly isn’t for the beginner investor. If you have a desire to learn how to detect errors in the financial statements and find evidence in supporting documents, this is for you.

Whether you have a interest in short selling or not, this book will give you an idea of how much work is needed for any thorough investment as well as the conviction and patience required.

[tags]short selling, book review, investing[/tags]

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  • http://www.contrarianvalueinvesting.com/ Alexg

    Considering you can make 100% on a short and lose infinity is it even wize to short?

    Alexg’s last blog post..Magic Formula Stocks On The Move 1-04-09

  • http://www.oldschoolvalue.com Jae Jun

    Thats the accepted principle and shorting is truly dangerous for those that short purely based on valuation or technicals but considering that the ratio of bad companies to good companies is greater, there would be more opportunity right? A company falls so much quicker than it goes up.

    AeroGrow would have been a great short if I had known about it earlier, but I went long and lost more.

  • http://compoundinglife.com KC

    As he mentioned I think the value is probably more in the analysis this book goes into rather than just the idea of shorting stocks. If you can find what makes stocks attractive to short sellers you may find more information that could eliminate a stock as a possible long position and hence a long term loss. But yeah shorting is risky I agree. When the market is like this with so many values I don’t really know why a value oriented person would short. However when things start to bubble up and you start running out of investment ideas then it might be worth looking into.

    KC’s last blog post..PSD: Dividend announced

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