With Europe on the ropes and the U.S. economy in shambles, it's important to remember that there are two sides to every trade.
Tapping into upward momentum alone is not the only way to profit. Markets can and do head south on a regular basis. Investors who fail to grasp this are leaving a lot of money on the table.
How much?
Nobody knows for sure. But stories about famous traders like George Soros who broke The Bank of England and reportedly scored a cool $1 billion profit abound.
People also speak in awe of John Paulson who made billions off the housing crisis and about Doug Kass of Seabreeze Partners who is about as gutsy as they come when it comes to making hay when the sun doesn't shine.
If you've never heard the term before - and many investors still haven't - shorting stocks involves selling stocks before you buy them and profiting as they drop.
Why would you do that?
Shorting overvalued stocks can lead to profits when others are crying in their beer. It's a way to keep you fully invested or otherwise in the game, especially when the markets are as unsettled as they are right now.
But you have to be careful. Despite the fact that shorting stocks can be a quick path to riches, not all stocks are the same when it comes to betting against them.
In that sense, short selling (at least the way I encourage investors to practice it) is no different than regular upside investing.
You want to diversify your holdings and use very strict risk management to control your exposure by not having more than 2.5% of your assets in any one position or 20% of your holdings in any given sector.
You want to short stocks in conjunction with the rest of your holdings, not in lieu of maintaining a properly concentrated portfolio. Despite what you may think, shorting stocks is not a game for market-timers or an exercise in timing.
As for how you select your target, that's not really different either.
For example, you don't ever want to bet against a stock just because it's expensive or even overvalued. Instead, you want to find a compelling reason for failure or a lower valuation.
I laid out seven of them last March when I suggested that Apple (Nasdaq: AAPL) may be the short of a lifetime rather than the next best thing since sliced bread.
At the time, I reasoned that:
Apple rose a bit further to a peak of $644, then fell 17.68% over the following few weeks to $530.12. It's still down today at $576. And yes, I think it will fall further in case you're wondering.
Other negative attributes I look for include insider selling and problematic accounting. Both can be hard to spot in a timely fashion but that doesn't mean you shouldn't look.
Armed with a good dose of skepticism, you can find companies that are likely to fall apart in pretty much any market anywhere in the world if you look hard enough.
Take action on strong up days when the believers are pushing the stock for all it's worth - every stock has them. Some brands like Apple (Nasdaq: AAPL), Harley Davidson (NYSE: HOG) and Facebook (Nasdaq: FB) , for example, are particularly well defended by brand loyalists.
That's why you've got to have a thick skin when you are shorting stocks because you're essentially betting against the success so many people hope for.
Your friends will accuse you of being un-American or a vulture - mine certainly have over the years. Worse, any butthead with an Internet connection can take a potshot at you in today's socially driven media age.
Stick to your guns. They'll get over it when they figure out how much money they could have made and how they can get in on the action.
Here are four industries I believe are ripe for the picking at the moment:
Those are mine. Let me know what you're shorting and why.
And remember, there is opportunity in every market. You don't have to be long to earn a profit.
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About the Author
Keith is a seasoned market analyst and professional trader with more than 37 years of global experience. He is one of very few experts to correctly see both the dot.bomb crisis and the ongoing financial crisis coming ahead of time - and one of even fewer to help millions of investors around the world successfully navigate them both. Forbes hailed him as a "Market Visionary." He is a regular on FOX Business News and Yahoo! Finance, and his observations have been featured in Bloomberg, The Wall Street Journal, WIRED, and MarketWatch. Keith previously led The Money Map Report, Money Map's flagship newsletter, as Chief Investment Strategist, from 20007 to 2020. Keith holds a BS in management and finance from Skidmore College and an MS in international finance (with a focus on Japanese business science) from Chaminade University. He regularly travels the world in search of investment opportunities others don't yet see or understand.