Invest Significantly at the Maximum Point of Pessimism 189However, there is one distinction between value and growth that
can lead to opportunity. Companies perceived as “growth” stocks
are often assigned higher valuation multiples by Mr. Market. If the
“growth” of such a company slows down, the valuation multiples
will likely decline as well. This action could lead the growth stock
to become a value stock. The opportunity to the value investor is
that if the business can earn greater profi ts in the future, growth
chasers will buy it again leading to a higher multiple and higher
share price.Myth: Value Investors Don ’ t Short Stocks
Similarly, many value investors shun shorting stocks. Going short a
stock is essentially the process of buying low and selling high, but
in reverse. (Being long means owning a stock; being short means
selling a stock one does not own.) Instead of fi rst buying the stock,
an investor will go short, or sell the stock fi rst. This is done by
borrowing the shares from the broker. The goal is that the stock
price will decline and the investor is able to buy back the shares
at a cheaper price; the shares are then returned to the brokerage
fi rm, with the investor keeping the difference. When going short a
position, an investor is betting that the share price will depreciate
in value, not appreciate in value. The strongest argument against
shorting is an economic one. When you go short, your upside
returns are limited to 100 percent because a stock can only go to
zero. If you go short a $ 20 stock and the price hits zero, you ’ ve
made a 100 percent return on your money. If you go short a $ 100
stock, it ’ s the same return if the shares approach zero. However,
your downside is unlimited because, theoretically, a stock can
go up in price infi nitely. That same stock that was shorted at $ 20
can go up to $ 30, $ 40, $ 60, and on and on. At $ 60, the loss is 200
percent. The basic reason against shorting is that it ’ s a bet made
with a capped upside but unlimited downside. In more technicalCH009.indd 189CH009.indd 189 9/2/09 11:49:58 AM9/2/09 11:49:58 AM