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Investor’s View Magazine
Some Invest with Success through Short Selling
Not everyone loses money in bear markets. Some investors have found ways to thrive in this bear market. One such person is Michael Swanson, a hedge fund manager and newsletter writer whose subscribers know him as TraderMike. “I started my newsletter back in 1999 and recommended Internet and technology stocks during the last year of the bubble. I personally made a small fortune with Internet stocks, but got out of them in March of 2000 near the top. Tech insiders were selling their shares like mad before it all ended. When I saw William Shatner dump his Priceline stock I knew it was over,” Swanson said.
Swanson began shorting stocks after the Nasdaq bubble burst. Using valuation, technical analysis, and a careful combing of SEC filings has enabled him to ride some stocks down to zero. “Two of my best trades were in Creative Host Services and Genesisintermedia.com. Both of them, “ he said, “went from being over $15 to $0.”
Bloomberg covered his research into Creative Host Services while Genesintermedia.Com ended up getting haulted by the SEC. According to Swanson, “there was such a crazy cast of characters involved with Genesisintermedia.com it was like out of a movie. You had total crooks and boiler rooms involved.” Adani Kashoggi a famous international arms dealer who was involved in the Iran-Contra scandal was the company’s biggest shareholder at the time.
Many more of Swanson’s short selling picks have been mentioned in the press, including Restoration Hardware, which was the focus of several articles on TheStreet.Com, which mentioned his research. “I had a subscriber go into Restoration Hardware’s stores and find them devoid of customers. That and the fact that its biggest shareholder was a hedge fund that had a short position in the company’s stock told me something funny was going on,” he said.
After 2003 though Swanson stopped short selling stocks and moved into commodities. He still thinks commodities are in a bull market, but beginning in October of 2007 he began to get involved in short selling again. Call it the return of the bear.
The past few months have been very profitable for short-sellers. One of the best performing mutual funds is David Tice’s Prudent Bear fund. Tice claims that “the days of buy-and-hold are over. It’s been an 18-year, uninterrupted secular bull market. And when that ends, you get a secular bear market.” Tice sees losses on the horizon for Internet, telecom equipment makers, and financial stocks. Auto, stocks, contract manufacturers…the list goes on.
While most analysts are skeptical, bear fund pros argue that you can use their funds to hedge your portfolio against a downturn. Market timers who believe Wall Street is heading into bearish times can also use the funds to ride the wave. Or, you could use the funds in a bull market to protect big gains.
Despite the market volatility, Charles Tennes, senior vice president of Rydex Funds, says that the asset size being invested by these funds hasn’t grown. “We’re not exactly sure why,” he says, “but one possibility is although people are discouraged by the performance in the market recently, there may not be a lot of fear. It may be, despite the slide, that there’s still a large degree of optimism in the market.”
Swanson thinks bear funds like Tice will thrive over the next year. “We had a huge rally in stocks and it was a fun ride, but the market has spent this whole past year making a key cyclial top. If the DOW decisively breaks down then bears are going to have a field day. It will be 2000 all over again and stocks could fall for another 2 years. You don’t have to short to make money. There are strategies anyone can use to make money, but if you don't know what you are doing and buy and hold some crap stock you heard about on TV you'll get wiped out. I'm ready for a stock market downturn,” he says.
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