Page 247 - THE MARKET WHISPERER

THE MARKET WHISPERER 24 3

did not withstand the test of integrity. Perhaps not; but it definitely does
hold up to the test of the market and the law. Markets are not socialist by
nature. The market is not intended to assist anyone, and no shorter gives
consideration to the best interests of the public, only to his or her own
interests. We can think about that situation in the following way: I borrow
David’s shares and sell them. David has an interest in his shares going up
in value, but by selling his shares, I increase the supply and cause a drop
in stock price. Not only does David have no idea he is helping me, but by
selling his shares, I cause him damage. Pure capitalism.

Does that sound dreadful? The truth is that compared to other services
we have become accustomed to accommodating, shorting is not so
horrible. For example, you know, of course, that when you deposit money
in the bank, it is used as the basis of loans for other people. It is the Capital
Adequacy Law that makes it legal for banks to lend nine dollars for every
dollar you deposited! Shorts are child’s play by comparison to the regular
banking system.

When I execute a short on Checkpoint, I sell 100 shares for $35,
receiving $3500 for them. Actually this is not my money, and the value of
the shares is counted against me to ensure that I return David’s 100 shares
as soon as possible. Remember that by selling 100 of his shares, I owe him
those shares in return. There is only one way to exit a short, whether that
incurs profit or loss: at some point, I must buy 100 shares and return them
to David.

To my great joy, I discover I was right and that Checkpoint has
plummeted to $33, as I had anticipated. At this point, I decide to exit the
trade and realize the profit. How is that done? I buy 100 shares at [2]. Since
the price is now $33, the cost of my purchase is $3300. The 100 shares
I bought are now returned to David’s account, and the trade comes full
circle. I now owe David nothing.

Examining the process, I bought at $3300 and sold at $3500, therefore
am left with a profit of $200.

The difference between a short and a long is the order by which the
process is conducted. With a short, we start by selling and end by buying.
We sell for a high price, and try to buy for a low price. This is known as sell
high, buy low.

What could have happened if my prediction turned out to be a failure,
and the stock price rose to $37 instead of dropping to $33? Under such
circumstances, I would be forced to buy 100 shares for $3700. Since I sold