Making money in a falling market

It seems almost impossible to make money in the current equity markets; constantly in the red and few signs of positivity. However money can be made by recognising these weaknesses and shorting the stock. Below are some key points I have picked up from some recent reading.

So what needs to be considered before shorting a stock?

When trading stocks, you need to go in full force or don’t bother going in at all; don’t dabble.


Shorting is great as it can reduce portfolio risk by including inverse positions.

When looking to short a stock, look for:

● High Price Earning ratios
● Low to no earnings and a flawed business plan
● Look for companies with low product depth, ie – one major product (croc shoes)
● Ask to speak to top customers
● Look for low barriers to entry
● Just plain bad products
● A company diversifying away from the fundamentals
● Lots of management changes, and changes in auditing procedures
● High receivables
●Revenue and earning deceleration
● High inventories

Also, look for a catalyst. A major one is a company with slowing revenue growth which have kept their earnings looking good by cutting expenses.

Stock, even if fundamentally flawed, should not be shorted unless it has started showing signs of weakness.

When looking at earnings reports, make sure to focus on GAAP rather than Pro Forma earnings. This is VERY IMPORTANT! GAAP (Generally Accepted Accounting Principles) are the guidelines that all companies must adhere to, whereas Pro Forma earnings can leave out valuable information such as depreciation, goodwill, amortization, interests and taxes and one time expenses.