"Phil McDonnell, Vic's student at UC Berkeley, writes:

I try to be long biased if possible but have no religious convictions which prevent the opposite. The biases against the short side in stocks are very strong:

1. The long term bias of 10%/yr in the stock market is tough to overcome. Not only does a short have to overcome this big bias but any round trip vig and taxes. Remember it is always a round trip because there is no such thing as a short and hold strategy because the long term bias will eat that one alive.

2. Shorts have to pay dividends on their borrowed stock. This should not be ignored in any short strategy back testing but can be safely ignored if looking for longs because it is always additive to long strategies.

3. Studies of the distributions of stock returns show that many stocks will have returns of more than 100% in a year. Returns of 500% aren't unheard of in a good year. For shorts these translate to losses of 5 times your money, or 10x for a 50% margin account. By contrast there is no such thing as a short sale profit of more than 100%.

4. Recent studies which include the period 2000-2002 may introduce a bias toward the short side which are unsustainable when one considers the long term upward bias. Studies which include this period to support shorting strategies are fundamentally suspect.

Despite the above, if one still wishes to use a short strategy I would recommend using options or futures instead of stocks. Theory and most empirical evidence says that options and futures are fairly priced zero sum game less vig. Thus selling a call, buying a put or selling a future avoids the long term upward bias problem. As always these vehicles are no magic bullet. You still need an edge and the best way to gain an edge is through counting."