As the calendar turns and we enter 2010, I think I will end up being nearly "long-only."  The "easy money" that was made shorting stocks in 2008 and early 2009 may be over, other than for specific company situations.

One of the main reasons I felt strongly that the stock market could really rip in 2009 is the fact that everyone was so excited about shorting stocks earlier this year.Seeing the vast number of people bragging about shorting stocks on twitter almost paid for my lost productivity on twitter itself. Academically, a good portfolio manager with the freedom to be both short and long stocks has an advantage over long-only managers.  Despite some failures, I’ve held my own shorting stocks, with such past successes as CROX, NOK, and even NFLX.  Recently my "double pair" smartphone trade includes two shorts which are working out quite well.

However, I really hate shorting stocks. Here’s why:

1. Statistically, the stock market goes up a lot more often than it goes down, 2008 notwithstanding. By shorting a stock, I’m really swimming upstream.

2. The entire Wall Street manipulation machine is against the shorts. Anytime a the buggy whip manufacturing company stock starts to fall, the CEO gets booked for a conference and touts “amazing trends in the horse-drawn carriage industry.” (I’m not talking about NFLX here, as far as you know)

3. When I’m right about shorts, my position gets smaller. This is a big deal. When my BKS (Barnes & Noble) short started working by dropping 20%, my position size got smaller. This is like compounding in reverse. Your best position gets smaller. When you are long a stock that works, when it goes up, it becomes a bigger percentage of your portfolio and contributes even more to performance. You are “playing with the house’s money.”

4. Good shorts are usually crowded. It’s almost impossible to “find a borrow” on all the good shorts. Even if you can borrow shares to short, borrowing costs are sky-high.

5. Short Squeezes. Any whiff of success, and a heavily shorted stock can pop 10-20% in a day as the market punishes the shorts and hedge funds lose conviction.When I’m long stocks, they can drop, but because of long-term holders they usually don’t plummet as quickly in one day.

6. Crooks are hard to unseat. The CEOs of various bank stocks (such as LEH, MS, etc…) vowed to punish the shorts, and even got their friends in government to publish a no-short list last year. Corrupt management takes years to unseat - remember, Madoff was on a list to be SEC chairman.

7. The furthest the stock can drop is zero. So when I short a $15 stock, the most I can make is $15 per share. If I'm long a $15 stock, it can easily double to $30 and go on to over $100.