Posted 12/18/2007

BUYING SHORTS IN WINTER'S COLD BLASTS

It was blowing ice pellets into my face as I walked down Park Avenue that December morning. As the light changed and the herd of pedestrians came to a halt in front of me, I heard the strangest conversation. It went something like this:

"I don't like the look of things, right now."

"Yeah, me neither. What are ya gonna do about it?"

"Things are freezing. I think I'm gonna go out and buy me some shorts."

The light changed and off they went. I spent much of the day wondering what that guy was talking about. Nobody buys shorts in 33-degree weather. And if it was Wall Street slang, the guy would have to be selling short, not buying short.

What was he talking about?

Later I learned he was making investing sense.

The average investor makes money when the market is going up and loses money when the market is going down. (Nobody knows how to make money when the market is going sideways).

In an up market, three out of every four stocks go up. Making money grow is easy. But when the market is going down, three out of four stocks are sinking. Making your money grow is virtually impossible.

Now it may be very possible for the average investor to make money both when the market is rising and falling.

There's a new investment vehicle on the block, the electronic traded fund -- or ETF, for short. It's like a mutual fund, except more flexible. You can buy and sell an ETF like a stock. And there are no up-front loads.

You could buy ETFs representing whole countries like Brazil or India or Singapore. Or you could buy ETFs representing categories like oil or mining or banking.

But now you can buy ETFs that short the market. These make money for you when the market goes down.

For example, you can buy UltraShort Dow30 ProShares or DXD, which moves up as the Dow Jones averages move down. The UltraShort MidCap400 ProShares, or MZZ, moves up as the mid-cap stocks move down. The UltraShort QQQ ProShares, or QID, moves up as the NASDAQ 100 moves down. The UltraShort S&P500 ProShares, or SDS, moves up as the S&P moves down.

Those are four kinds of shorts you can buy when you feel the market is headed down.

So the guy on the street was right.

Buying shorts when the market goes cold can warm up your portfolio.

But remember, timing is everything.

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