Lang vs. short: Getting rich only works with one strategy

Dear fool,

you may have already asked yourself: Should I invest long or short? Fortunately, we now have a stock market environment that is accessible to all, so we can take advantage of a wide range of options. Whether to take them all is, of course, another question.

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But let’s look at these two options today. Investing for a long time means, as you know, that you buy a share and profit from its increases in value. Whereas short investment is short selling and betting that prices will fall. The return is achieved by ideally varying the time of sale and purchase and enjoying a cheaper purchase.

But getting rich really only works with one strategy. This is due to the basic return expectations behind these two alternatives.

Lang vs. card: Getting rich only works here!

Of course, it does not matter where the return comes from. In the stock market, it is legitimate to be short. Like going long on a stock. The crux of the matter, however, is that the return expectation differs significantly.

Just by considering how to interact on the long side, there is a huge upside potential. willing to share Amazon , which despite the current correction has shown a performance of 31,200% since 1998, emphasizes that the return potential is not limited. No matter when you would have bought: You could only have lost 100% of your bet.

When a stock goes short, the risk-reward ratio suddenly reverses. Specifically, this means that a stock can only provide 100% return on a total loss. If it rises 31,200% just like Amazon (which no one would probably ever sit out), it would again be the negative performance.

If you think further, it means that you can get a maximum of 100% return by shorting (minus some costs) before you have to see new potential for a divestment in another share. On the other hand, long-term investment is associated with a classic buy-and-hold approach, a possible return over years and decades, and a more favorable risk-return ratio in general.

Thinking ahead

Long or short is therefore not a matter of faith. No, rather, the risk-reward ratio indicates a good and a less good alternative. As I said, it actually does not matter where the return comes from. Still, shorting a stock means taking unlimited risk for a maximum of 100% performance.

So getting rich only works on the long side. But if we think about it, a big mistake that destroys more than you have invested is only possible when you invest short. It does not have to be a counter-argument. However, this emphasizes that even when it comes to timing and approach, you really need to know what you are doing and what you are getting into. Although tempting in a volatile market environment, the risk / return ratio is not exactly favorable.

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Vincent owns none of the aforementioned shares. John Mackey, CEO of Amazon’s subsidiary Whole Foods Market, is a member of The Motley Fools’ board of directors. The Motley Fool owns shares in and recommends Amazon.

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