For those of you who don't sell stocks short very often, the term describes the practice of investing in things which you expect to go down. Investors have the opportunity to profit from an expected decline in a stock's price, by borrowing the shares from someone else, selling them in the marketplace, buying them back later at a lower price and returning the shares to the original owner. I won't bore you with the details, but trust me, it's possible. In fact, Charles Schwab and others make it easy.
I have personally never sold a stock short, and never recommend to anyone that they do so. It's waaay too dangerous. A stock can only go down to zero, but it can go up to infinity, and not always for a good reason. Since the stock market mostly goes up, the trade-off between risk and reward selling short leans to risk. Quite a bit else can go wrong. Why any sober, intelligent investor would enter into such a transaction, let alone do so professionally, I can't guess.
But I appreciate the presence of professional short-sellers in the marketplace. They bring balance to the Force. 75% of all stock recommendations from Wall Street firms are to buy, and most of the rest are to hold. What’s wrong with a few sell recommendations from the pros? And what about stock fraud? Without short-sellers, Nikola, a company which produces great mock-ups of electric trucks, but which has yet to produce a real truck or earn a penny of revenue, would still have a valuation of $15 billion, roughly equivalent to Subaru and slightly lower than Nissan. Without short-sellers, Valiant Pharmaceuticals and a long list of others would still be in business.
These companies all meet (or met) my general criteria for stock frauds, and they were all exposed by short-sellers, who diligently dug into the numbers and found carefully concealed dirty laundry. I don’t know any short-sellers personally, but they strike me as steely-eyed realists who enjoy exposing fraud and don’t mind taking a little heat for their contrary opinions. If anything, especially now, we need more of them.
Until last week, I had never heard of WallStreetBets. After hearing about it, though, I had to check it out. Talk about democratizing Wall Street. The site has 8 million subscribers, all chatting happily with one another, cheering on the mob, and denigrating investment professionals, with big servings of paranoia thrown in:
“Jim Cramer openly admitting to the immoral ‘tricks’ he and other short sellers use to manipulate stock prices.”
“Oh God! If there is such thing as ‘justice’, please do justice to the malicious short-selling evil forces, the Axes of Evil and the common enemy of the individual investors of good will.”
and,
“I despise evil short sellers!”
The comments continue in an endless list, with many rallying exhortations to hold strong on GameStop, or stick it to Wall Street re AMC: another example of the crazy influence of social media in our lives, with this one likely to end badly.
Browsing through the entries, it seems to me that these people are looking for some sort of togetherness in the stock market, a feeling of belonging. It’s the single worst place on the planet to look for that. They also have something of a battle mentality: us vs. them, similar to what we already observe in politics.
They’re going to get crushed. You can’t find a colder, more inhospitable place for togetherness than Wall Street. Wall Street concerns itself with numbers, and dollars, and, especially, with numbers of dollars. Over the short term, it often gets pushed out of balance by herds, and here we have an especially vivid example. Over the long term, it is a stone cold machine for calculating value, and those who subscribe to herd mentality will lose their shirts, a fate which I fear for the WallStreetBets crowd. (They need an investment advisor like me.)
Coldly calculating value is a super useful service. In fact, it’s the whole point of a market. How else do we determine value? Short-sellers are part of this ecosystem, and good ones.
GameStop stock has just experienced an epic short squeeze (a special hazard for short sellers which I forgot to mention), but I will not buy my next game console there, and neither will you. I thank the short sellers for pointing this out to me.
Yours,
Donald
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