When Short-Selling Is Done Right

when short selling is done right

Authored by Doug Kass via Seabreeze Partners,

Short selling is risky

Most individual investors would be better off to avoid short selling

The academic evidence on the effects of short selling on our capital markets is overwhelmingly positive

Short selling improves the efficiency of security prices, increases liquidity, and positively impacts corporate governance 

*  *  *

“We don’t like trading agony for money” 

Charlie Munger (in his response to my question when I was the “credential bear” at the 2013 Berkshire Annual Meeting)

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Short selling is a risky investment strategy where the investor profits if the stock price drops.

Let’s start with the reasons why most retail investors should not sell short as an offensive (and non arbitrage) strategy:

1. The gravitational pull of stocks is higher over time.  On average, equities return about six to seven percent per year. So, bull markets are a far more frequent condition than bear markets.

2. The reward v. risk in short sales is asymmetric. One can only make 100% on a short, but, in theory, the upside is infinite. (For example, GameStop rose from $20/share to $480/share. Compare that percentage rise to the percentage decline opportunity if GME had gone bankrupt!)


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