Short Sellers Are Not Your Enemy
There’s been recent talk about Short Selling, and as amusing as it might be, it’s shameful and embarrassing to see a CEO have such an odd take on it.
Of course, this isn’t the first time a high-profile CEO has lashed out in this way against the amorphous cabal that seeks to “destroy value” of stockholders. However, it’s probably the most comical instance of someone finding reason to displace blame upon and attribute executive difficulties to Financial Evil Doers.
What intrigues me the most is that Mr. Karp’s company is at all-time highs. Like, dude!!!??? WTF are you REALLY complaining about?
Let’s break down a few things that bear mentioning.
The rules that involve short selling are MUCH MORE restrictive than for someone who wants to go long. It’s naive to be of the opinion that short sellers are evil market manipulators, and that people who buy long aren’t. The cards are stacked against short sellers from the get-go, and the pool of market participants who are trying to manipulate the market for gain are HEAVILY weighed toward the long-side. Uptick Rules, Locate Requirements, Borrowing Costs… All of this makes short selling a MUCH MORE risky endeavor than for someone who wants to put their money on the long side. If someone wants to go short on a stock and jump through all those hoops and legally establish a short equity position, then why should we have a problem with that regardless of whether we’re bullish or bearish?
At it’s core, price movement is based on Supply and Demand. Too many sellers? Price goes down. Not enough buyers? Price goes down. There is a valid argument that shares sold short create artificial supply. But ultimately, any security that can make a strong bullish case for itself does so regardless of how such a trade would affect Short Interest. Long positions aren’t invalidated because the other side sold it short, and if the stock goes up, then that position would still be profitable for the buyer. Short Sellers don’t drive a price down. They only stuff rallies/bounces and absorb buy-side demand.
The way I see it, the American Dream manifests itself best in the way our financial markets operate and what they allow. The ability for someone, anyone, to achieve their financial goals regardless of any physical traits or social status is one of MANY things that make this country great. And having the ability to take a bullish or bearish stance is a key component of the freedom we enjoy as investors.
And with all of that said, I can only vaguely remember the last time I went short on a stock. IIRC, it was back in 2016 when I shorted like 50 shares of EBAY. I can’t even remember if I made a profit or not.
There’s a reason why I seldom go short, and it has nothing to do with the negative take some billionaire has regarding it. First, I’m not a fan of unlimited risk. Going short on an equity or on a Call option opens that door and I generally don’t look at such positions as having attractive Risk/Reward profiles. Second, the amount of buying power that gets tied up for a short trade is WAY too restrictive. Tack on the cost to carry such a position and things look even worse. Third, there are much better surrogates when I look for bearish trade opportunities, namely Put options. Puts offer a much better Risk/Reward profile, since you can limit your risk exposure and also get better leverage for the buying power that’s required to establish such a position.
But you’ll never hear me whine (except, perhaps, in jest) about Short Sellers or Market Manipulators or blah blah blah. What a waste of frickin time! There’s no boogeyman on the other side of my trade. It’s just me, The Market, and the decisions I make.
Caveat Emptor, Caveat Venditor