3 ms·

I manage money for a living and I always get fascinated with frauds and "bullshit businesses" for shorting. This whole flap is so funny to me because about a y

by bedhead 11y ago

I manage money for a living and I always get fascinated with frauds and "bullshit businesses" for shorting. This whole flap is so funny to me because about a year ago after reading a few things about Theranos and hearing a few anecdotes from people in the lab business, I thought to myself, "Man, I wish this company was public so I could short it." There were just so many of these little red flags. Anyway, in these situations the response from the company often gives the best indication of how genuinely dire things are. In my experience, Theranos' response has been really, really worrisome. The hasty Cramer appearance (Mad Money??? Uhhh, this isn't a public company). The lawyered-up non-denials and general evasiveness. The editing of the website. The world's most expensive attorneys. The threats to the now-deceased co-founder (realize this was not a response to the WSJ, but still). The reluctant bending to FDA requests. If this company was public it would be my largest short.

saryant 11y ago
This is why I think shorts provide a valuable service to the economy. They have an incentive to snuff out fraud and deception in publicly traded companies and act as a bulwark against that sort of behavior. Sadly we don't have an equivalent for privately traded firms.
- Maarten88 11y ago
  Why is it not enough when all private investors just loose their money if it turns out this company is worth much less that they hoped and payed for? What would it add when a short-seller makes a profit on the loss of the investors who took on the risk trying to create a business. Who would pay the shortseller's profit? In general, I think all derivatives should be taxed the equivalent of casino tax, because that's what it is: betting in a zero-sum game for society. Of couse we know that betting provides very good predictive information, but that does not seem like a good reason to treat financial betting different from other form of gambling.
  - saryant 11y ago
    The profit for shorts provides an incentive to correct the market regarding overvalued or fraudulently valued companies. That's a good thing.
  - troydavis 11y ago
    To your question of "Who would pay the shortseller's profit?": in most cases, shorting a stock isn't causing more cumulative loss[1]. There's no additional "payment" or transferred gain. Shorting lets the market incorporate the collective doubt earlier than it could otherwise, but it's the same "payment" (share price change). One could make a strong argument that shorting prevents some shareholders from taking a much bigger loss. Some shareholders would have purchased in this hypothetical run-up that short sales would soften. When "it turns out this company is worth much less that they hoped and payed for," those shareholders would lose more because the difference between what they paid and what it's worth would be larger. That's particularly true for the quintessential long-term retail investor who fundamentally believes in the company. That person is likely going to own it until the company's product is proven or disproven, and the fluctuations in between aren't going to affect them (other than as above, if they bought at an inflated price). Shorting also creates an incentive for skepticism. One could argue that, if Theranos' technology doesn't work, making it harder and more expensive (dilutive) for them to raise money is a service to society. [1]: an arguable exception is shorting solely to make other investors lose confidence (rather than due to a negative view of the company). However (a) that's not the case here, (b) often it's actually the undiscovered seed of a real issue (someone has to be first..), and (c) shorting enough of a stock to meaningfully depress it is much, much tougher to do than it sounds, since the short investor will need to purchase/repay shares at some point, the possible exposure when they do is unbounded, and they'll need capital to cover their unrealized loss in the interim. This is not a trade anyone takes lightly.
rwmj 11y ago
Insider trading would be even more useful (assuming that the trades are all visible). Once you see the insiders selling up ...
- intopieces 11y ago
  Are/were insider trading laws ever effective? It seems like they create an incentive for secrecy.
rajacombinator 11y ago
There's a pretty good chance Goldman has sold when-traded OTC contracts on a lot of these hyped up private companies, in effect making themselves short the stock. Hence the WSJ article. Actually when you think of it this way and realize they have probably fleeced a lot of dumb third world money, the whole Theranos board setup makes more sense.

by bedhead 11y ago

saryant 11y ago

This is why I think shorts provide a valuable service to the economy. They have an incentive to snuff out fraud and deception in publicly traded companies and act as a bulwark against that sort of behavior. Sadly we don't have an equivalent for privately traded firms.

Maarten88 11y ago
Why is it not enough when all private investors just loose their money if it turns out this company is worth much less that they hoped and payed for? What would it add when a short-seller makes a profit on the loss of the investors who took on the risk trying to create a business. Who would pay the shortseller's profit? In general, I think all derivatives should be taxed the equivalent of casino tax, because that's what it is: betting in a zero-sum game for society. Of couse we know that betting provides very good predictive information, but that does not seem like a good reason to treat financial betting different from other form of gambling.
- saryant 11y ago
  The profit for shorts provides an incentive to correct the market regarding overvalued or fraudulently valued companies. That's a good thing.
- troydavis 11y ago
  To your question of "Who would pay the shortseller's profit?": in most cases, shorting a stock isn't causing more cumulative loss[1]. There's no additional "payment" or transferred gain. Shorting lets the market incorporate the collective doubt earlier than it could otherwise, but it's the same "payment" (share price change). One could make a strong argument that shorting prevents some shareholders from taking a much bigger loss. Some shareholders would have purchased in this hypothetical run-up that short sales would soften. When "it turns out this company is worth much less that they hoped and payed for," those shareholders would lose more because the difference between what they paid and what it's worth would be larger. That's particularly true for the quintessential long-term retail investor who fundamentally believes in the company. That person is likely going to own it until the company's product is proven or disproven, and the fluctuations in between aren't going to affect them (other than as above, if they bought at an inflated price). Shorting also creates an incentive for skepticism. One could argue that, if Theranos' technology doesn't work, making it harder and more expensive (dilutive) for them to raise money is a service to society. [1]: an arguable exception is shorting solely to make other investors lose confidence (rather than due to a negative view of the company). However (a) that's not the case here, (b) often it's actually the undiscovered seed of a real issue (someone has to be first..), and (c) shorting enough of a stock to meaningfully depress it is much, much tougher to do than it sounds, since the short investor will need to purchase/repay shares at some point, the possible exposure when they do is unbounded, and they'll need capital to cover their unrealized loss in the interim. This is not a trade anyone takes lightly.

rwmj 11y ago

Insider trading would be even more useful (assuming that the trades are all visible). Once you see the insiders selling up ...

intopieces 11y ago
Are/were insider trading laws ever effective? It seems like they create an incentive for secrecy.

rajacombinator 11y ago

There's a pretty good chance Goldman has sold when-traded OTC contracts on a lot of these hyped up private companies, in effect making themselves short the stock. Hence the WSJ article. Actually when you think of it this way and realize they have probably fleeced a lot of dumb third world money, the whole Theranos board setup makes more sense.