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What you're saying should be absolutely correct, but in practice incredibly naive. First, I don't disagree the market and price discovery can benefit from shor
by bedobi 5y ago
What you're saying should be absolutely correct, but in practice incredibly naive.
First, I don't disagree the market and price discovery can benefit from shorting. But here we're talking about retirement accounts that are already long the stocks in question. There's no world in which the owners of those stocks benefit from them being lent out to short sellers, despite creative rhetoric to the contrary. If the shorters are right and the company is a fraud, it's STILL not in the interest of owners of stock in that company to lend their shares out. If anything, it's even MORE in their interest to NOT lend them out to be sold short, instead, they need all the help they can get to keep the price up so they can make a controlled exit themselves.
Second, why, if a decrease in price is all just an artifact of shorting, and it is in fact a solid, profitable business with a bright future, can't this be easily countered by simply pointing that out and buying the shares at a discount until the market catches on and the price skyrockets back up?
Because, unfortunately, it's much easier to just go with the momentum and jump on the shorting bandwagon, betting the stock will go down even more. Even if you tried to stem the drop, the short sellers can just borrow even more stocks and continue to overwhelm you with selling pressure.
This dynamic plays out all the time in US stock markets, and this isn't even taking into account abusive naked shorting, which is actually kinda sorta illegal except even the rules against that aren't meaningfully enforced.
- peterbonney 5y ago> Even if you tried to stem the drop, the short sellers can just borrow even more stocks and continue to overwhelm you with selling pressure. The problem with this kind of reasoning is that it applies even more strongly in reverse, because herds of long-oriented speculators aren’t bound by the need to borrow stock or sell on an uptick, etc. Short-oriented speculators need capital, stock borrow, and upticks to sell stock. Long-oriented speculators just need capital.
- bedobi 5y agoAgain, should be true but often simply doesn't play out that way in practice. The stockholders may be very diffuse groups of people, or mostly represented by proxies (eg fund managers) that don't have any real incentive or ability to organize a counternarrative and counterdrive to counteract concerted, well organized shorting, with all that entails in terms of media FUD etc etc. Hell, even in cases where long oriented speculators really do bite back, and in even in the fraction of those cases where they're able to have any success, they still get ridiculed in the media and in the industry.
- peterbonney 5y agoCan you give some examples where something like this played out the way you describe? Even a single example?
- ac29 5y ago> There's no world in which the owners of those stocks benefit from them being lent out to short sellers, despite creative rhetoric to the contrary. Not true - many mutual funds pay out securities lending revenue to investors. For example, VTSAX had ~$170M in net lending revenue in 2020, about 1% of fund total income (nearly all of overall income is from dividends). https://www.vanguard.com/funds/reports/q850.pdf https://www.vanguard.com/funds/reports/q850.pdf