Siren Call of Shorts

So many shaky markets; so many securities seemingly ripe for short selling. Except that short selling is dangerous, as a trader who predicted the end of the 1990s bubble found out at the cost of hundreds of millions of dollars.

On the basis of his prediction, he short sold technology stocks. From Ponzi Regulation:

“What made the strategy especially dangerous was that the trades could not be held for a lengthy period until the prediction kicked in. Short selling is simply not suited for long-term bets because borrowed securities have to be replaced. By contrast, a buy-and-hold strategy can have an indefinite time frame. Correct timing is more important for a portfolio consisting of shorts because keeping up the positions is prohibitively expensive.

While neither fundamental nor technical analysis provided correct timing, these methods armed him with plenty of arguments to back his case. That he knew the eventual direction several years ahead concealed the fact that he was ignorant of what really mattered—when he sold a security, he had not the slightest idea what the market would do before he had to buy it back. The plethora of information he gathered obscured the disconnect between his predictions and trades, reassured him that he was in the right, that stocks would collapse next month, next quarter, no later than the turn of the year.”

Before the year ended, he’d lost more than 50% of the capital invested in his fund.


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