By John Drachman
If you’re looking at the market with a skeptical eye, the time might be right to unlock your inner contrarian and join the short sellers.
Wait, what? Isn’t short selling bad for your financial health?
Robinhood’s mop-topped CEO, Vlad Tenev thinks so. The recent GameStop fiasco showed how the same shares could be borrowed repeatedly to cover an overabundance of short positions, “creating some sort of runaway chain reaction,” Mr. Tenev said.
The social media-fueled explosion in GameStop short selling that took place across Tenev’s Robinhood platform created a monster called “The Short Squeeze.” Nervous bears know the squeeze is on when the stock price that’s supposed to go down jumps sharply higher, forcing them to buy shares to stop the damage.
Of course, this buying scramble adds to greater demand for the stock – and higher prices. “The data indicates that many Wall Street shorts are now once bitten, twice shy, and with good reason,” says MSN Money. “The GameStop fiasco cost institutional short sellers tens of billions of dollars.”
Should the average investor follow the institutions and shun bearish moods that lead to bets against conventional market wisdom? True, there have been situations where short selling artificially manipulated prices by distorting news about a company. While such “short and distort” schemes have mislead investors, the U.S. Securities and Exchange Commission has been keeping a close eye on such law-breaking and is relatively quick to hit crooks with hefty fines.
True contrarians wear their dark side proudly. While these nay-sayers get a reputation for risky, unfriendly behavior, their dim view can also serve as a check to the market.
Peter Davies, CEO of Jigsaw Trading, says short selling generally impacts the market just the way it should: “It helps to drive prices down, usually because they are considered to be less valuable. People trade the markets because of what they think will happen to prices,” Davies explains. “The idea that only people that buy stocks are good and that people that short them are bad is odd. They are both risking money based on their opinion of the market.” Far from downbeat Scrooges who resent other people’s financial success, short sellers help the market to operate smoothly by creating more liquidity for shares while also acting as a kind of reality check against over-enthusiastic investor behavior.
Savvy short sellers know the risks to betting with the bears as they’re reminded of John Maynard Keynes’ timeless warning: “The market can stay irrational longer than you can stay solvent.” The long and the short of investing is still this: Different strategies involve different risks. That’s why working with a financial professional can help you provide the expertise you want to make the informed selections you need – whether you’re betting with the house or against it.
John Drachman is a contributing writer to www.myperfectfinancialadvisor.com, the premier matchmaker between investors and advisors. John is an IABC award-winning writer, who applies his 30 years of financial marketing experience toward advancing the dialog between investors and investment professionals.