The Big Long
By David Henderson
Anywho, if you’re quick on the draw you’ll understand the implications. Shorting is for when you believe* a stock is going down. If you borrow a share from a broker that’s trading for… 10 bucks and short sell it, you pocket 10 bucks then and there. You then stand to gain as much as you buy it back for after the price goes down. If, for example, you buy the share back when the price has dropped to 5, you turn in that share back to your lender and now have netted 5 bucks. The maximum gain for this example is 10 bucks, i.e. the company bankrupts and their shares are worthless. I say “believe” with an asterisk, because there’s a caveat. We’ll come back to that.
This is from an irreverent and expletive-filled post last night by someone named Trashaccount121. It’s all about the Gamestop (GME) controversy. There’s a lot of good information in the post, although I think some of it is wrong. One important example of an incorrect statement:
Only big money hedge funds and financial institutions are allowed to short,
I’m pretty sure that’s false.
A non-economist friend who’s a daily news junkie called me yesterday afternoon to see if I was following this. I wasn’t. But I got up at about 3:45 a.m. PST and watched CNBC’s Squawk Box to see what they were saying. The GME short was the main news item they discussed. Just as the irreverent blogger above said in his post, two of the three hosts, Joe Kernan and Andrew Ross Sorkin, were talking about how bad this event was, how terrible it was that people buying stocks in units of 100s rather than 1,000s were making life difficult for hedge fund traders. From what I saw, the third, Becky Quick, was more the real reporter, showing some curiosity and some humility.
The three of them interviewed Mark Cuban on the phone. Cuban seemed to delight in what was happening and he pointed out that you shouldn’t get too upset at people for taking advantage of the rules in the marketplace. If you don’t like the behavior, change the rules. (That last statement is his thought, not mine.)
Cuban made an analogy with football. Change the NFL rules and you can expect people to game (no pun intended) the system.
Becky Quick asked if the SEC should introduce some regulation and her tone, disappointingly, suggested that she favored new regulation, although it wasn’t clear what that would be. Cuban answered that we no longer see investors in the stock market, people who buy and hold long-term. We don’t? That’s all most of my friends and I do with our Vanguard Total Market Index or the equivalent and some holdings of individual stocks. One fact that came out that surprised me is that the average amount of time a stock is held now is, wait for it, 40 seconds. I’m a little skeptical. Cuban said that you could require people to hold a stock for at least a day. He admitted that that would reduce liquidity but argued that liquidity is the not the be all and end all. (Those are my words for his thought.) I doubt that requiring stocks to be held for a day would reduce liquidity much, but I still don’t see the point. No one prevents me from holding a stock for 10 years if I want to.
Read the whole post that I mentioned above to see how the shorts got hurt by various players coming in and actually trying to make Gamestop into a successful company. It reminds me of that great movie The Producers. (That’s the picture above.) The shorts actually shorted more than 100 percent of the stock, just as the producers of a Broadway play planned for it to fail so that they could oversubscribe and sell more than 100 percent of the production.