Shorting stocks can be rewarding so why I never short-sell stocks? these are my 7 reasons.
1. You can lose more than 100% of your money – with long investing my potential lose is maximum 100% of my initial investment (not so fun!), with short it’s a bit different, you can actually lose an uncapped amount of money as long as your bet goes the other way.
2. You pay interest – with shortening you are basically borrowing shares and sell them, to own the shares that you are going to short you need to pay interest to the shareholder. I don’t like to pay fees, not at all, some of the shares can cost as much as 50% in interest and more.
3. Any OK news can send the stock higher – I knew that $TCG.L would not make it (you can read my posts about it in my feed, you need to go further down though), you just had to look at the balance sheet and the big amount of goodwill which is intangible asset to understand that there is no value in it, but I didn’t short, why? a) if the stock goes bankrupt I will earn nothing. and b) news about possible buyout sent the stock higher for a few weeks before the bankruptcy. so in depressed stock, any OK news can send it higher, some time to the moon.
Another example, I think that $SNAP & $UBER are a great candidate for short, with any dollar, added to the revenues the company generating more operational losses, something is deeply wrong there. Nevertheless, let’s say that tomorrow the company will lose $900m instead of a $1b and the shares may jump up, crazy ha. And we didn’t even start to talk about the troll in the room $BYND.
4. You need to be tuned to the share price/computer all the time – because you can have potentially uncapped losses, you also need to deal with your trades all the time. as a long term investor, I don’t like to track the prices of my stocks every day. shortening stocks is not fun, it can draw you back from the core reason why you start to invest in the first place, which in my opinion is a) make money b) have fun c) sleep well at night.
You may set a loss/profit stop but then again, you need to open a new trade the “right” moment.
5. The hedging is a fiction – because I am investing for the long run, any short term move down at the price of the stock is not really bothering me, if anything I will be adding more to my initial investment in cheaper price and lower my average price.
6. The market is bias – the market also has a systematic intrinsic bias towards the longs.
If for example, the share price is decreasing too fast, then the trading of the stock can be paused and return after it’s stabilizing.
7. I don’t like to be in conflict of interest against other investors – it’s not a mathematical equation but more philosophical reasoning, I don’t like to earn money when I know that other investors had to lose it. It’s bad karma.