Friday, March 19, 2021

CNBC asks 'Why Is Short Selling Legal?'

Short selling and the social media efforts to thwart it provided me a lot of material this year, alternating between silly and serious beginning with Noah, Colbert, Kimmel, and Corden explain GameStop, a funny tale of the stock market and Retail Apocalypse, then CNBC, The Economist, CBS This Morning, and Retail Archaeology explain GameStop, a serious tale of the stock market and Retail Apocalypse, and most recently Samantha Bee, Trevor Noah, and Legal Eagle have more funny things to say about GameStop, a tale of the stock market and Retail Apocalypse.* It's time for a serious examination of the topic as CNBC asks Why Is Short Selling Legal?

When a stock rises, all of its investors turn a profit, right? That’s not the case for short-sellers, who look for profit by betting against the success of a company or the market. The recent events surrounding Tesla, Reddit, Robinhood and Gamestop’s short squeeze have put short selling under the limelight. So how did the practice of betting against the U.S. market become such a common, legal practice? Watch the video to find out.

The recent events surrounding meme stocks and GameStop’s short squeeze have put short selling, one of the oldest practices in the stock market, directly under the limelight.
The video made three points in favor of short selling. First, it is one major way to make money off a declining market. Second, it provides liquidity, the ability to turn stocks into cash, during a declining market. Third, it's a way of "discovering price," what the true value of a company is in the face of fraud, mismanagement, and hype. I won't dispute any of that, but I will add the following quote from the video's description.
“I think the main reason people dislike short selling is that something just feels bad about profiting from someone else’s failures,” said Sasha Indarte, an assistant professor of finance at the University of Pennsylvania’s Wharton School. “Short sellers gain when someone else loses. It’s like if you took out an insurance policy against your neighbor’s home and your neighbor’s home was destroyed.”
That pretty much sums it up. Just don't confuse buying the insurance policy with setting the fire, although it would look like a motive.

I shouldn't be surprised that CNBC reported support for short selling as well as the moral case against it. As I quoted TVTropes 10 years ago, "CNBC is watched by people who think they own the country," so it will take the side of the markets. I expressed a more detailed complaint about CNBC two years ago.
While the channel is more entertaining than its competition (I'm looking at you, Bloomberg), it has a perma-bull attitude — it's always a good time to buy stocks, according to CNBC. My wife and I don't believe that, as we got out of the stock market about six months ago. We don't care that the values recovered; it was too stressful going down.
We have since returned to the stock market. During the past two years, we have developed a better tolerance for uncertainty. I suppose living through a pandemic did that for us, a silver lining to the storm clouds the past year has brought us.

Stay tuned for tomorrow's post about the Vernal Equinox, which will be the final entry of the tenth year of this blog. After that, it will be Nowruz, the blog's tenth birthday, and the beginning of my eleventh year of blogging here.

*I have a somewhat funny video about GameStop from Business Insider to post next week along with another one about Twinkies to continue the alternation between silly and serious. Consider this footnote to be a preview of coming attractions.

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