Economic Shorts

There are two basic unannounced theories of short selling, or indeed long investing.

The first you might call cheap investing. The investor buys something that is under-priced. He is looking for a value, a cheap stock.

In this method, you run the risk of having false information from the company.

The second depends on predictions of the future, usually based on some economic analysis.

Now there is nothing wrong with economic analysis. I have nothing against those who struggle with inaccurate government reports, sudden surprises, unforeseen developments, and all the twists and turns of fate. However, somehow economists have developed a reputation for being mostly wrong, like long term weather forecasts.

The effects of losing your capital are so crippling that exposing it to the risks of economic forecasts is a very brave act that is well known to many hedge fund managers who have large losses.

There are just too many imponderables in the future to be betting your money on it.

Even when you buy $1 for fifty cents, you may find nasty surprises. There are investors who have purchased stock in a company at a price below the cash per share that is in the company, only to find that they still lose money.

However, these losses are very rare compared to the losses to those who predict the stock market or the economy.

We are often told that market timing is a losing game. In fact, it may be.

Now when you go short, you want to be shooting fish in a barrel, not stabbing blindly into the ocean.

The truly aggressive short seller is not content to take position and wait for the future to happen, he makes it happen.

At the least the short makes a big public announcement of his discovery so that the long holders will be stampeded out and new shorts may come in to assist.

He may go further than that and try to start government or media investigations, inform customers, employees, suppliers, sources of finance and those who assist the victim.

In doing so, he risks suits for slander, interference with business relations, and securities law claims.

A wise victim investigates the accusers and any dirt found may be used against the short.

So some shorts have developed the strategy of using fronts or attacking from a hidden position.

The allegation has been made that the people who were short mortgage securities for large profits financed various seemingly independent entities to expose mortgage problems.

So these are the three positions in the game, bet on the future, buy cheap, or make it happen.