Thread by @gabebassin

0/A short thread on short-selling

1/Short sellers don't cause stocks to go down, LONG sellers do.

2/People often conflate this and right now its front and center with all of this @Tesla nonsense.

3/Many studies have been done showing that the most highly shorted stocks underperform over time.

nber.org/papers/w10434.…

economics.mit.edu/files/3022

pdfs.semanticscholar.org/b3f6/33f161eae…

@CliffordAsness correct me if I am wrong here. You're the best "data guy" around. I want to know if so.

4/Stocks don't go down BECAUSE of the short-sellers but rather, IN SPITE of them. This is a correlation vs. causation thing.

Short sellers are captive buyers - they need to buy to close their position. Hence, why short squeezes occur.

5/Short sellers have a massively asymmetric risk/reward payoff. It is imperative they are right more than they are wrong.

6/THIS is why higher short interest stocks underperform over time. They do deeper work and understand these companies better. This is a must as there is no bound to their potential loss.

7/A "glass half full" argument can be made that short sellers should be thanked and applauded for signaling to the market which companies are awfully managed or even fraudulent.

Over time if you follow-their lead you should outperform.

Timing is a b*tch though.

8/Short sellers give us information to input in our models.

Of course this information can be gamed though.....

9/This is exactly what is happening right now in a most public and vitriolic (on both sides) fashion between @Tesla and shorties.

10/Reminds me of this scene from Training Day:

11/I actually think @wolfejosh put it better when he tweeted earlier today that this is a massive high stakes poker game playing out in real time.

https://twitter.com/wolfejosh/status/1027202383787556864

Who is gonna win?

12/To Josh's point, @elonmusk better have aces down. In fairness, even if he does he could catch a bad flop.

Aces down always get rekt anyways, right @philivey?

13/The bottom line is this: Short seller's are simply a part of a relatively free market system. They do not cause companies to go bankrupt. Stocks go down because long sellers want out (usually for fundamental reasons noted by the smart-money short sellers)

14/Highly concentrated short sellers are often early and probabilistically correct in the long-run.

15/With the soap opera we are witnessing in real time perhaps this deal goes through and the shorts experience permanent capital loss.

Or, perhaps there is no deal and this is all noise.

16/Or perhaps the deal goes through AND the shorts end up being "right" in the long run as the buyer is the one who chokes on it.

How about that for a bad beat?

(h/t @TeslaCharts, @CliffordAsness, @wolfejosh, @ReformedBroker and @WallStCritic for inspiring this thread.)