Some of the takes lately on short sellers have been exaggerations of reality in my opinion.

Short sellers serve an important roll in the markets. They dampen out volatility because they often cover when prices fall rapidly to cover their positions, and sell on rapid...
.., unusual price increases on the way up. Usually this improves market stability.

Others have pointed out they also ferret out fraudulent companies like Enron and Worldcom. All true.

Lately, I have seen the following companies being short squeezed described as frauds:

If I missed any please let me know.

What the companies being squeezed do seem to have in common is the deep impact the pandemic has had on their operations.

Gamestop, AMC, American Airlines, Bed Bath and Beyond, Express....

Not frauds, but all greatly hurt by Coronavirus
Its been wisely pointed out that short squeezes like this cause economic harm through capital mis-allocations. Companies raise money at crazy valuations, getting more than "their fair share" of available capital when it could go to better uses. All true.
The squeezers run amok have dislocated reasonable resource allocation.

But the opposite is true of short sellers running amok and driving prices down too low on real businesses.

A depressed share price makes raising capital harder when a company needs it (like in a pandemic).
Selling 140% of the shares outstanding pushes down prices. During times of stress, this weakens the ability of a company to raise capital, and therefore, recursively strengthens the position of the short sellers, potentially creating a feedback loop. Shorts seem predatory here.
This kind pressure ultimately hurts co-operation and growth in the entire economy. It's a wealth transfer from the unlucky to the lucky, which is exactly the opposite of what helps society.

Some companies which would have survived disappear unnecessarily.…
So the benefits of short sellers uncovering frauds and providing stability in some environments have to be weighed against their tendency to sometimes drive prices below reasonable levels and hinder a companies ability to survive.

Its a tradeoff.
But the negative side mostly seems to come from extreme levels of short selling, when the shorting keeps building and building, overly depressing the share price.

From this light, a roving band of short squeeze hunters might be a good thing for markets and the overall economy.
If they allow shorts to continue to play their roll finding frauds and preventing extreme volatility, while the squeeze-hunters prevent shorts from pilling onto weakened, but real, companies preventing their possible recovery, we may have stumbled onto a better system.

• • •

Missing some Tweet in this thread? You can try to force a refresh

Keep Current with breakingthemarket

breakingthemarket Profile picture

Stay in touch and get notified when new unrolls are available from this author!

Read all threads

This Thread may be Removed Anytime!


Twitter may remove this content at anytime! Save it as PDF for later use!

Try unrolling a thread yourself!

how to unroll video
  1. Follow @ThreadReaderApp to mention us!

  2. From a Twitter thread mention us with a keyword "unroll"
@threadreaderapp unroll

Practice here first or read more on our help page!

More from @breakingthemark

17 Dec 20
I just re-read Bernoulli’s 1738 paper “Exposition of a New Theory on the Measurement of Risk” which is the foundational paper of Expected Utility Theory.

It’s Amazing

It’s so wildly different than EUT that its hard to believe this was its beginning.

Let’s see if you agree.
The paper isn't about utility. It’s about expected value.

Bernoulli used the utility concept to get the reader to abandon the traditional view of expected value(arithmetic average), and then used it to derive the equation for valuing risk.

The final equation doesn’t use utility
He starts out the paper identifying that tradition evaluation of risk come from expected values, which are calculated with the arithmetic average.

Notice the rule here in italics is about expected values.
Read 30 tweets
14 Dec 20
If everyone is society optimized for arithmetic return, or linear utility, then society would grow wonderfully at first. Society's geometric return would be high. Some people would win big, some would lose big, and the average would be good because many are involved.
Through time though, many people would get unlucky by losing a few times in row and would fall out of contributing because they don’t have much capital/resources/access any longer to help. So now the number of contributors to society’s growth is smaller.
If people keep basing decisions on linear utility, with fewer and fewer winners each round and more and more losers, a funny thing starts to happen. Probability says society stops growing as more people fall out of the game, leaving fewer people capable of creating growth.
Read 7 tweets
4 Jul 20
There are two side to the Kelly Criterion which I think often get equated as the same when they really are not.

Traditional Kelly betting is about limiting your exposure to a risky bet. The bet in question is usually a "bet" in that when you lose, you lose everything you expose.
So you scale back and don't risk everything. Most casino games fit this description as do some financial instruments like options.

The optimal leverage here is less than 1. You want to hold cash on the side to buffer the future losses.
But standard investment assets, don't work this way.

I showed here, that individual stocks are effectively full Kelly bets.

Just buying one stock is the appropriate "size", as they have an optimal leverage of 1.…
Read 7 tweets
1 Jun 20
Lots of tail hedge articles these days. I feel many miss the point. They keep studying returns as if they add with each other through time. They don’t. The math of lose 3% in 9 calm years, make 25% in the one volatile year = -5% return is meaningless.
The average through time is meaningless because investment returns don’t ADD. They COMPOUND.

A tail hedge that reduce the average return of a portfolio (as a tail hedge often does) but reduces the portfolio variance by more than twice as much, leads to higher geometric returns.
Now is this really complicated and difficult to get right with options based tail risk hedges? Yes. There are so many ways to implement it and returns are skewed and convex. And if you don’t understand why tail hedges are useful, you could easily butcher the implementation.
Read 8 tweets
21 May 20
I’ve really enjoyed the Asness-Taleb feud. Some of the best parts are the comments by the people supporting their “guy”. I’m drawn to the similarity of their views:

-Both sides think they are the counterpuncher. Both sides think they were attacked first.
-Both sides think the other’s intellectual prowess is overrated.

-Both sides think their investment strategy is superior.

-Both sides think the other often acts like a bully.

-Both sides think the other is acting unhinged and triggered in their response.
-Both sides think the other often gets very angry and blocks people.

-Both sides think their “guy” is making clear obvious points.

-Both sides think the followers of the other are brainwashed, but are slowly coming around to the truth.
Read 4 tweets
20 Apr 20
A year ago today I started reading @ole_b_peters and @alex_adamou 's ergodicity economic lecture notes.

They were so good I finished it by the end of the next day.

There's lots of math, but as I've said before, this stuff is going to change the world.
My blog is about trying to create the best investment strategy, and isn’t EE centric. But the concepts I use are very similar to those EE discusses. I’m an engineer, so I’m focused more on application than pure theory.
Many posts come from similar concepts as EE does. This post on stochastic efficient is the most similar, as it’s my proof that EE’s work on the subject is correct.…
Read 14 tweets

Did Thread Reader help you today?

Support us! We are indie developers!

This site is made by just two indie developers on a laptop doing marketing, support and development! Read more about the story.

Become a Premium Member ($3/month or $30/year) and get exclusive features!

Become Premium

Too expensive? Make a small donation by buying us coffee ($5) or help with server cost ($10)

Donate via Paypal Become our Patreon

Thank you for your support!

Follow Us on Twitter!