When most people invest or speculate in a stock, they go long and are banking on that stock's value going up. Short selling is buying a stock and expecting that stock to go down in value.
Both are pretty straightforward processes, but if you do some homework, the movement of the market and its stocks can offer you lots of opportunities to go short, or long for that matter. See 20 quotes from some famous people, including major investors, well known hedge fund managers, international celebrities and other famous people.
1. James McCormick from Natwest Markets warns about quickly increasing bearish positions in S&P500 that people should look out for. Exactly which shares he recommends to short selling is still unclear. But shorting is nothing new, it's been going on for a long time – at least by the smart investors.
Smart investors have been shorting stocks for centuries
While opportunities may abound, investors who've found success in short selling say you shouldn't rush in blind. Carefully select any shares you might go short or long in. You can do it easily with modern shorting.
2. Legendary short-seller Jim Chanos from Kynikos Associates says:
“Primary research is crucial and not as many people do it as you think.“
Mr Chanos famously went short on Enron, bucking the wider market trend. He says prospective short sellers should do their research, pointing to financial statements and source documents.
You might think short selling is a recent phenomenon. But shorting been around for as long as people have been investing and speculating in business. In the early 18th century, many investors made a mint when the South Sea Bubble burst. Nearly 100 years ago, some investors predicted the Wall Street crash of 1929 and went short. One was Jesse Livermore. He was smart, but he knew you couldn't know everything.
“It is much easier to watch a few than many,” he said when explaining his stock market success shorting stocks.
Skip forward to the present and the same rule applies. So which short selling candidates do you believe have more downside than upside potential right now? If going purely by P/E ratio, perhaps Tesla shares (-1046 in P/E), shares in Amazon (116x earnings in valuation) or even the highly valued Zoom Video shares (2432 in P/E) could be worth looking into?
4. Warren Buffett says you should only invest in companies you understand. He took a big loss recently after going long on US airlines stocks such as Boeing Co. Even if he is a long term investor, it's clear he estimate that Boeing shares are heavily overvalued. This year, airline stocks have tanked. If he had gone short, Warren Buffett would be adding rather than subtracting billions from his bank account balance. He's philosophical about that, saying;
“If past history was all that is needed to play the game of money, the richest people would be librarians”.
Another long-term investment that Buffet recently sold off include Goldman Sachs shares. We guess he simply cannot justify the current valuation with all potential risks for banks in a downturn.
5. Another billionaire short-seller is George Soros. He's famous for lots of things, including a currency speculation in the early 1990s that drove down the price of the British pound and nearly broke the Bank of England. He sounds like an interesting guy. But George Soros makes himself sound as interesting as brown gravy. He says;
“If investing is entertaining. If you’re having fun, you’re probably not making any money. Good investing is boring.”
With respect, making money is never boring
Now plenty of people might disagree and say making money is never boring. Doing the legwork and homework to succeed at short selling shouldn't be a chore because it will see returns down the track. Picking what stock to go short on at the right time is key.
6. The co-founder of Oaktree Capital Management, Howard Marks, is a walking talking personification of the successful short-seller. He says;
“The most dangerous thing is to buy something at the peak of its popularity. At that point, all favorable facts and opinions are already factored into its price and no new buyers are left to emerge.”
A decision to short a stock should be based on cold-hearted realities, not emotion.
7. Ben Graham, another successful American investor says picking stocks should be like buying straight forward groceries.
“Investors should purchase stocks like they purchase groceries, not like they purchase perfume“.
He means your decision should be utilitarian and rational. Don't be afraid to go short because you like the company. You might like Telsa cars and Elon Musk, but if his wildly over-optimistic forecasts open the way for you to make money – go for it.
Elon Musk and his mates at BlackRock
8. Elon Musk's company, Telsa, is one of the most shorted stocks in the world. What drives people to go short on Telsa shares? One reason is that Elon Musk has a history is making wildly ambitious short to medium-term forecasts. For example, in 2015, Mr Musk said he expected Telsa to be worth $700 billion by 2025. “Our market cap would basically be the same as Apple's is today,” he said.
Naturally, this caused some consternation. Elon Musk later admitted it was a back of the envelope estimation. This year, continuing the pattern, he said;
“Tesla stock price is too high imo”.
Tesla stock price is too high imo
— Elon Musk (@elonmusk) May 1, 2020
It's manna from heaven for investors looking at shorting Telsa. Still, Tesla shares are near all time high right now.
9. US investment firm BlackRock made nearly $600 million from shorting Tesla in 2018. Elon Musk wasn't thrilled. BlackRock has been making money from a variety of investment approaches for other 30 years. BlackRock says the following about short selling;
Our view is that long-only investing can sometimes be a very restricting investment approach. It means giving up a large part of the insight gained from analyzing companies.
10. Carson Block is a well know short-seller in the USA. He thinks the post-March 2020 bounceback in the stock market has no long-term legs. He thinks the market still has quite some way to fall. “
Current valuations make no sense … the (market) directions has to be sharply downward,” Mr Carson told Bloomberg earlier in May.
Everything old is new again in short selling
11. American billionaire hedge fund manager, Steven Cohen says, “A basic principle in going short is that there has to be a catalyst.” In this sense, a catalyst is an event. In 2020, COVID-19 and its impact on markets is an example. But COVID-19 was tough to anticipate. But, there might be a company out there that's working on a vaccine. What's the likelihood of that vaccine working? That's also an event. With a bit of homework, you might be able to anticipate that event and buy the stock accordingly.
“The fear and panic now rampant in the market increase the likelihood of short-term share price overreactions,” says Sam Twidale at Investor Daily, referencing the current volatility in the stock market. “The challenge is that there’s still considerable uncertainty in assessing the duration and severity of the COVID-19 outbreak.”
The uncertainty opens up opportunities for short-sellers. Between mid-February and mid-March, short-sellers saw a paper profit of $344 billion.
12. Ihor Dusaniwsky of financial advisory firm S3 Financial says;
“Short sellers are topping up their gas tanks … they continue to have a short bias to the market and they're making sure they're at the levels they want to be at. At the moment we're seeing active short activity across 80 percent of the sectors which implies there's still a negative market sentiment”.
Ihor also got some interesting stories on Twitter like the one below about Hertz shares, so make sure to follow him.
$HTZ short int is $89.2MM; 59.44MM shs shorted; 42.02% of float; 73.31% fee & rising. Shs shorted down -5.04MM shs,-7.82%, over last 30 days as price fell -50% & down -4.88MM shs, -7.6%, last week. Shorts up +$363MM in 2020 mark-to-market profits; down -$53MM on today's +59% move pic.twitter.com/3s36XpxPEQ
— Ihor Dusaniwsky (@ihors3) June 5, 2020
Patience remains a virtue
If you are of the same mind as Carson Block and think the stock market will continue to decline, experienced short-sellers do not understate the old school virtues of patience and steady nerves. 13. Another famous quote comes from John Rockefeller.
“I don't think there is any quality so essential to the success of any kind as the quality of perseverance. It overcomes everything, said John Rockefeller”.
You might not think an old-timer like Rockefeller has much relevance to the go short strategies of 2020, but he was an old hand at selling short and like Jim Chanos and Jesse Livermore, he appreciated the importance of understanding the business he was putting his money into. That's as relevant now as then.
14. Contemporary investment advisor Whitney Tilson sings from the same songbook. Patience is key, but he says;
“There are far more good short ideas than long ones at most times, as there are large forces pumping stocks up, not down”.
Nerves of steel in 2020
15. Mr Tilson also says investors in short stocks need to be able to hold their nerve.
You must be able to withstand the volatility in the market, both financially and psychologically.
16. Peter Lynch, a prominent American investor, and mutual fund manager agrees. He says of short selling; “The key thing to making money in stocks is not to get scared out of them.”
It helps that there are so many events (or catalysts as Steve Cohen put it) in 2020. They add some basis to make decisions to go-short and provide some confidence when predicting financial outcomes.
And many professional market analysts feel the stock market was overvalued leading into 2020. To that extent, going short is simply participating in a market correction.
17. Robert Wilson, who managed hedge fund Wilson and Associates took both long and short positions in many companies. But he liked going short because it covered him over downturns, like what we are seeing in 2020.
“Yeah. It’s not just comfort. It’s a matter of, if the market collapses, I still have a lot of money,” he said in an interview when asked about selling short
Ultimately, short selling is about making money. You might drive a Tesla but if there's money to be made by shorting Tesla and undercutting Elon Musk, why not do it?
Searching out opportunities
Carson Block is far from alone when it comes to pessimism about the US stock market. Financial advisor Paul Franke things the market has some way to drop, opening up opportunities for short-sellers.
“The U.S. stock market has bounced strongly off its March bottom, but could turn lower again in a second round of selling related to the coronavirus economic shutdown”, he says.
18. PNC Financial Services Group is a well-known player in short selling circles. Right now they are considering buying a number of banks, including Goldman Sachs. PNC can't buy every bank on its list but its interest is an event and it is pushing the stock price up of the banks. If you wanted to go short, you'd be looking at what banks PNC ultimately decided to give a miss. In May, PNC decided to sell all of their stake in Blackrock.
“History has shown can arise in disrupted markets”, says PNC about their sale of the 22% stake in Blackrock.
Perhaps they assume they mean that President Trump is facing a challenging time, and the government is spending too much? When big banks with a long successful history starts to sell of their stakes, we cam expect there will soon be negative effects.
19. Luke Lango, a Markets Analyst at InvestorPlace, reckons there are a number of companies potential short-sellers could keep an eye on this year. In addition to the aforementioned Telsa, Lango likes businesses such as Beyond Meat, Nio, Snap, Revolve, and Catasys as short sell prospects. He says;
“Several times every month, short squeezes happen in the market, and produce huge overnight gains in individual stocks”.
Sometimes, the best short-selling opportunities can be staring at you in the face. You don't need to be an investment guru like Warren Buffett. Over in Seattle, Boeing is in all sorts of problems. Planes are grounded, orders are canceled, and revenues are down. You don't need to be a genius to see that this company isn't going anywhere for a while. And, while there has been a small correction, a bit of research, will tell you why Boeing is prime for selling short. But modern short selling strategies are not always easy to handle.
20. Uffe Dreisers tells danish newspaper Børsen (in Danish) that:
“Going out of the market is mega anxiety provoking”.
But all his numbers point red and the biggest short selling of the year might be here sooner than you first thought..
And the last word
So this article has talked a lot about the opportunities for potential short selling in the current environment. You might think it is the playing ground of big names like Elon Musk, Warren Buffett, and BlackRock. Not so, with a little bit of homework, some patience and nerves, going short is no more difficult than buying conventional long stocks.
Why should you do it? Because whether it's 1820 or 2020, investors have been able to profit from selling short. In a market like what we are now seeing, going short is one of the few ways to make money. Short positions can also act as a hedge against long positions. Economics and business analyst Kimberley Amadeo says;
“Short selling allows you to potentially reap a large return without putting much money upfront. You only have to invest the fee to your broker. If you're right, and the stock price plunges, the rest is all profit.”