ON Shorting

I repost here:


https://hotcopper.com.au/threads/ri...get_post=true&direction=previous#.WV3aL4h96Uk

"On a side note, do you factor in the level of shorts into your valuation?"

Not even for a nanosecond [*].

Reason being that the activities of short-sellers (along with all the various types, styles, shapes, and sizes of the hundreds and thousands of other market participants) does not alter the fundamental value of a business one bit.

I think that people spend far too much time thinking about the role played by short-sellers, trying to second guess what shorters might be doing at any given point in time, and blaming shorters for share price outcomes.

Short-sellers are merely one of many sub-sets of an indeterminate number of market participants. And, just like all those market participants who buy and sell shares at different times, shorters are sometimes selling shares, and sometimes they are buying them.

Long-only investors try to buy shares when they think they are cheap and sell them when they perceive them to be expensive. That's no different to what short-sellers do.

It therefore follows that very often, short-sellers and long only investors will be selling at the same time (when they think certain stocks are expensive) and buying at the same time (when they think those stocks are cheap).

So for the life of me, I can't understand why one particular set of market participants - who act with no different profit motives to those of all other market participants - are singled out for so much scrutiny and discussion (and vitriol, too).

And just like long-only investors make many mistakes, so too do short-sellers. And those mistakes might lead to stocks being erroneously shorted to a point below their intrinsic value.

When that happens, it is a boon to investors who invest with strong, disciplined valuation-based investment process.

Because, don't forget: today's short-seller of stock at some stage needs to become a future buyer of that stock.


If you analysed it in some detail, I suspect the vast majority of posts on this forum deal in some way with trying to second-guess why share prices are going up or down (even though that is a completely futile exercise because one will never be able to know - and even if one could figure it one on any given day, tomorrow it will all be different again, anyway).

That's a huge amount of time and effort going into something that is not knowable; not only that, but that unknowable factor has absolutely ZERO effect on the fundamental value of a company.

So, no, I don't factor in short-selling activities when it comes to investing.

For the exact same reason that I don't try to factor in the activities of other market participants such as pension funds, quant investors, index investors, boutique fund managers, country funds, macro funds, growth funds, fund of funds, family offices, derivatives traders, retail investors, etc. etc., all of which - just like short-sellers - are trying to buy-low and sell-high.

How could I possibly do so?

[*] Truth be told, I do sometimes (say once every 3 months or so) cast my eye over the listing of the most shorted stocks in the market to see if there are any businesses in that lot that are of the sort of quality that I might care to own, and which has been sold to a level below its fundamental value. So while I don't incorporate shorting into my valuation, I do sometimes look for potential investment ideas among stocks that have been heavily short-sold. But almost 100% of the time my conclusion is that the stocks that appear on that list of the markets most shorted stocks,