The financial world has been noisy and tumultuous in recent days from the war of small investors in hedge fund managers who make short (“short”) sales of stocks. At the current point in time hedge funds have been caught with their pants down and small investors tailing and sweeping the entire coffers and on the way dragging brokers all over Wall Street to recalculate a route.
Social networks such as Reddit and Twitter allow small investors to band together, exchange opinions, disseminate information and create tremendous pressure on the short selling position of hedge funds who have not dreamed that a dollar and another dollar and another dollar can pile up imaginary sums that will make them particularly painful short squeeze.
The amazing story of Gamestop, AMC and KOSS shares is ostensibly a romantic story where a bunch of young men and women created a virtual grouping of economic interests and hit the rich and sophisticated investors under the belt, however this is only a small part of the story and the following systems for simple investors are expected to change.
Unlike posts on networks that present the short sale of a security as an act of bad people who want to cause injustice to certain companies and lead to layoffs and financial loss, in order to rake in financial profits, then a short sale is a legitimate financial action and in most cases contributes to all investors.
A short sale is the ultimate tool to bring about an intelligent economic analysis into a commercial position in which profits are swept from the sale of a property whose price is inflated.
The sophisticated investor or one who thinks he is like this, analyzes the asset and concludes that this asset is detached from its economic value and therefore he tries to translate this basic economic insight into economic profit in exactly the same way he would have concluded that the asset is underpriced and therefore should be bought. Alternatively, the short sale allows the sophisticated investor to hedge another investment in his possession, which has a high correlation with the seemingly expensive asset and enjoy the performance gaps between the said pair of assets if the economic analysis proves itself.
De-legitimizing short sellers is a self-defeating goal for the proper functioning of markets, as short selling is the ultimate tool for draining hot air from financial bubbles. A world situation in which the price of a financial asset rises and rises and completely detaches from its economic value according to accepted valuation models is problematic and increases the risk to simple investors who may mistakenly think that eucalyptus may grow into the sky (and it does not ..).
Valuation of companies is not an exact science and there are assets that are difficult to assess until it is impossible to assess with acceptable tools, but when a failed company does not publish a substantial economic announcement and its price rises by hundreds of percent in a short period then the dog realizes that it is a dangerous financial bubble.
The absurdity is that it is precisely the most sophisticated investors, some of whom have suffered the greatest damage from the short squeeze in the stocks I mentioned, who will benefit over time from inflating financial bubbles and growing investor fear of short selling, given the recent market events.
Last Friday, Ayalon Musk tagged the Bitcoin currency on 43.5 million followers on Twitter, and that was enough for investors to boost the value of the virtual currency by 20%.
Musk, who controls Tesla, which is traded at a market value of about $ 750 billion and most analysts have a hard time explaining its price, is one of the big beneficiaries of the boom in private investors who trade without basic financial education and traders according to momentum and underestimate analysis. Over the past few years Musk has successfully fought shortlisters who have been short selling the Tesla stock through exceptional vision and performance yet no exception testifies to the rule and never resilience even for Tesla.
Some have argued that Musk himself sided with the army of private investors who stormed the shortlisters, as the weakening of the shortlisters would significantly reduce the likelihood of sharp price declines in the price of inflated financial assets including Tesla shares.
In conclusion, short selling is far from being the disease of the financial markets and is much closer to being a cure for certain diseases and therefore the de-legitimization done to this legitimate financial action these days is ridiculous and problematic, even if the victims are the rich everyone loves to hate .
Sorry to disappoint young readers but over time there is no substitute for long-term investment, even if many of us want to make a quick hit in the capital market.