Lately, we’ve been talking a lot about short selling in this blog. In particular, we’ve been talking about the pros and cons of short selling, and last time I mentioned that there was a distinct dark side to the practice that causes many to cringe when they even hear the term. This time, we’re going to talk about exactly that.
Short and Distort
Short selling is a somewhat cryptic process that is rarely understood all that well by the amateur investor. Because of this, it creates a ripe opportunity for unscrupulous traders to take advantage of short selling and twist it into a market-harming “money making machine” that doesn’t respect the true meaning of free commerce and investing.
When this happens, investors resort to using a tactics known as the “short and distort”. The way it works is this. Imagine that you have a bear market. The prices of stocks are almost universally down, and prospects all around aren’t so great. Traders might take this opportunity to buy a bunch of short options in a stock. Of course, that in itself is perfectly normal and ethical. However, what makes the “short and distort” such a terrible practice is that the investors then go on to spread slander and lies about the businesses that they’ve bought shorts in.
Slander Is Believable
Obviously, in a bull market, everyone is already nervous and pessimistic. Slander is thus easily believed, and it’s easy for investors to cripple a company through these means. When that happens, they walk away from the smoking wreckage with a handy profit, purchased at the cost of their integrity as real business people.
Of course short selling has its dark side. So do all forms of investing. It’s the ease with which short selling can be exploited however that makes it a particular target for scepticism.
See you next week for part 8 of Short Selling.
Sean Rasmussen
The Bullhunters Guide
Universal Wealth Creation © 2004 – 2008
{ 3 comments… read them below or add one }
great artical
thanks
terrence lane
Hi Sean,
Wow! I can’t believe that there are people out there who would really do that. I guess it makes sense though; there are a lot of unscrupulous people who will do anything for a dollar regardless of who they hurt in the process.
You’re right, short selling definitely seems like an easy target for these people.
There are unscrupulous people everywhere. I can see how easily unethical people can bring others down for their own profit.
It is good to be aware of these things though and understand ‘the dark side” that operates in the market.