Bonus points for a gif from Margin Call.
Great post. Interesting point about dividends! Something I wouldn’t have considered if I were to enter a short position.
Good shout, really enjoyed that movie.
As @Cgwinning reminds, there have also been points where shorts have been momentously successful.
And you can argue that shorts provide an important role in the markets - cutting down overinflated stocks.
Big issue with shorting from investor side (other than unlimited losses) is that in general markets go up more often than down, so you have to be smarter than the general trend.
From a society side, aggressive shorting is sometimes seen as vultures feasting on a corpse. But then without vultures the savannah might be covered with corpses.
I think another important (and infamous) aspect of shorting is the negative behaviour it can inspire. Humans are very susceptible to negative news, and those traders/investors who have made high-risk shorts may be tempted to take actions that may fulfil their prophecies.
In the past, this used to be anonymous faxes, tips, and newspaper articles; nowadays, it’s commonly anonymous commentators on social media, investor forums, investment websites, blogs, etc.
These mediums can be used to launch anonymous short attacks on companies (whether targeting a legitimate weakness, or fabricating one), and there’s increasing evidence of its use and efficacy. Clearly, this type of activity is asymmetrical, as these activists can use the anonymity afforded by the Internet to make disclosure-free, unregulated, and (usually) consequence free claims against a party that is heavily regulated.
Often the claims are false or completely unverifiable, but succeed in spooking investors.
[ I suggest a brief detour to this interesting Harvard Law article for more specific data ]
Just to emphasise, nobody should take this post as a claim that all shorting is inherently bad, but I just wanted to focus on this particular aspect.
The answer to this issue is really complex; it’s a classic case of technology moving so fast that everyone has been left standing. However, it’s something for the wise investor to be aware of when reading any (purported) news about companies, especially if it’s anonymous or unverified!
Thanks for the post @Tommy, and bringing up this really important topic!
Great points, there certainly is a proverbial grey area for these activist investors, particularly those that are short, who border on the line of market manipulation to try and achieve their goals. Then there is just the blatantly illegal S&D traders.
Documentary wise… this one is riveting:
Check out “Dirty Money” on Netflix
@Freetrade_Team George Soros’s infamous short of the Central Bank would be worthy of a mention too 
Very interested in Soros and reflexivity
https://freetrade.io/blog/investing-philosophies-101-or-how-not-to-value-a-stock/
A current example of the risks when shorting!
https://www.cnbc.com/2018/06/06/shorts-against-teslas-stock-lose-more-than-1-billion.html
FYI received the news through finzine which linked to cnbc after looking into it from @tommy and @Viktor advice on the news and podcast post, highly recommend!
Yes please 
Finally managed to watch this since first reading your post and I’m dumbfounded as to how Herbalife are still in operation. Regulators & Wall Street turning a blind eye after Bill Ackman delivered all they needed to know on a plate. I must assume for my own sanity that they flipped their business model around so as not to still be a pyramid scheme.
I don’t think I have what it takes to go short. The idea of unlimited losses turns me off. Rather deal with the risk of losing 100 percent. Rather lose everything I have than top it up with what I don’t.
That’s why most long short funds have short positions sized at about 1% to 2% of NAV. In contrast, their longs will be 5% to 10% of NAV.
It becomes more about risk management when it comes to sizing shorts.
Naive questions:
Is it that long/short funds use the short positions for insurance/hedge?
Also if short positions are 2% of NAV and longs are 10%, what’s the other 88%?
Part two here by the way
Totally depends on their strategy! Some L/S funds run pair trades, some just roll SPX puts, some are totally idiosyncratic. In most cases, they try to hedge out equity market beta and try to be market neutral (but again, depends on strategy… Einhorn or Pershing Square are likely not market neutral).
Sorry I wasn’t clear, I meant each short position is about 1 to 2% of NAV. In total they might have 0 to 50 individual short positions, which would complement their long book. You’d look at their net and gross position to see their directional positioning and leverage. E.g. if they are 50% net long with 150% gross, it’s likely that they have 100% long and 50% short.
Thanks for that - I don’t think it was that you were unclear, it’s that I don’t understand that part of the world at all, and therefore I should steer clear of it! (Though I’ll continue to pay attention to Jim Chanos because he seems to give entertaining media.)
I simply don’t think I have neither the heart nor the stomach for it.
I’m glad there are those who do for they provide a service to the community