Financial markets work effectively in part due to the fact that investors can take both sides of a trade. Betting against a stock via selling shares in a company short or engaging in various options strategies is one way contrarian investors are able to make money in any market (up, down, or sideways).
Besides the obvious value of hedging one’s portfolio, sometimes taking the opposite side of a trade can be very lucrative for companies which are obviously over valued by the market.
Finding such companies which are clearly overvalued is the difficult part. Investors who pride themselves on looking at the negatives of various businesses are known as short sellers, and they typically engage in betting against companies and providing information to financial markets as to why they are doing so, increasing market efficiency.
The information provided by short sellers often goes directly against the grain, challenging the way investors in a given company think about the risk/reward profile of a given company.
The temptation for many investors who have held a position in a company for a long time and believe in the long-term potential of such company is to ignore or criticize investors.
Firms often spend a lot of time fending off “short attacks” on their companies, providing additional information to investors as to why such a short thesis might be correct. Herein lies the value short-sellers provide: dialogue.
Investors looking at high-profile firms which have seen exponential growth over short amounts of time will likely also see a short thesis arise at some point. I invite all investors to analyze the information critically – bear theses provide perspective in this current bull market environment.
Invest wisely, my friends.
