Wednesday, March 28, 2012

Update on the morality of short-selling

A commenter reasonably asks "What rights you have to ask other person not to call the bluff of a moron (or group of morons!) by the process of betting?" Thanks for asking!
I have absolutely no objection to "betting" against a stock per se, and there are options, futures, and other derivatives for doing so. But "betting" using the underlying stock, which is intended for investment and which we want to be safe for retail investors needs to be strictly off limits. Maybe we do need additional marketplaces for people seeking only to "bet" for or against stocks, but let us try to do a much better of making the core stock market safe for investment. Shortselling makes stocks much less safe for investment, not more safe. Yes, it is true that pump-and-dump buying is also harmful to everyday investors, but to put it as simply as possible: two wrongs don't make a right.
By all means, let us discourage all forms of short-term trading of raw stocks. For example, we do need to have a steep excise tax on stock transactions of less than two years. Not to raise revenue for the government, but to strongly dissuade people from using stocks themselves for their so-called "betting."
To be honest, there are two distinct forms of "betting": short term and long term. Short-term betting is for casinos. Long-term betting is for true investment for financing of the productive capacity of society. If companies want to "make a buck" off the former, fine, this is still a free country, but as socially acceptable as a "weekend in Vegas" might be, safeguarding our "seed corn" is a deep social obligation. We need to do everything we can to discourage betting on the short-term, and do everything we can to encourage betting on the long-term.
The idea that shortsellers are increasing liquidity and "normalizing" the market is an excuse rather than a reason for tolerating the practice. The good news is that most of the time the shorts get hosed by their own greed and poor timing. The problem is that there are too many times when shortsellers act as predators rather than protectors of the common investor.
By all means, let people "bet", but let us place short-term betting with stocks (and bonds) strictly off limits.

-- Jack Krupansky


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