Short Selling vs Casino Gambling

Four aces - short-selling
Q: When a proposal for short selling is presented, a frequent objection is that profit potential is limited in that the shares can only go down to zero but losses are potentially infinite since there is no limit, in theory, to how high the stock price can go. How do you answer such an objection?
A: Two questions: How many stocks have gone to infinity and how many have gone to zero? If you short sell a stock for $100 using margin capital of $50, and the price drops to $50, you have a profit of 100% on your margin capital. How many more times, in theory, can you double your capital if the price continues to drop — $25, $12.50, $6.25, etc.? Doesn’t the target price of zero give you an infinite ability, in theory, to continue doubling your capital?

Q: Good point, but can you give me a more down-to-earth presentation?
A: How do you feel about investing in National Leather?

Q: Never heard of it. Where is it listed?
A: In 1929 it was one of the DJIA 30. National Leather is no longer in business, along with about 25 other companies that were in the DJIA 30 at the time. For those 25 stocks there were, in theory, an infinite number of times you could have doubled your money. With a short sale your position is marked to market daily so your account is credited the profit daily and you can use that as you see fit. With a long position, you must first sell the stock to have access to your gain. On the long side, adjusted for inflation, the DJIA only started to exceed its 1929 high in 1982. That’s a 53-year wait. But there’s another even more serious problem.

Q: What’s that?
A: How index averages are adjusted when a new company is added. They retroactively remove share price data for the bankrupt exiting and substitute data for the new favourite entering. Same applies to the S&P 500.

Q: Sounds hopeless. How do you protect yourself if the game is fixed?
A: Sell short and speculate. You can get house odds.

Q: What is the difference between market speculation and going to the casino to gamble?
A: It’s something like the difference between poker and roulette. At the roulette wheel, the odds are stacked against you. The longer you play, the more you lose. Both poker and market speculation are games of skill. In a poker game it’s you against the other players at the table. Everything is connected economically. With market speculation it’s you against the world. It’s a bigger challenge than poker by orders of magnitude.

Q: Are there other important differences?
A: Yes, there’s the fact that 97% of what’s written about economic issues is propaganda deliberately designed to mislead you by persons who have an agenda.

Q: Sounds like going to Las Vegas makes more sense than being a Wall Street client.
A: They’re more honest about what they do in Vegas. You usually get what you pay for in Vegas. Everyone knows what the house odds are. On Wall Street, the typical customer rep won’t even know your odds.

Q: Sounds like owning a casino if the only way to win.
A: There are many ways to win. If you short sell, you benefit from the stock promotion without paying for it. That’s better than house odds. You don’t have the overhead expenses. And, if you’re long gold, you’re short fiat currencies and central bank manipulation. Nothing grows to the sky. All promotions end for reasons known as economic laws. The Fixed System applies those laws to market speculation in order to understand and profit.

And, always remember: Carthage must be destroyed.

Photo credit: fitzsean via Visual hunt / CC BY-ND


Leave a Reply

Your email address will not be published. Required fields are marked *