A lot of people buy stocks, hoping they will go up in value. But it is possible to bet in the opposite direction. You can bet against a stock, hoping it will plunge. It's called "shorting" a stock.
Most people don't short stocks, and we wondered why. So we decided to short something ourselves.
We had no idea what to short, or how to do it. So we asked the well-known short seller Andrew Left of Citron Research for advice. He interrupted me before I could finish explaining our plan.
"Don't do it," he said.
It turns out that shorting is not just the opposite of buying a stock. Left rattled off three reasons why we should give up.
- "You could lose an infinite amount of money." If you buy a stock for $10, the most you can lose is $10. A stock can't go any lower than zero. But if you short a stock, you can lose a lot more. A $10 stock can shoot up to $50, or $100, or $200. The more it goes up, the more you lose.
- "The forces of Wall Street are against you." Over time the stock market tends to go up, not down. By shorting something you are swimming against the current.
- People will hate you. Betting that a company's stock will drop can make you unpopular. Left says he has been sued four times. Once, he says, the CEO of a small company got really really mad and sent some guys to sit outside his house in a black truck.
That last one in particular was a problem for us. We're journalists. We can't take sides. We can't bet against a particular company. If there were a section on shorting in the NPR ethics guidelines I'm pretty sure it would say what Andrew Left said: "Don't do it."
We came up with a solution that seemed fair, and fun. Instead of shorting one company, we could short every company. We could short the entire stock market. We could short America!
We ran the idea by another well-known short seller, Sahm Adrangi, who runs a hedge fund called Kerrisdale Capital.
"That's a terrible idea," he said. "It's a great way to lose lots of money."
The U.S. stock market has a long long history of going up over time. And a lot of U.S. companies these days are really global multinational companies. So, he explained, we'd be shorting not just America but the entire planet.
Adrangi did have a name for what we were proposing. He called it "The Armageddon Trade."
Which kind of sealed it for me. I liked the ridiculousness of betting against America, and the entire planet.
Our previous two investments — in a toxic asset and a gold coin — both lost money. So why not?
I called a broker at E-Trade and told him we wanted to short the stock market. It was remarkably easy to do. We used $400 of our own, personal money; in the unlikely event we make a profit, we're going to give it to charity.
(Side note for finance nerds: We shorted SPY, the exchange-traded fund that tracks the S&P 500. That's not the whole stock market, but it's close.)
America, your bad news is now our good news. We'll let you know how it goes. We'll be using our @planetmoney Twitter account to tweet how we're doing every day. #sorryamerica
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Transcript
RENEE MONTAGNE, HOST:
Now, it would seem the whole point of buying stocks is for them to go up. But you can bet against a stock, hoping that it will drop. It's called shorting. Most people don't short stocks. Our Planet Money team wondered why and decided the best way to find out was to short something themselves and see what happens. Here's David Kestenbaum.
DAVID KESTENBAUM, BYLINE: We had no idea how to short something or what to short. So we consulted one of the best-known short-sellers, a guy named Andrew Left. He publishes a newsletter called "Citron Research." He was really helpful.
ANDREW LEFT: No. Don't do it.
KESTENBAUM: Why?
LEFT: It really is not for the average investor. It's dangerous. You can lose too much money doing it. The forces of Wall Street are against you.
KESTENBAUM: But everyone buys stocks. Why can't I do the opposite - bet against one?
LEFT: You can lose an infinite amount of money - infinite.
KESTENBAUM: If you buy a stock for $10, the most you can lose is $10. A stock can't go any lower than zero. But if you short a stock, you can lose a lot more. A $10 stock can shoot up to $50 or $100 or $200. The more it goes up, the more you lose.
LEFT: You can lose an infinite amount of money - infinite.
KESTENBAUM: Also, Andrew Left warns us, nobody likes short-sellers. They are betting a company's stock will drop or that a company will fail. He told us about this one time the CEO of a small company got really, really mad. Andrew's wife noticed a black truck parked across the street.
LEFT: And she went out, and they said, does Andrew Left live here? And she said, yes. And they said, OK, fine. They made comment - we're friends of - and they said the CEO's name.
KESTENBAUM: They just sat outside the house in that black truck.
LEFT: I called the CEO right there on the phone. I'm, like, what do you think you're doing? This is Wall Street. This is business. Like, what world do you live in?
KESTENBAUM: What did the guy say after you said that to him on the phone?
LEFT: Typical thuggery-type stuff - you don't know who I am. Like, what does that mean? I know who you are. You're the CEO of a publicly traded company.
KESTENBAUM: This, frankly, was a problem for us. As journalists, we can't bet against a company. But we came up with a solution that seemed clever and fair to everyone. Instead of shorting one stock, what if we shorted every stock? What if we bet against the entire stock market? What if we shorted America?
SAHM ANDRANGI: Yeah, that's a terrible idea.
KESTENBAUM: This is Sahm Andrangi, another well-known short-seller. He runs a hedge fund called Kerrisdale Capital.
ANDRANGI: It is very dangerous, and it's a great way to lose lots of money - especially American companies because I think 40 percent of their revenue comes from outside of the U.S.
KESTENBAUM: I'm shorting the whole planet.
ANDRANGI: Yeah. So it's why it usually doesn't work.
KESTENBAUM: I like the ridiculousness of it. Sahm Andrangi even had a name for what we were proposing. He called it the Armageddon trade. Andrew Left, our other expert, was actually OK with the idea. In the short-term, he said, the stock market could go down. But he was not comfortable with the term shorting America. He really objected to it.
LEFT: Do we have problems? Of course. But as for shorting America, I don't the way that sounds. We've really have done an amazing thing in this country.
KESTENBAUM: It's nice to hear a pep-talk from a guy who specializes in shorting.
LEFT: Yeah, listen - that's what's part of - amazing about this country is the ability to short. I mean, how great is that - that we live in a country that says - you know what? - you can buy a stock - you don't like the stock? You can short the stock.
KESTENBAUM: And that's what we did.
(SOUNDBITE OF PHONE RINGING)
STEPHEN PEARSON: E-TRADE elite client services. This is this Stephen Pearson.
KESTENBAUM: I did it through an E-TRADE account. We used $400 of our own personal money, not NPR's. I want to short something.
PEARSON: All right.
KESTENBAUM: I want to short the entire stock market.
PEARSON: The entire stock market.
KESTENBAUM: We shorted this thing that tracks the S&P 500. It has little slices of the 500 largest companies in it. It just took a minute.
PEARSON: All right. I've got that trade placed for you.
KESTENBAUM: America, your bad news is now our good news. I'm David Kestenbaum, NPR News. Transcript provided by NPR, Copyright NPR.
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