Hacker News Reader

Comment by pardoned_turkey | Hacker News Reader

Nobody is arguing that you should feel sorry for short-sellers. It's just a mildly interesting fact, although it's less meaningful than implied in the article, because Tesla is also one of the most-heavily traded companies on the market.

A lot of "index fund" folks criticize shorting and other "gambling" tactics, but it's probably worth noting that the argument for the soundness of index funds hinges on there being a class of traders who identify bad businesses and try to drive their price down. Otherwise, you're just pumping money into a snapshot of the market with no regard for the health of the constituent businesses, and it eventually ends in tears.

View on HN

There are reasons for short selling and we'd be in stone age without it.

Black-Scholes delta hedging (more fancy called "replication of theoretical option prices") relies on it. Shorting for Black-Scholes also has two facets: one where your loss is limited, when you buy a call then delta-hedge by shorting against it. And another one where the market is up to get you, selling a put and hedging by shorting. Works in theory but in practice you get funked and there's little to nothing you can do against it when it happens. I suspect most "betting against Tesla" shorters were actually institutional put sellers. Case when they weren't "betting" at all but hedging.

Price discovery doesn't rely on short selling. An active investor with stock in a company is already motivated to monitor if the company is overvalued and sell their stake. Short selling may improve the efficiency of price discovery but given the relativly high costs of needing to pay interest on the borrowed stock while you hold a short position (in contrast to a long position where you get payed dividends), I'm skeptical on how much selling actually helps with this.

There are certainly ways to use short selling as a hedge for other positions. But in those cases, loosing money on the short is typically good because it (hopefully) correlates to making more money on your main investment.

Why? If market on average grows then so is your snapshot. If it does not, then financial systen will eventually collapse so $1 = $0

Index funds aren’t the entire market. Just specific major stocks (eg, s&p 500). You want someone “thinning the herd” to keep the index sound over time.

The market is not an isolated thing sitting out there in nature. It is a complex system built and run by humans. Index investors are freeloading off of the work that a bunch of active investors are doing. This is good for the index investors because they do not need to pay for all the work that active investors are doing for them.

Active investors, for their part, need to either maintain enough of an edge over freeloaders to justify their pay, or serve a niche market with concerns other than "line go up" (this is where the "hedge" in "hedge fund" comes from).

If every participant is an index investor, then no one is doing the actual work, so the entire system crumbles.

What if it does not crumble? What if the people who "did the actual work" turn out to be the useless ones?

It’s not so much that people were trying to drive Tesla down as that the fundamentals simply don’t support its valuation.

The people shorting really just miscalculated how long the meme can carry on.

Reply on news.ycombinator.com