The Short, The Index, And The Private Markets
CFA Institute Contributors, 25 April 2021
The GameStop story returned short-sellers to the front pages of the global financial press. The Reddit crowd’s “Main Street Takes Revenge on Wall Street” narrative cast these short sellers as the villains of the financial markets. It also created enough consensus buying pressure to squeeze their positions into margin calls and realized losses.
But my focus here is not the GameStop story. Rather, it is the necessity of both short positions and representative, investable benchmarks for private market investments.
Cash is king.
I admit early in my career I viewed naked short positions as a noisy and disturbing component of the market. But I was confident that the market would discover the fair value and that that fair value would become the transactional price.
Trained as a long investor, I had fixed-income quant notions, equilibrium economics, and efficient pricing models in mind, and when I was thrown headfirst into equity fundamental analysis in corporate finance and investing in public markets, I was fascinated by equity stories and entrepreneurial narratives. At that time, I naively believed that pure speculative short positions, those that sought to profit from a company’s misfortunes, had some – yes, let’s say it – unethical components.
Later, equity markets taught me about real-life investing and I soon realized the important and courageous role shorts play. Value is a target, an expectation, the result of the best possible judgment process. But the price you pay or receive in actual transactions is the only objective element that matters. The cash of settled transaction is king. The rest is opinion.
