In The Big Short, Michael Lewis outlined the experience of a handful of investors who saw the red flags before the onset of the 2007-08 financial crisis and were determined to find ways to profit from the collapse. The meme stock phenomenon, which made for many salacious headlines earlier this year, once again brought short-selling into the limelight. The power of social media and retail-investor crowds were harnessed as a way to “stick it to the man” via a combination of Reddit and Robinhood, squeezing short-sellers out of their positions (with “the man” in this case being hedge funds trying to profit from the collapse of some struggling companies). More quietly, however, shorting stocks is a standard part of everyday financial markets and generally goes unnoticed by most investors.

Recently, a client inquired about the effects of investors shorting a given small-cap stock – particularly one that he believes to be a good business at its core. Should business fundamentals ultimately win out, or are common stock shareholders (aka “the longs”) at the mercy of “the shorts,” barring a coordinated effort ala Robinhood/meme situation to drive out the short interest? Frankly, I don’t know enough about the subject to provide a robust off-the-cuff answer, so my goal today is to research this topic and see where that leads us.

Here We Go!

Links mentioned in this episode: