A Word About Short Selling: Don't

The fracas in January over a company called GameStop suddenly brought the practice of shorting stocks back into the public spotlight. GameStop sells video games via a network of thousands of retail outlets that have the anachronistic feel of Blockbuster stores. Business has soured, mainly because of online competition. GameStop scratched out a profit in fiscal 2017 (ending January 31, 2018), then lost money in the next two years and is estimated to have lost $680 million in the past 12 months.

- By James K. Glassman

GameStop was a good candidate for a short—that is, a bet that its stock price would decline (a process I’ll describe shortly). And, indeed, if you had shorted GameStop a while back, you could have made a lot of money. The share price skidded from the mid $30s in November 2015 to $3.85 last summer. Then, the price of GameStop started climbing, for no particularly good reason, and shares closed 2020 at about $19, which some short sellers believed was unsustainably high for a brick-and-mortar company that was wallowing in red ink.

This is where the story takes an unusual turn, familiar by now to anyone who follows the stock market. In the course of two weeks, shares of GameStop skyrocketed to $348. The short sellers, mainly hedge funds, were crushed, trading platforms such as Robinhood limited purchases, and politicians and regulators caused an uproar. All I want to say about GameStop is that all stock prices go up and down, but in the long run they reflect the actual underlying value of the company. So, no growth, no earnings, no three-hundred-dollar stock price.

My subject for this column, however, is not the GameStop controversy, which has been portrayed by some as a moral contest between scrappy little investors versus evil Wall Street speculators. My subject is short selling, which was the predicate for the controversy in the first place.