32 - Shorting Stocks is a Negative-Sum Game (Investing First Principle)

Mental Models discussed in this podcast: Zero Based Thinking Negative Carry Opportunity Cost Hidden Costs Please review and rate the podcast If you enjoyed this podcast and found it helpful, please consider leaving me a review. Your feedback helps me to improve the podcast and grow the show's audience.  Support the Podcast on Patreon This is a podcast supported by listeners like you. If you'd like to support this podcast and help me to continue creating great investing content, please consider becoming a Patron at DIYInvesting.org/Patron. You can find out more information by listening to episode 11 of this podcast. Shorting Stocks is a Negative-Sum Game (Investing First Principle) - Show Outline The full show notes for this episode are available at https://www.diyinvesting.org/Episode32 Mental Model: Zero-Sum Games Any gains by one participant must be offset with losses by other participants. The sum total of all value for all participants is equal to zero Why shorting Stocks is a Negative-Sum Game Stocks as a whole provide a positive expected value Shorting stocks is the opposite. Now you have a negative expected value.  Further complicated by the issue of "negative carry." When you purchase stock in a company the only cost of holding it, is an opportunity cost. What you could have spent the money on or what alternative investments you could have chosen. This opportunity cost is an implicit or hidden cost. Shorting is different. The act of shorting a stock involves two key explicit costs, both of which create negative carry. Borrowing Costs Dividend Payments Other Key Problems with Shorting Time Horizon Matters a lot: You can be right and still lose money Everyone is working against you. CEO, Employees, debt markets, other investors, etc... The economy generally gets better over time. You're fighting the tide. Like gambling in a casino "The House Always Wins."