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Maybe my question is trivial but I can't find an answer on the internet.

After reading a lot about personal finance I deducted that I should hold S&P500 or World ETF for the long term, at least 5 or 10 years.

However, I still have a question about all of that. We hold ETF because companies will eventually fail in their business some day, they will be replaced by better company in the ETF and that diversifies a lot for you. Also, if you bet on a single company, there is a high chance that it will go bankruptcy some day.

So I don't get why you could not short, let us say 20 or 50 companies, that you consider to be bad (or even good actually, as it is like casino and you are not someone capable of predicting what companies are good in the future), not necessarily in the S&P 500. Aren't you likely to have let's say 19 out of those companies that will go down in the long run?

Is this strategy not profitable because of the interest rate of the short position? Or is it because of the inflation and the circulating amount of money that increases? There will be more and more money around and stock will be positively affected by that? I have several hypothesis without being able to prove one. Maybe it is something else I do not know yet!

EDIT thanks to @D Stanley's comment I used bankruptcy but this is extremal, and also optimal for a short position on one of the companies. If out of the 20, 3 bankrupt, 15 goes down, and 2 quadruple their value, I am likely to be winning?

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    Nowhere near 19 out of 20 publicly traded companies go bankrupt. Bankruptcy is likely higher in small private companies, but still probably not anywhere close to 95%.
    – D Stanley
    Nov 8, 2022 at 23:10
  • @DStanley, I edited my question to try clarify my thinking :) thanks!
    – JKHA
    Nov 9, 2022 at 0:47
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    Everyone dies eventually. It's still a bad idea to bet that anyone in particular will die any time soon unless you know a heck of a lot about them and their situation.
    – keshlam
    Nov 9, 2022 at 5:15
  • Companies are often bought out/taken over by other companies rather than going bankrupt. Nov 11, 2022 at 3:11
  • I feel obliged to downvote because the level of risk presented, alongside the naivety of the question is something I would call quite dangerous. Please thoughtfully read the answers provided and consider whether you may be in over your head before you start making stock selections, and especially before you short a stock. Nov 11, 2022 at 16:10

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An important feature of short-selling is that the potential loss is not limited to the initial investment. If one of the 50 companies in your short-selling portfolio goes up a lot, you would be on the hook to buy back that stock at whatever price it ends up at.

The general idea of "make a lot of smallish investments and hope that one of them turns out amazing" only works if the losses from the failed candidates are capped by the smallish amount you've invested.

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The key problem with your idea is "in the long run". Yes, in the long run, most companies will go out of business. But that long run could be longer than you will live.

Some companies have stayed in business for centuries. Many have stayed in business for decades. Statistically, in the long run the stock market consistently goes up. Historically, you would have made more money if you gambled that a random stock would go up than if you gambled that it would go down.

Of course if you have reason to believe that a given company will soon go bankrupt, or take a sharp downturn, it can make sense to short sell it. But most companies on the stock exchanges will go up in any given year, not down.

The reason for buying ETFs or mutual funds is not because most of the stocks that make them up will go down. If that was true, the fund as a whole would presumably go down and it would be a bad investment. The advantage of such funds is that they spread your risk. A FEW of the companies that are included in the fund will go broke or suffer a downturn. By buying into many companies, the majority that go up will make up for the few that go down.

It's like life insurance. Everyone dies sooner or later. Does that mean that the life insurance industry is a foolish, losing game, because they KNOW that they'll have to pay a death benefit to every customer sooner or later? No, because every customer isn't going to die TOMORROW. They charge premiums calculated so that, on the average, they will collect more money in premiums than they pay out in benefits.

Presumably every company will go out of business sooner or later. If nothing else, when the world ends, however you suppose that's going to happen. But the fact that, say, Coca Cola or McDonalds or Wall-Mart will likely some day go broke as people's tastes change or as new competitors come along, doesn't make it a bad investment TODAY. Maybe in 50 or 100 years it will be a bad investment, but not today. Of course if I knew just which companies will boom in the next year and which would go bust, I'd be much richer than I am.

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  • "You would have made more money if you gambled that a random stock would go up than if you gambled that it would go down." - this could perhaps be worded better. That the stock market has historically gone up doesn't imply that most stocks go up - there are few big winners and many small losers. Historically, less than half of stocks have delivered gains. Even though in aggregate, gains from rising stocks eclipse losses from falling stocks, a randomly picked stock is more likely to go down than up. Nov 9, 2022 at 20:26
  • @NuclearHoagie A fascinating assertion. Can you point me to some data to back that up? In principle one could pick, say, 100 random stocks and see which ones have gone up over some period of time and which down, but that would be a lot of work. If I had all the data in a database it would be easy, but I don't. In any case, we're back to mutual funds: If you buy a bunch of stocks, the odds are that the aggregate will go up. (Well, mutual funds or just being rich enough to buy a bunch of stocks.)
    – Jay
    Nov 10, 2022 at 14:08
  • This article states that between 1926 and 2015, only 48% of stocks saw lifetime gains. The trend seems to be with more stocks being introduced in later decades, fewer of them make money: kiplinger.com/article/investing/… It seems well documented that the vast majority of market gains come from very few stocks. Diversification is key when shooting for low-probability, high-gain stocks, since the aggregate historically always goes up but most of the individual stocks actually go down. Nov 10, 2022 at 14:20
  • Okay, I would have guessed more winners, but 48% is not wildly implausible. Especially over 90 years. I'd guess -- and let me emphasize I'm just guessing -- that the longer the time frame, the higher percentage of losers. I suspect that in a shorter term you'd see a higher percentage of winners. You shift from percentage of companies to percentage of gains. 48% is, after all, just under half, not a tiny minority, so if you pick a random stock, it's basically 50/50 whether it will go up in the long term, and probably better than that in the mid term.
    – Jay
    Nov 11, 2022 at 5:00

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