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This post has little to do with south of Boston web design, but it is something I think is important. 

Last week the SEC banned short selling for financial services stocks.  It was an unprecedented move.  Some have come out to denounce it, but I think this action was positive and should be made permanent, rather than having the ban lifted in early October. 

Short selling is used when an investor believes a security (stock) will go down.  Here’s a description of a short sale from wikipedia:

“Short selling or “shorting” is the practice of selling things the seller does not own, (often financial instruments), in the hope of repurchasing them later at a lower price. Often the sold item is ‘borrowed’ or ‘rented’ for the period of sale and re-purchase.  Short-sellers attempt to profit from an expected decline in price (in contrast to the ordinary investment practice, where an investor “goes long,” purchasing a security in the hope the price will rise).”

The reason short selling is fundamentally flawed is it turns the stock market into the largest casino on the planet.  Look closely at how this quote from Wikipedia is worded.  It’s implies “betting” on which way someone thinks a stock will behave – it says nothing about owning something of substance.  This implies gambling, and it’s one of the reasons our financial system is struggling – it represents a fundamental flaw.  In fact, much of our financial infrastructure is becoming more casino-like and looks less like what it was originally intended to do.

The original intent of the stock market was to invest (not gamble).  It was designed to provide capital to entrepreneurs who had a good idea and a strong business model.  If the company performed well the stock would pay a dividend to those who owned it.  It was a way for a wide variety of people to participate in our free market economy who may not otherwise be able to do so.  It was a way to develop this country from the ground up, in a grass roots way.  It’s a brilliant model in which citizens can take ownership and have a vested interest in success. 

Like any successful model, the negative parts of human nature will try to undermine it.   

In recent years, the stock market has evolved into a casino.  It’s become a way for those addicted to gambling to ”justify” their vice.  The stock market has become a way for people to “make money” first, and invest in good ideas second.  That was not the original intent.  Originally, people ”made money” in the stock market via dividends, and increases in the value of the stock was secondary.  Now, this concept has been flipped: 

• People who participate in “shorting” care little about dividend payments and good ideas and more about “making money”
• People “bet” on which way the stock market will move, rather than investing in good ideas and business models
• People buy “options” which have no intrinsic value, and it’s sole purpose is to “bet” on the value of a stock – this is pure gambling

Short selling has nothing to do with investing in good ideas and good people.  It has nothing to do with finding unique business models or healthy entrepreneurial endeavor.  It has little in common with finding CEO’s that can make valuable ideas a reality.  Short selling is wrong on every level and should be banned forever.  This is also true with “options” and other financial instrument that have no actual value like ETF’s. 

Options and short selling are supposedly used as a form of ”insurance” to protect an investor from downturns in the market.  This “insurance” argument is used to justify high-stakes, wall street gambling and nothing else.  A stock should go up or down based on dividends, or potential of dividends, as well as the business model and management team.  Short selling and Options put false pressure on stock prices because people are not selling stocks based on a desire not to own them, but rather because they believe the price will go down.  While this distinction may seem insignificant, it’s absolutely essential to understand the subtle difference – on one side is healthy ownership on the other side is gambling and chance.

The added pressure these misguided financial instruments put on the real price of stocks is a fundamental flaw which will continue to plague our financial system.  Of course, those who create the tools that allow gamblers to feel better about their vice and undermine a great institution make billions of dollars.  It will be unlikely these practices will stop until we experience the downside that comes from swimming against the current of morality. 

Gambling is wrong and will undermine the original rightness of the financial system as long as it is allowed to persist.  I understand the seeming value of “insurance,” but in the case of short selling and Options this “duck” walks and talks like ”gambling and chance” rather than investing in good ideas.  Let’s call a spade a spade and ditch short selling and options forever.  

Who’s with me??!!