Public Service Announcement: Robinhood Is Not Your Friend

I didn’t want to do this. Talk about GameStop, Reddit, Stonks, short-squeezes, hedge funds and roaring kitties.

And yet, here we are.

GameStop Strip Mall Location

I didn’t want to do this because part of what I hate about traditional financial journalism is that it focuses on the sensational and statistically improbable, such that the average reader may come away with a twisted sense of what is normal and probable. And therefore the average reader might set a course that is unwise, or cement beliefs that are untrue.

I didn’t want to do this, but then I kept reading the stories that celebrated all the sensational. I fielded questions like – “are short sellers bad? If not, please explain” and comments like “I bought GME, wish me luck.” So I can’t help myself. 

My apologies for piling on. 

Short-selling is not bad. Short-selling is a necessary market function. Institutional market makers, otherwise commonly known as brokers, go short in the ordinary course of their business to maintain orderly market flow. Other institutional investors have the ability to “go short,” by borrowing securities, selling them at today’s market price, and then hoping to buy them back at a lower price in the future. Sometimes this makes money, when the stock declines. Sometimes this loses money, when the stock price rises. There is no deeper moral meaning to this short selling activity. 

Short-selling is part of the plumbing and wiring of financial markets. Short-selling is no more evil than copper wires are evil for lighting up your house. Should you, the non-licensed electrician, touch those copper wires? Hells NO! Step away from those wires. Do not short stocks yourself unless you want to get fried.

Institutional investors do sometimes short stocks. They also use borrowed money, engage in options strategies, and trade for short-term gains and losses. Retail investors should, probably, never do these things. I’m not saying it should be illegal for individuals to do this – we permit harmful vices all the time in a free society among consenting adults – but there should be warning labels and limits and deep discouragements and heavy taxes and all the speedbumps to prevent people from doing themselves much harm.

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