What is short selling?

Short selling is a tactic available to investors who anticipate a stock's price decline. That is, investors will borrow a number of shares from a broker, then sell them immediately. When the stock price is lower, they will buy back the shares and return the shares to the lender. If the trade goes smoothly, the investor will pocket the difference between the lower buy price and the higher ask price.

But these deals don't always go well. Sometimes the price of short-selling stocks goes up instead of down, forcing investors to rush to buy back shares at inflated costs to cover their losses.

And as we've seen with GameStop, the "short squeeze" causes institutional investors to suffer humiliating losses.

So what is Buffett's view?

Warren Buffett won't be surprised to learn that short sellers who bet down GameStop lost billions of dollars in the first month of 2021.

Buffett is known for taking a long-term view when it comes to investing, preferring undervalued stocks to stocks that have skyrocketed because of media attention and hype.

He does not deny that short selling can be profitable. However, he did not do that, because it only brought a limited profit but the possibility of loss was unlimited.

It's fascinating

At Berkshire Hathaway's annual meeting in 2001, he said short selling had "ruined a lot of people. "It can burn you out."

"It's absolutely fascinating," he continued. “You often see stocks that are suddenly overvalued rather than stocks that are unusually undervalue. So you think making money short selling is delicious. And all I can say is it's not for me."

It's really harsh

One of the main problems, Buffett says, is that short sellers are relying entirely on powerful and influential parties to inflate stocks.

"It's a very, very difficult thing to do because you have to deal with unpredictable losses and in fact people who overvalue stocks often straddle the thin line between advertiser and scammer," he said. shared in the 2001 meeting.

According to Buffett, short sellers can run out of money before the stock hysterics run out of ways to keep prices up.

“It was really harsh,” he said. “In my experience, making money in the long run is a lot easier.”

Simply stupid

Buffett also reacted strongly to the question of "leverage," an essential element of short selling because stocks need to be borrowed first to short.

In a Q&A with the University of Florida Business School in 1998, Buffett commented on the collapse of Long Term Capital Management (LTCM) at that time, a famous hedge fund that was once very successful and famous as one of the founders who won the Nobel Prize.

The fund had collapsed weeks earlier, in part because it had operated with too much leverage in investing in risky foreign currencies and volatile bonds.

"To make money that they didn't have and didn't need, they risked what they had and needed," Buffett told the audience. “That was stupid. Simply stupid. Regardless of your IQ, it is pointless if you risk something important for something unimportant. "

What should you do?

Publicly saying no to the pursuit of short-term profits, it's understandable why Buffett shies away from short selling.

Also at the University of Florida, Buffett made his stance with a very clear metaphor:

If you give him a gun with a million cartridges and only one cartridge and you say, 'Put the gun to your temple. How much money do you want in exchange for 1 shot, 'He won't pull the trigger. No matter how much you bet, it won't matter because the risk is obvious. So he doesn't care about that kind of game.

Buffett's strategy has long been slow but sure to win the race. Obviously, as a billionaire investor, this motto has worked for him over the years.

And you have something that Buffett didn't have when he started investing in 1942: technology.

New investors now have all sorts of investment apps at their disposal, all of which offer the opportunity to grow their money gradually without the big risks of short selling.

And you don't even have to have enough money to invest. With the microinvesting app, your debit or credit card purchases can be rounded to the nearest number so you can invest your spare change - and you do nothing but My account viewing is inching up day by day.

It sounds trivial, but that's the key. As Buffett once said "Great strides are often greeted by yawns."