Is there anything that rankles populists who are "anti-speculator" more than the ability to short stocks? From time to time countries that are upset about falling markets will ban short-selling. But I have defended stock (and other asset shorting) as a critical market mechanism that helps to limit damaging bubbles. I wrote waaaaaay back in 2008, after the US temporarily banned short selling of certain assets:
At the start of the bubble, a particular asset (be it an equity or a commodity like oil) is owned by a mix of people who have different expectations about future price movements. For whatever reasons, in a bubble, a subset of the market develops rapidly rising expectations about the value of the asset. They start buying the asset, and the price starts rising. As the price rises, and these bulls buy in, folks who owned the asset previously and are less bullish about the future will sell to the new buyers. The very fact of the rising price of the asset from this buying reinforces the bulls' feeling that the sky is the limit for prices, and bulls buy in even more.
Let's fast forward to a point where the price has risen to some stratospheric levels vs. the previous pricing as well as historical norms or ratios. The ownership base for the asset is now disproportionately
made up of those sky-is-the-limit bulls, while everyone who thought these guys were overly optimistic and a bit wonky have sold out. 99.9% of the world now thinks the asset is grossly overvalued. But how does it come to earth? After all, the only way the price can drop is if some owners sell, and all the owners are super-bulls who are unlikely to do so. As a result, the bubble might continue and grow long after most of the world has seen the insanity of it.
Thus, we have short-selling. Short-selling allows the other 99.9% who are not owners to sell part of the asset anyway, casting their financial vote [on] the value of the company. Short-selling shortens bubbles, hastens the reckoning, and in the process generally reduces the wreckage on the back end.
Shorting the market in the way they did is very risky, and one has to be very confident, perhaps overconfident, in one’s forecast to take such risks. As a consequence, many people who were pessimistic about the housing market simply stayed on the sidelines—which in turn meant that for a while, valuations in the market primarily reflected the beliefs of optimists.
The timing issue is key. I have been right probably in 4 of out the 5 major market shorting opportunities I have identified in the last 10 years, but have been on average 2 years early with all of them, meaning I lost money on most of them, or made money after enduring some really big paper losses for a while.