Why is shorting often more profitable than going long?
People usually think of the relationship between 100 times 1.1 and 100 times 0.9. From a mathematical perspective, that is indeed the case—shorting can be more profitable than going long.
In the U.S., many professional investment banking institutions only short and do not go long. Even when the overall market index is rising, they can still make a lot of money by shorting.
Basically, companies that short seldom end up losing, whereas companies that go long often run into financial problems.
Why does this happen? Because shorting is deterministic, while going long is not. One thing is certain: a person will die—but you can’t calculate how old they’ll be when they die.
The stock market works the same way. When touchscreen phones appear, you don’t know whether Android or Apple will win, but one thing is certain: Nokia will definitely be wiped out.
Take the automotive industry in its early days—there were many companies, like Ford, General Motors, and Mercedes. Which one should you invest in?
At this point, you can short companies related to horse-drawn carriages, because new technology will inevitably replace outdated technology.
In essence, it’s also a form of value investing. You know its value is being eroded—so you should short it.
People usually think of the relationship between 100 times 1.1 and 100 times 0.9. From a mathematical perspective, that is indeed the case—shorting can be more profitable than going long.
In the U.S., many professional investment banking institutions only short and do not go long. Even when the overall market index is rising, they can still make a lot of money by shorting.
Basically, companies that short seldom end up losing, whereas companies that go long often run into financial problems.
Why does this happen? Because shorting is deterministic, while going long is not. One thing is certain: a person will die—but you can’t calculate how old they’ll be when they die.
The stock market works the same way. When touchscreen phones appear, you don’t know whether Android or Apple will win, but one thing is certain: Nokia will definitely be wiped out.
Take the automotive industry in its early days—there were many companies, like Ford, General Motors, and Mercedes. Which one should you invest in?
At this point, you can short companies related to horse-drawn carriages, because new technology will inevitably replace outdated technology.
In essence, it’s also a form of value investing. You know its value is being eroded—so you should short it.