Shorting: how to do it like a hedge fund

‘Shorting’ has become the talk of the town, following the GameStop share-buying story. But what does shorting really mean, and why might it have value, rather than being seen as an attempt by ‘robbing’ hedge funds to ruin a business?

A recent tweet from Elon Musk got a lot of attention:

u can’t sell houses you don’t own, u can’t sell cars u don’t own, but u can sell stock u don’t own!”

And that, in brief, describes shorting. It stems from the fact that there are always some stocks that are of “short interest”, which is finance-speak for stocks that investors believe will go down in price in the future. That’s what certain hedge funds thought about GameStop.

It may seem odd to those of us who think in terms of investing in stocks in the hope the value will go up. Shorting is just the opposite: using this method investors attempt to profit from a stock’s price going down instead of up. As Rob Isbitts says in a recent Forbes article: “short selling is to investing what sword-swallowers are to entertainers: it is way, way at the high end of the riskiness spectrum.” So, it’s not something to try at home, in other words.

How do investors ‘short sell’ stock?

It’s definitely more complicated than buying a stock and then selling it. That’s the easy option.

The thing to remember is that the stock market revolves around ‘valuing’ a business. A business launches a new product that proves popular, and its share value rises. That’s what most investors look for: a company that is producing something which is perceived as valuable. Short sellers have a very different approach.

As Isbitts’ says: “They look for businesses that the market thinks too highly of. In other words, businesses that are, in their judgement, “overvalued.”

Hedge funds and others are always analysing markets, and often they are looking for stock selling at a higher price than they believe it is worth. Now, if they buy that stock there is no way that they can make a profit from their ‘buy’, because they predict it will be going down. However, their research has shown them an opportunity to sell the stock short.

In order to do this, they ‘borrow’ shares of the company they want to short from a broker. These shares are then owed to the broker at some point in the future. When they return them, they receive the profits of the short sale. Isbitts sums it up neatly: “If the stock price goes down, those same shares will be worth less than the short seller received. That allows them to repay those shares to the broker, but pay less to do so than they received when they shorted.”

There is of course a lot of risk involved in doing this, as a few hedge funds found out after the r/WallStreetBets community pushed the share value of GameStop up.

If you invest $5000 in shares priced $50, the most you can lose is $5000. But if you enter into a short on stock that is valued at $50 per share, and the share price rises to $500, then you owe the stock back to the broker at the new price of $500, not the $50 you shorted it at. In other words, you have lost a lot of money, because you never owned the stock in the first place.

The hedge funds believed that GameStop’s share price would fall, and so initiated short sale trades, but got caught out by a large group of retail investors who followed the crowd.

Whatever Elon Musk might say, shorting is not a scam: it’s an investment position, largely based on research and opinion about a company. What happened with GameStop is not necessarily good news for the small guy. They may go searching for other companies that have been heavily shorted and attempt to repeat their GameStop action. But tracking down overvalued businesses in a bid to make money could really bite them on the ass. This has been a particularly crazy episode, and it appears the subredditors have turned their attention to silver this week. Let’s hope that in this case ‘every cloud does indeed have a silver lining’.

iPhone location tracking is a security risk

There is no such thing as absolute privacy or security for smartphone users. The only way you can have control is by not storing information that you want to keep a secret on your phone.

As Apple CEO Tim Cook said last year, “The people who track on the internet know a lot more about you than if somebody’s looking in your window, a lot more.” It should make us pause to think about how we use our phones.

Apple, according to Zak Doffman, believes it is “privacy protector-in-chief,” and iOS14 is intended to demonstrate its privacy-first approach. Doffman points to the ongoing battle between Apple and Facebook over ad tracking, remarking, “Exploitation of our personal data has become a commodity traded between the world’s largest organisations.”

However, iOS users were surprised when Apple explained its location tracking. It is an invasive feature, and as Doffman says, “a perfect illustration of just because you can, doesn’t mean you should.”

Were you aware that the location tracking builds up a data collection of all the places you have visited, including times, dates, the type of transport you used to get there and how long you stayed at the location.

Jake Moore of ESET commented, “significant locations is one of those features hidden within the privacy section which many users tend not to be familiar with. I cannot think of a positive or useful reason why Apple would include this feature on any of their devices.”

If you check out the data repository on your iPhone, you will likely see that it stores certain places, times and dates, and that is because it is trying to work out if this might be important for a photo memory or a calendar entry. But do you really want this? I agree with Doffman when he says, “I don’t need my phone tracking every single location I visit and deciding which it deems significant to save me a few seconds of effort.”

According to Apple, the device wants to “learn the places that are significant to you.” However, you can breathe a small sigh of relief when you learn that the “data is end-to-end encrypted and cannot be read by Apple.”

What this illustrates is that even though the data is encrypted, you still don’t have absolute control over the security of your iPhone. John Opdenakker, an information security expert, said, “While Apple’s encryption and device-only restriction certainly reduces the security and privacy risks, I personally switched this feature off because it doesn’t offers real benefits and just feels creepy.”  He added, “What worries me from a privacy perspective is that this feature is enabled by default and that the setting is hidden away such that the average user probably doesn’t find it.”

Don’t forget that you can turn off other location-based services on your Apple device, such as ads and alerts. Want to know where to find them all? Just go to “Settings-Privacy-Location Services-System Services-Significant Locations.”

Are you switching to Signal?

For some years now almost the entire world has been using WhatsApp thanks to it being the leading secure messaging platform. However, that is all changing  due to a slowness on the part of its owner Facebook to introduce multi-device access.

Zak Doffman comments that this has been made worse by “the fast-moving convergence of messaging and calls—and with WhatsApp calls still tied to a phone, rather than an easier-to-use large screen device, it’s becoming a major stumbling block.”

Facebook tried to rectify this by launching the cross-platform Messenger Rooms, but these don’t offer end-to-end encryption. So, as Doffman says, it isn’t an ideal way to communicate if your information is sensitive or confidential.

Admittedly, WhatsApp does do a good job of securing voice and video calls from its iPhone and Android apps, and you can now have up to eight people on a call. It also has a desktop app in the pipeline, but it’s all a bit too late.

The super secure Signal platform is beating WhatsApp. It has already started beta testing one-to-one video and voice calls from its desktop app. Group calls are not available yet, but they won’t be far away, as Signal’s recent announcement would seem to indicate: “We think that calls need to zoom out of the past and into the future, and your feedback will help us get there.” Obviously this was aimed at Zoom, which dominated work and personal conversations during lockdown.

“This release is one of the first steps towards our goal of enabling secure voice and video calls that are available on all of your devices,” Signal says, adding, “in addition to being end-to-end encrypted and free for everyone to use.”

However, Doffman points out that Signal isn’t really that concerned about Zoom,  it is WhatsApp that is the real target. And it is picking up traction with those who don’t really trust Facebook for messaging. The only downsides of Signal at the moment are first, the number of users is relatively small at the moment, and second, there are no backups yet, so if you lose your device, you lose your messages.

The recent protests in the USA and Hong Kong have highlighted the need for a more secure messaging by anyone concerned about interception, metadata or tracking. What’s more Signal is chasing WhatsApps users and is ahead of the game. If WhatsApp wants to retain its No.1 position, it needs to implement end-to-end encrypted back-ups and linked devices. Not used Signal yet? Why not install it on your phone and try it now.

Avoiding the fakes – when you’re looking for an online coach

Having a life or business coach is an invaluable investment in yourself. However, finding one that has the right expertise and who gives you value for money can be a search with challenges, especially if you rely on the online coaching industry.

When you venture on to the web, you’ll find coaches for every aspect of life and it is spectacularly easy to find them. But, as the Romans said,

“Caveat Emptor,” or “let the buyer beware.”

I say this because the Internet has made it very easy for anyone to set them up as some sort of guru, offering wealth and power in five easy steps, if you just pay for their book, course or one-to-one sessions with them. So, how can you tell the wheat from the chaff? Well, there are a few things you can watch out for.

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Exaggerated claims

Policing the Internet is a work in progress and currently it is still easy for those who want to trick you to get on the first page of results. These people know how to SEO their sites to the hilt. My advice is to look out for coaches who make exaggerated claims. Is the offer just too good to be true? Will you really make millions in a matter of months? Look for the coaches that don’t promise the spectacular and unachievable, who don’t use flashy language and who acknowledge you have to put the work in for any real change to happen.

Check their credentials

And I don’t mean their training certificates. If a coach claims they can help you to boost your income to seven figures, make sure you find out if they have been able to do that for themselves. Do your research to make sure the coach has achieved what they claim to be offering. But don’t stop there. Look deeper. Did the coach have a more advantageous starting point than you; in other words, did they work to get where they are, or have they benefited from a fortunate background? If you and the coach have very different starting points, then they possibly are not the one for you.

Watch out for the marketing tricks

Beware of certain sales tactics. For example, there are many who throw in an enormous number of ‘bonuses’, which is an attempt to make you feel more comfortable with the high cost of the course. Also, watch out for those who use special offers within a limited time period that are intended to make you pressure buy. This probably means they know the course isn’t worth the money they are charging. Instead, find one who understands the investment you are making and who can demonstrate that you will be getting value for money.

The free content

Like pressure buying, the offer of free content is another marketing trick. Sometimes the free content is a genuine offer. But, do study what you are offered gratis. Is it just a rehash of some information that is already on the site, for example? The quality of the free content directly relates to the quality of the course you will pay for. Is it going to be worth it?

Finally, you must go with your gut. What inconsistencies can you spot? Do they seem like a balanced person? Are they arrogant or do they brag about themselves? If something feels off, then it probably is. Trust your instincts before you spend your money.