Sat 18th November 2006, 2:04am
QUOTE(LamontStormstar @ Fri 17th November 2006, 6:28pm)
I have no idea what that means and I'm not downloading that large thing that probably won't answer it.
Search engines for "the man behind the red desk" aren't helpful, either.
The large thing is a Shockwave-based slideshow detailing how short selling works. Personally, I prefer Spy Magazine's simpler and more understandable explanation from the September 1991 issue (reproduced without permission, sorry E. Graydon):
Here's how a short seller goes about making money after he has identified a stock whose price he's sure will drop: First he borrows some shares of the stock from the brokerage house. Eventually the short seller will have to replace what he has borrowed, but in the meantime he can do something wonderful with his borrowed shares: he sells them in the open market and keeps the proceeds. If his prediction is accurate, the stock will dive in the coming weeks or months (losses, product failure, embezzlement - all these are helpful.) With the stock now much cheaper, the short seller buys the same number of shares that he borrowed and squares things with his broker. His profit is the difference between the amount he received when he sold the shares and the amount he later paid when he replaced them. Really, a short seller is just like any other investor - he hopes to make money by buying low and selling high. What's different about the short seller is that he reverses the normal order. He sells high first, then he buys low.
Now, I should again point out that there's nothing illegal about short selling in itself, as long as the shorter can, and actually does, honor his agreements. However, a naked
short seller is someone who can't honor his agreements, i.e., cover his risk - if the stock doesn't take a nosedive, and in fact goes up in value, then such a person has to declare bankruptcy because he doesn't have the money to buy back the shares at the higher price.
Tabby, am I fairly close on the mark here? Presumably the "man behind the red desk" is the naked short seller depicted in the Shockwave presentation, as this person is depicted as sitting behind a red desk, though it's really more like a filled rectangle.
Okay... so we might now ask, what's the big deal? Well, we have two sides to this issue. On the one hand, you have folks like our very own Mr. Patrick Byrne. He's the CEO of Overstock.com, apparently a major target for short sellers. They believe Byrne is a "wack-job" who doesn't know how to run a business properly, and that Overstock.com is essentially doomed to "penny-stock" status. This is, in fact, what they want,
so that they can make money off of the company's failure. And so they spare no effort in attacking Byrne at every possible opportunity.
On the other hand, you have Mantanweissland. His
argument is that short sellers actually do a public service for investors, by counteracting what he calls "pump and dump" schemes - i.e., attempts by less savory brokers and entrepreneurs to hype the stock offerings of "microcapitalized" or "no-business-model" companies that have no real chance of success (such as, say, Wikia Corporation). If handled effectively, the hype drives up stock prices early on in the selling cycle, so that the unsavory types can sell off their shares quickly and laugh all the way to the bank while the company disintegrates.
Also, remember that the short seller's risk is theoretically infinite.
While you can only lose 100 percent of your investment in a normal stock transaction, in a shorting transaction you can lose far more than that, because the stock's value could, theoretically, increase by a thousand percent or more. Critics of the practice claim that this is why people like Mantanweissland do things like try to bad-mouth and denigrate target companies on public websites: They live in perpetual fear of ruination.
It's a pretty good motivator!
To me, the essential question is this: Can you believe that someone who actively seeks the downfall of certain publicly-traded companies, along with their employees, vendors, and contractors, in order to make a profit, would do so out of a genuine desire to protect other investors?
I can't, but I'm just a cynic, I guess!