Why Not Short Even When Bearish? Munger Did the Math on a 'Losing Trade'

marsbit2026-06-03 tarihinde yayınlandı2026-06-03 tarihinde güncellendi

Özet

Why Not Short Even When Bearish? Charlie Munger's Calculated "Loss-Making Account" Many traders, drawn to speculative tools like futures contracts, often face repeated failures. As the article notes, unless one is a genius, such instruments should be avoided for long-term profit-seeking. Similarly, the practice of short selling is viewed with caution. The author firmly states a policy of not shorting, even when bearish, preferring to simply wait. The core reason? Successful short selling requires exceptionally difficult conditions to profit. Legendary investors Warren Buffett and Charlie Munger have themselves reflected on painful short-selling experiences. Munger highlights two critical flaws in the mathematical logic of shorting: 1. Asymmetrical Risk/Reward: A long position has a maximum loss of 100% but unlimited upside. A short position caps profit at 100% (if a stock falls to zero) but carries theoretically unlimited loss potential. 2. The "Promoter" Problem: Fraudulent or struggling companies can prolong their decline. As Munger said, "You can run out of money before the promoter runs out of ideas," meaning short sellers may be forced to cover positions at a loss before the company's true fate unfolds. The article cites Stanley Druckenmiller, a famed hedge fund manager. He once shorted 12 companies that all eventually went bankrupt. However, intense market rallies forced him to cover his positions within three weeks, resulting in massive losses—$200 million of hi...

At the end of a previous article, there was a comment that said:

"Recently, I've become obsessed with futures contracts, always thinking I can make money, but trying again and again, failing again and again..."

Regarding such financial instruments, I've mentioned many times in articles before that ordinary people, except for geniuses, should avoid touching them, especially not using them as tools for long-term profit-making and gains.

Trying repeatedly but failing in the end basically proves that this reader is not a genius, so it's better to avoid them from now on.

I had this experience myself in my early years, and fortunately, I haven't touched these instruments since then.

Another instrument as popular among many enthusiasts as futures contracts is short selling.

My attitude towards this instrument is equally firm—I definitely do not use it. Even if bearish, I won't short; I will only wait.

Why not short even when bearish?

Because to successfully execute a short trade and profit from it requires some additional conditions that are even harder to grasp.

In fact, not only is it difficult for ordinary people to grasp, but even recognized investment masters like Warren Buffett and Charlie Munger have reflected on their past experiences with short selling multiple times in their shareholder meeting transcripts.

In my impression, Munger's reflections on his short selling experiences are particularly profound and poignant. Two of his comments that I particularly like are:

The first is that he repeatedly emphasized that short selling is mathematically unprofitable, with asymmetric risk and reward.

When a short seller buys a stock (going long), his maximum loss is 100%, but his profit potential is unlimited; whereas when he shorts a stock, his maximum gain is capped at 100% (if the stock price falls to zero), but his potential loss is unlimited.

Just from common sense, an operation with such asymmetric risk and reward should be rejected immediately.

Another point he made is: "You can run out of money before the promoter runs out of ideas."

What this means is: Many companies targeted for short selling do indeed have problems, or are even run by fraudsters. But these operators are very skilled at sustaining the bubble; they can use new ideas and tactics to keep the stock price rising. This causes the short seller's margin to be exhausted while these operators can still continue to support the rising stock price.

Recently, a veritable Wall Street titan also disclosed his past experiences with short selling.

Many readers have probably heard of Stanley Druckenmiller, who was once a top trader under George Soros.

For someone like him, many people's (including my own) first impression is likely: He must handle all kinds of financial instruments with great proficiency and ease.

"Short selling" must be a piece of cake.

But what was the result?

In his interview (see reference link), he mentioned that he once picked 12 companies to short. In the end, all 12 companies did indeed go bankrupt.

But he didn't last until the day they went bankrupt.

Within three weeks, the companies' stock prices were driven to extreme highs by frenzied market sentiment, causing him not only to lose his entire $200 million principal but also to be forced to cover his positions, incurring an additional $600 million loss.

Finally, he admitted that he might have never made money on short selling in his life.

Druckenmiller's experience perfectly encompasses the two issues Munger discussed:

- He not only lost his principal but also lost additional money.

- He didn't wait for the fraudsters' tricks to be exposed; his principal was already depleted.

Even such two master-level figures have at least proven that they are not geniuses when it comes to the operation of short selling. I think ordinary investors should be even more cautious.

Not only short selling, but for other financial instruments (including the futures contracts mentioned above), before anyone thinks of using them to achieve long-term stable profits, they should seriously examine themselves and not waste time again and again on these fancy financial tools.

Reference link:

https://x.com/mubeitech/status/2044744282767028356?s=20

İlgili Sorular

QWhy does the author advise against engaging in practices like short selling and contracts?

AThe author advises against them because they are complex financial tools where the average person is likely to lose money. For short selling specifically, the risks and rewards are asymmetrical (unlimited potential loss vs. capped gain), and investors can run out of capital before a fraudulent or overvalued company's stock finally declines.

QAccording to Charlie Munger, what is the key mathematical disadvantage of short selling?

ACharlie Munger highlighted that short selling is mathematically disadvantageous due to its asymmetric risk-reward profile. A short seller's maximum gain is 100% (if the stock goes to zero), but their potential loss is theoretically unlimited, making it an unfavorable proposition.

QWhat does Charlie Munger mean by the quote: 'You can run out of money before the promoter runs out of ideas' in the context of short selling?

AIt means that companies targeted by short sellers, even if fraudulent or problematic, can often prolong their inflated stock price through new schemes, narratives, or promotional tactics. As a result, the short seller may exhaust their financial resources (e.g., margin) before the company's misdeeds are exposed and the stock price finally collapses.

QWhat was the outcome of Stanley Druckenmiller's attempt to short 12 companies, as mentioned in the article?

AAlthough all 12 companies he shorted eventually went bankrupt, Stanley Druckenmiller did not profit. Within three weeks, their stock prices surged due to market frenzy, forcing him to cover his short positions at a massive loss. He lost his $200 million principal and an additional $600 million, admitting he likely never made money from shorting in his career.

QWhat is the author's suggested alternative action when one is bearish on an asset, instead of short selling?

AThe author suggests that instead of short selling, one should simply wait. The recommended approach is to avoid the tool altogether and not take action, implying a strategy of patience and observation rather than engaging in a high-risk short position.

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