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
