Trading on stocks – some of the biggest shorts of all time

 Buy good stocks and hold them – that’s the fundamental principle to investing, isn’t it? The majority of the time, stocks rise. There are periods when equities slide – we’ve all lived through at least one bear market. But bull markets are stronger and last for longer - and that’s why the major indices keep hitting all-time highs.

But a short selling strategy does not always fail, as the recent collapse in Tech Pro Technology Development shares show.

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Tech Pro

 

On Thursday (July 28th), shares in Tech Pro plunged nearly 90% after arguably the most successful aggressive shorts in history. A report from activist investor and short-seller Glaucus Research Group said Tech Pro was a strong sell and gave it a price target of zero, while accusing the firm of overstating profits.

According to Bloomberg, volume was 50 times higher than usual and the short interest rose to 3.7%, a record.

Iomega

 

One of the great shorts, Iomega’s story finally came to an end in 2008, when it was sold to EMC for under $4 a share. Iomega was once trading at $140 before the short sellers went aggressive as they predicted , correctly, that competition would rise and technology would make the Zip drive useless before too long.

Valeant

 

A report from Citron Research queried the accounting practices of Valeant Pharmaceuticals International. Speaking to CNBC, Citron Research editor Andrew Left said he had shorted the stock – which plummeted 39% on the release of the report. Valeant is currently trading at less than one-tenth of its peak in July 2015.

Short Strategy

 

For some investors, of course, there is no merit in short selling. Regulators in many jurisdictions agree and there are all sorts of rules preventing naked short selling. Germany and other European countries have cracked down heavily on this practice.

Italy has placed a ban on shorting bank stocks, amid fears of a complete meltdown among some lenders.

US regulators banned short selling of financial stocks in 2008, while China has introduced its own curbs. Regulators like to ban the practice when markets are in turmoil as they think it contributes to the problem.

However, a study by the New York Fed from 2012 argues that short selling bans don’t work.

“The 2008 ban on short sales failed to slow the decline in the price of financial stocks; in fact, prices fell markedly over the two weeks in which the ban was in effect and stabilized once it was lifted,” explained authors Robert Battalio, Hamid Mehran and Paul Schultz.

“Similarly, following the downgrade of the U.S. sovereign credit rating in 2011—another notable period of market stress—stocks subject to short-selling restrictions performed worse than stocks free of such restraints.“

Of course, this probably won’t prevent regulators from coming down hard on short sellers when markets are under pressure.