Here’s an article by Michael J. Panzner about the shortening of the investment cycle. Here’s a snippet:
The stock market has changed a great deal in recent years. The pace has quickened, the influence of hedge funds has expanded and the range of activities that traders and investors engage in has grown by leaps and bounds. Attitudes and approaches are often very different from what they were even 10 years ago, reflecting a new reality in the wake of the bubble and its aftermath. This seems especially true with respect to the impact that increased short selling is having on the equity landscape.
Short selling has been around as long as the markets, but the tactic remains poorly understood. Many people believe, for example, that selling short is the opposite of going long. While this is simplistically true, the stock must still be borrowed from a shareholder and eventually returned in order to make delivery. This creates an ever-present element of time pressure that does not necessarily exist for the long-only bulls, especially those who don’t buy on margin.
The economics of short selling are also less favorable than for traditional long-only investing. The differences run the gamut from the costs involved (e.g., dividends that must be reimbursed while the stock is on loan) to risk-reward and return profiles. For unleveraged shareholders, the maximum loss is the initial outlay, and ongoing success often garners additional benefits through the magic of compounding. For short sellers, the potential downside is unlimited and winnings naturally diminish as prices fall. [read the rest...]
