Myth #10: The myth of the "structural short"

"With great power comes great responsibility."

– Uncle Ben, Spider-Man

Structural shorts are stocks perceived as irreversibly doomed; horse carriages in the 1930s, print papers in the digital age, and coal mines in the renewable energy era. They are supposedly compelling shorts because the dynamics of their business models or industries are structurally flawed.

Structural shorts are as cheap as market gurus flapping their mouths in the media, a dime a dozen. Profitable structural shorts are the unicorns of the financial services industry, as rare and elusive as market wizards.

In Chapter 3, Take a Walk on the Wild Short Side, we dispel the myth of structural shorts. For now, let us focus on what it means to look for structural shorts when managing other people's money. Market participants have held the comfortable belief that somewhere out there, there is a stock that they just can sell short and throw away the key. Since it will see itself to bankruptcy, it does not need any further maintenance.

Now, they do not hold reciprocal beliefs about their longs. Of course, they believe they require continuous maintenance. They believe in meeting with management, updating earnings models, calls with analysts, and so on. So, they believe in rigorous work ethics on the long side and passivity on the short side. In the real world, everyone knows that the short side is considerably harder than the long. So, how come complacent laziness would work on the difficult side when hard work barely pays off on the easy one?

When people publicly hold this kind of asymmetrical unquestioned beliefs, the inconvenient truth is that they have not given much thought to the short side. They do not know how to sell short. They have obviously not tried very hard either. If they had, reality would quickly have slapped them into submission. Yet, they still hope things will magically take care of themselves. They confidently market a skill they do not possess, happy to take on other people's money and milk generous fees. Yet they have no intention of taking responsibility for the inevitable discomfiture. In the Queen's English, this is called dereliction of duty. In execution trader English, those individuals are called clowns. For the rest of the book, let's embellish their status to chrematocoulrophones (chremato: money, coulro: clowns, phones: voice).