Whenever something big hits the financial markets, many people turn to legendary investor Warren Buffett for guidance. The Berkshire Hathaway (NYSE:BRK.A) (NYSE:BRK.B) CEO has had a successful career spanning several decades. Buffett has seen just about everything in his time as an investor.
The recent short squeezes we've seen with GameStop (NYSE:GME) and other stocks have brought short-selling to the forefront of investors' minds. With that in mind, it's worthwhile to take a look and see what the Oracle of Omaha has said about selling stocks short and why he doesn't do it at Berkshire.
"It's ruined a lot of people"
Buffett has weighed in on short-selling at various times during his tenure at Berkshire Hathaway. During the internet bust and bear market from 2000 to 2002, questions often came up at annual shareholder meetings about whether Buffett would ever considering selling particularly bad stocks short.
Buffett's response to those questions should resonate well with those watching what's happening to short-sellers currently. "Everything we've ever thought about shorting worked out eventually," Buffett said at the 2001 Berkshire shareholder meeting. "But it's very painful. It's a whole lot easier to make money on the long side. You can't make big money shorting because the risk of big losses means you can't make big bets." Meanwhile, Buffett warned, "It's ruined a lot of people. You can go broke doing it."
Vice-Chairman Charlie Munger put it in more colloquial terms. "Being short and seeing a promoter take the stock up is very irritating. It's not worth it to have that much irritation in your life."
"Playing on human nature"
You'd think that when a stock is in an obvious bubble, it'd be a logical candidate to sell short. But Buffett warns that stock prices can just keep going up and up, seemingly defying all logic and common sense.
"A bubble plays on human nature," Buffett said in 2002. "Nobody knows when it's going to pop, or how high it will go before it pops."
He also related his own personal experience on the short side of trading. "I had a harrowing experience shorting a stock in 1954," Buffett said. "I wouldn't have been wrong over 10 years, but I was very wrong after 10 weeks, which was the relevant period. My net worth was evaporating."
"I'd lend them stock"
That said, Buffett doesn't share the views that some investors have that short-selling is somehow evil or wrong. "I don't see the problem of people shorting stocks ," Buffett said in 2007, "assuming they're not manipulating the market."
Buffett isn't afraid to poke fun at short-sellers, either. "I would welcome people wanting to short Berkshire. In fact, I'd lend them stock and earn extra income. They're a certain future buyer. If anyone wants to naked-short Berkshire, they can do it until the cows come home. In fact, we'll hold a special meeting for them."
Moreover, Buffett has used this share-lending strategy with some of his other companies. The Berkshire CEO related a story in which a large brokerage company approached Buffett wanting to borrow USG (NYSE:USG) stock to sell short. "We charged them a lot," Buffett said. "We even forced them to hold it for a certain period of time so we could continue to earn money on the borrow."
"It's a very tough way to make a living"
In the end, Buffett doesn't find short-selling to be a compelling risk-reward proposition. "If you buy something at $20, you can lose $20," he said in 2006. "If you short at $20, your loss can be infinite."
Those who shorted GameStop at $20 only to see the stock jump above $400 can definitely relate. As Munger put it, "Why would you want to go within hailing distance of that?" Neither of Berkshire's leaders seems interested in short-selling, and that's a good enough reason for many investors to steer well clear.