Although short-selling is logistically difficult and increasingly competitive, it is an essential tool to reduce the impact of market downturns on a portfolio. During falling markets, many stocks will decline in price, even those of companies with strong business models. During these times, having capital available to reinvest in high-quality companies can provide an important source of return over the long term. Short positions that increase in value when other positions are declining provide incremental capital when it is needed most.
In normal times, short sales can also generate incremental return by capitalizing on mispricing that results from misunderstandings in the marketplace. Security selection involves recognizing asset prices that can decrease as well as those that can increase. Cable Car does not view short selling as a moral judgement. Although Cable Car sometimes shorts companies it suspects of fraud or malfeasance, short positions often reflect Cable Car’s view that the market’s expectations for an otherwise good business have gotten too high. The activity of short sellers is an important part of fully functioning capital markets.
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