At the end of the previous article, there was a comment saying:

“I have recently become obsessed with contracts, always feeling that I could earn, but time and again, my attempts have resulted in failures...”

Regarding these financial instruments, I have mentioned many times in articles that ordinary individuals should avoid them as much as possible unless they are geniuses, especially not to use them as tools for long-term profit and earnings.

Repeated attempts that ultimately failed basically prove that this reader is not a genius, so it’s better to avoid them in the future.

I had a similar experience in my early years, and fortunately, I have not touched such tools since then.

Another tool that is highly favored by many enthusiasts, similar to contracts, is short selling.

My stance on this tool is equally firm—---------------I definitely do not use it. Even if I am bearish, I won't short sell, I will just wait.

Why be bearish but not short sell?

Because to successfully short a trade and make a profit, additional, more elusive conditions are required.

In fact, it’s not just ordinary people who find it hard to grasp; even the renowned investment masters Buffett and Munger have reflected multiple times on their experiences with short selling during their shareholder meetings.

In my impression, Munger’s reflections on his short selling experiences are particularly profound and heartfelt; two of his comments that I particularly appreciate are:

The first is his constant emphasis that short selling is mathematically illogical; the risk and reward are asymmetric.

When a short seller buys a stock (goes long), their maximum loss is 100%, but their profit potential is unlimited; whereas when they short a stock, their maximum profit cap is only 100% (if the stock price drops to zero), but their potential losses are unlimited.

In fact, looking at it from a common sense perspective, such an operation with such asymmetric risk and reward should be immediately rejected.

His other point is: “You can run out of money before the promoter runs out of ideas.”

This means that many companies being shorted indeed have issues and may even be run by fraudsters. However, these operators are very good at maintaining bubbles; they can support stock prices with new ideas and means, which leads to short sellers exhausting their margins while these operators can still keep the stock price rising.

Recently, a bona fide Wall Street mogul also publicly shared his past experiences with short selling.

Stanley Druckenmiller is someone many readers may have heard of; he was once a top trader under Soros.

For someone like him, many people (including myself) would have the first impression that he must be very adept with various financial tools.

“Short selling” would be a piece of cake for him.

But what was the outcome?

In his interview (see reference link), he talked about having chosen 12 companies to short sell. Ultimately, all 12 companies did go bankrupt.

But he didn’t even last until their bankruptcy day.

Within three weeks, the stock prices were driven up by frenzied market emotions, which caused him to not only lose his initial investment of 200 million but also incur an additional 600 million due to forced liquidation.

In the end, he admitted that he probably never made a profit from short selling in his lifetime.

Druckenmiller’s experience comprehensively covers the two issues Munger discussed:

- He not only lost his principal but also put in extra money.

- He didn’t wait until the fraudster’s tricks were exposed, and his principal was already lost.

Even these two master-level figures demonstrate at least that they are not geniuses in the operation of short selling. I think ordinary investors should be even more cautious.

Not only with short selling, but with other financial tools (including the contracts mentioned above), everyone should seriously reflect on themselves before attempting to use them for long-term stable profit; don’t repeatedly waste time on these flashy financial instruments.

Reference link:

https://x.com/mubeitech/status/2044744282767028356?s=20

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