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I would stay very far away from these investments.

First, stocks have a positive expectation (derived from the risk premium). Shorting an asset with a positive expectation is -EV.

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this is very poor reasoning.



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I know his reasoning can't be correct, but I don't see why. Can you explain further?

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it is very simple. shorting an asset with a positive risk premium can be + EV.

if you expect the price to move down to a certain degree within a certain timeframe, why would you not short it?

look at it in the converse. since ALL assets have some risk premium built into them (except developed world currencies), gull is saying that it is -EV to be short anything. that is clearly not the case since there are many a time when ex ante being short is correct and + EV.

even breaking apart the term "risk premium" we see that you are being compensated for taking risk. risk implies volatility and volatility implies up and down moves. if you can forsee a downmove (not easy but certainly doable) and you have the ability to take a short position in it, clearly you can profit in expectation.

Barron

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ok, but would you agree that since stocks as a whole have a positive expectation that it should theoretically be more difficult to find a good short than a good long?

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no because if you are investing from a tactical standpoint, you want your signal to be equally likely to generate a positive vs. a negative.

risk premiums take a long time to acheive vs. tactical positions which reach fruition over much shorter time spans.

so basically, you want a uniformally distributed signal which is equally likely to go short as long.

i think i'm rambling again and CF covered it anyways. short term vs. long term.

Barron