Short and sweet

Can you sell something you don’t own? Yes, clearly, you can steal goods and then flog them. That’s how thieves make a living.

But we’re not crooks, are we? So, what if we borrow something instead of stealing it, and then sell it to get some dosh? The only problem is: what we borrow, we have to give back.

This mechanism, in essence, is what happens when people or institutions sell shares “short” on the stock exchange. They borrow shares for a fee, and sell them in the hope that they can buy them back later at a lower price, and make a profit on the deal.

In other words, short selling is a gamble that share prices are going to fall. Until recently, it wasn’t illegal (unless done to manipulate share prices). Indeed, some argue that short sellers make financial markets more efficient and reduce the risk of bubbles.

The financial authorities in the US, Britain and a number of other countries clearly don’t agree at the moment. They recently banned short selling temporarily to reduce the risk of a further stock market crash.

By the way, my favourite story of short selling concerns Piggly Wiggly — don’t you just love that name? — a US supermarket chain.

In the early 1920s, a battle took place on Wall Street for control of Piggly Wiggly. Certain stock-market operators spread rumours that all was not well at Piggy Wiggly and began selling its shares short.

At this point, Clarence Saunders, the company founder, decided to take on the speculators by buying up as many Piggly Wiggly shares as possible. His aim — it is alleged — was to “corner” the short sellers — that is, to force them to buy back shares from him at a higher, not lower, price when they wanted to return them to their original owner.

The story of Clarence Saunders’ battle with the speculators is beautifully told in “The Last Great Corner”, a chapter in John Brooks’ wonderful book Business Adventures.

I won’t spoil the story by telling you are the details. Let me just say that Saunders didn’t win his battle.