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Why 2019 was a savage year for short sellers

Sebastian Bowen
long term investing

With the ASX markets recording an incredible year of returns last year, most investors who have any kind of financial interest in the share market would have likely been very pleased. Given that almost every worker in the country is required to have a superannuation account, this translates to almost everyone in the nation.

With one exception: short sellers.

Short selling works by the ‘shorter’ borrowing shares from another investor with the promise of returning them at a later date. The shorter then sells the shares and buys them back at the specified date. If the share’s price is lower at that time, the difference is banked by the shorter for a profit.

But if the share in question appreciates between the time the shares are borrowed and returned, the short seller makes a loss.

It’s an inverse transaction to what most investors do: buy shares hoping for gains over time (also known as ‘going long’).

What happened in 2019?

The markets clocked up one of the best years in recent times last year. The S&P/ASX 200 (INDEXASX: XJO) banked a 20.3% gain for the year (not including dividend returns), which far exceeds the long-term average return of between 8-10%.

That’s already a high bar to try and profit from short selling. But according to reporting in the Australian Financial Review, the top 25 companies that investors shorted in 2019 actually exceeded the market return of the ASX 200 – with an average rise of around 25%. The report states that of these 25 companies, only 7 actually saw their share prices end 2019 lower than where they began the year.

Amongst these most shorted shares, the biggest losers (for short sellers) included JB Hi-Fi Limited (ASX: JBH), which saw its share price go from around $21.60 in January to $37.70 on New Year’s Eve, and Kidman Resources, which saw its share price jump about 50% after the company was acquired by Wesfarmers Ltd (ASX: WES).

Saving the shorts were lithium producers. Lithium as a sector had an awful year, as lithium prices continued to trend lower throughout. Thus, lithium miners like Pilbara Minerals Ltd (ASX: PLS), which suffered a near-60% drop in share value during the year, would no doubt have made a lot of short sellers happy.

Foolish takeaway

I think the experience of short sellers in 2019 is a great reminder of the futility of trying to predict market moves. In my opinion, ‘going long’ and investing for the long-term is a far better strategy than trying to pick which shares are going to crash in the next twelve months.

The post Why 2019 was a savage year for short sellers appeared first on Motley Fool Australia.

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Motley Fool contributor Sebastian Bowen has no position in any of the stocks mentioned. The Motley Fool Australia owns shares of Wesfarmers Limited. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

The Motley Fool's purpose is to help the world invest, better. Click here now for your free subscription to Take Stock, The Motley Fool's free investing newsletter. Packed with stock ideas and investing advice, it is essential reading for anyone looking to build and grow their wealth in the years ahead. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson. 2020