STEVE INSKEEP, HOST:
We have an update from our colleagues on NPR's Planet Money team who have been playing the stock market. They've been reporting on the practice of short selling. They did that by deciding to sell something short, betting that an asset like a stock will drop in value. NPR's David Kestenbaum is up next, and don't sell him short. He explains how it all works out.
DAVID KESTENBAUM, BYLINE: It was a great idea.
SAHM ADRANGI: Yeah, that's a terrible idea.
KESTENBAUM: Sahm Adrangi runs a hedge fund called Kerrisdale Capital. We told him we wanted to short the entire stock market - place a bet that it would go not up but down.
ADRANGI: Is very dangerous, and it's a great way to lose lots of money.
KESTENBAUM: You know, he said, over the long run, the stock market tends to go up. We ignored his very wise advice.
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STEPHEN PEARSON: E-Trade Elite Client Services. This is Stephen Pearson.
KESTENBAUM: Did it through an E-Trade account, using $400 of our own money.
I want to short something. I want to short the entire stock market.
PEARSON: The entire stock market.
KESTENBAUM: It was easy. Sahm had jokingly called this the Armageddon trade since our investment would pay off under that scenario. But we did it not because we thought the end of the world was coming. We did it because we wanted to explore this hidden world of short selling. And as we looked into it, we were not the only people doing the Armageddon trade. There were lots of others, including one quite notable guy you've probably heard of, George Soros.
RAUL MORENO: Yes, he's actually one of the richest people in the world.
KESTENBAUM: This is Raul Moreno, co-founder of iBillionaire, which tracks billionaires.
MORENO: He has a net worth of about $20 billion.
KESTENBAUM: More than me.
MORENO: More than you.
KESTENBAUM: While we had bet $400, George Soros' bet was a lot larger. We were in a position to make tens of dollars. He was in a position to make millions.
MORENO: So if the stock market goes down 10 percent, he makes $16 million, which is a lot. He gains by the market going down.
KESTENBAUM: When people heard this, some of them thought, a billionaire is betting against the U.S. stock market? Why is he betting against the stock market? Raul Moreno is pretty sure that is not what George Soros was doing. He says a lot of the shorting out there - it is not people betting the market will go down. It is just insurance - what's known as a hedge. Say you believe Coca-Cola is going to do better than people think. You could buy Coca-Cola stock and also short the overall stock market. That way, if the overall market goes down, sure, Coca-Cola goes down with it. But your short makes some money. Hedging is a way to filter out the overall ups and downs. Our short was not part of some larger, fancy trade. It was a simple bet that the market would go down, which it stubbornly refused to do.
PEARSON: Hey, David, how are you doing there?
KESTENBAUM: Good, and nice to talk to you again.
Last week, I called back Stephen Pearson at E-Trade.
It's been a great - what is it? - six-and-a-half weeks for the stock market, huh?
PEARSON: It has been. Yeah, I think we're at almost 6 percent.
KESTENBAUM: Up - the stock market.
PEARSON: Correct, yeah.
KESTENBAUM: Which is bad for us.
PEARSON: It is bad for the trade.
KESTENBAUM: (Laughter) All right, well I think - I think it's time to end it.
PEARSON: All right. Well, we'll get you out here. We currently...
KESTENBAUM: We had invested 400 bucks. After fees and our unfortunate timing, we lost $42, a negative return of about 10 percent. America's good news was our bad news. That's life as a short. David Kestenbaum, NPR News. Transcript provided by NPR, Copyright NPR.
