“I short stocks. I make money shorting stocks. Some of my best friends are the stocks that became worthless over the years and I never had to cover. I short stocks because I’m a firm believer that in a universe of more than 10k public companies, not all of them are well operated. I also believe that since short selling is rarely if ever offered as an option by traditional brokers to their customers, there is always going to be a bias towards demand trying to push the price of a stock up. That in turn creates an opportunity for short sellers who get to take advantage of that upside bias. Of course there are risks to short selling. If you don’t fully understand what you are doing, you can lose more on the short side since a stock can only fall to zero, but it can go up to any price. To me, that just gives me reason to do more homework, not to shy away.” — Mark Cuban

Read Mark Cuban’s Blog on Short Selling.

Yes, it sounds like Cuban has a fundamental view to some extent, but his words about shorting in general are strong.

What Cuban Gets Right About Shorting

Cuban’s observation about structural upside bias is the most important point in the passage. Traditional brokers rarely offer short selling to retail customers. The industry’s business model is built around the long-only relationship: buy stocks for clients, collect commissions on those purchases, and benefit from the ongoing management fees on assets under management. Short selling disrupts this model because it involves selling positions rather than building them. The result is a systematic bias in retail demand toward the long side of equity markets. That structural imbalance creates an exploitable opportunity for participants who can and do go short.

The asymmetric risk observation about short selling being unlimited on the upside while a stock can only fall to zero is accurate and important. It is the reason position sizing in short positions requires more care than in long positions. A long position can lose at most 100% of its initial value. A short position faces theoretically unlimited losses because the stock can continue rising indefinitely. This is not a reason to avoid shorting, as Cuban says, but it is a reason to manage size carefully. A short position should be sized more conservatively than an equivalent long position, because the adverse move can be larger.

Where trend following differs from Cuban’s approach is the caveat the page acknowledges: Cuban has a fundamental view. He shorts stocks he believes are poorly operated. Systematic trend following does not require a fundamental thesis for either long or short positions. The system enters a short when price breaks below the defined lookback low, regardless of whether the company is well or poorly operated. The trend is the signal. The fundamentals may or may not confirm it. The entry does not require them to.

Both approaches end up in the same place: short positions on declining prices. Cuban gets there through fundamental analysis of management quality. Systematic trend following gets there through price signals alone. The zero-sum arithmetic is identical in both cases: the losses of long holders in declining stocks transfer to short sellers. Cuban’s “best friends” that became worthless represent exactly that transfer, whether the short was justified by fundamental analysis or by a price breakout below a 20-week low.

Why Trend Followers Must Be Willing to Short

A trend following system that only goes long captures the uptrend component of the approach but misses the most profitable periods that systematic trend following historically produces. The largest concentrated gains for trend following managers have often come during market crises: 2008, 2000-2002, 1987, the Asian financial crisis. These are periods when equity markets decline sharply and equity long holders suffer catastrophic losses. A trend following system that was short equities and long safe-haven assets during those periods captured returns that a long-only systematic approach would have missed entirely.

Cuban’s point about the upside bias in retail markets is also the explanation for why the short side often produces better entry opportunities than the long side for systematic trend followers. If retail demand is structurally biased long, then declining stocks are often held for too long by investors who do not use stop losses and who are reluctant to sell at a loss. That creates sustained, clean downtrends that a short position can ride for weeks or months without being stopped out by technical rallies driven by new buying pressure.

Frequently Asked Questions

Why does short selling offer opportunities that long-only investing misses?

Because the structural upside bias in retail markets, produced by the long-only orientation of traditional brokers and most retail investors, causes declining stocks to be held longer than rational analysis would justify. This creates clean, sustained downtrends that short sellers can exploit. The long-only investor who does not use stops holds through the entire decline. The short seller profits from it. As Cuban notes, the structural bias toward long demand creates a persistent opportunity on the short side.

What is the asymmetric risk of short selling and how should traders manage it?

A long position can lose at most 100% of its value if the stock falls to zero. A short position faces theoretically unlimited losses because the stock can rise to any price. This asymmetry requires more conservative position sizing on short positions than on long positions. In systematic trend following, this is handled by volatility-based position sizing, which reduces the number of contracts or shares when a market is more volatile, providing an automatic size reduction during the periods of violent upside moves that create the most risk for short sellers.

How does Cuban’s fundamental-based shorting differ from systematic trend following short signals?

Cuban shorts stocks he believes are poorly operated based on fundamental analysis. Systematic trend following enters short positions when price breaks below a defined lookback low, regardless of the company’s fundamental quality. Both approaches end up short on declining prices. The difference is the trigger: fundamental judgment versus price signal. Trend following does not require a view on management quality, earnings prospects, or competitive position. It requires only that price is moving in the defined direction.

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