Um, does this ever happen? Ever? It looks like an imaginary situation.
The closest direct analog is a crash—if I go from being able to buy one share for one dollar to being able to sell my one share for one penny, one can see this as the value of cash going up 100X.
(This is somewhat contrived when dealing with cash, but it does seem that the foundational level of wealth is food and ammunition. It could happen that the exchange rate between those and cash and stocks skyrockets, and that would be Bad News for a lot of reasons.)
Indirect analogs rely on opportunity cost—because you invested in A and got a 2X return, you missed out on investing in B, where you would have gotten a 2000X return. This is a profoundly unhealthy way to view markets.
The closest direct analog is a crash—if I go from being able to buy one share for one dollar to being able to sell my one share for one penny, one can see this as the value of cash going up 100X.
For this to work you need for basically all financial assets to crash, not just some particular stocks. Besides, we still have the problem of the unit of measurement. If you want to measure your wealth in consumables (say, cans of beans) then for “unlimited” losses from long positions you need not only a financial crash, but also cans of beans becoming really really cheap. This is.. unlikely.
All in all, there is a real asymmetry between going long and shorting. Trying to construct imaginary situations in which you could lose a lot from being long isn’t terribly helpful.
because you invested in A and got a 2X return, you missed out on investing in B, where you would have gotten a 2000X return. This is a profoundly unhealthy way to view markets.
I think it is the correct way to view the markets once you add risk management. If the probabilities of getting those returns for A and B were the same (and the distributions were shaped the same), you indeed missed out greatly.
Yeah, basically the only scenario I see is cans of beans becoming very cheap in terms of ammunition for unethical reasons.
I think it is the correct way to view the markets once you add risk management. If the probabilities of getting those returns for A and B were the same (and the distributions were shaped the same), you indeed missed out greatly.
Agreed—I’m making the assumption that such comparisons are made retrospectively instead of prospectively, and thus are implicitly ignoring risk.
the only scenario I see is cans of beans becoming very cheap in terms of ammunition for unethical reasons.
Unethical even in the Zombie Apocalypse scenario? X-)
But sure, if the entire financial system {im|ex}plodes, your shorts aren’t going to do you any good and so we finally achieve symmetry—everyone is fucked.
I’m making the assumption that such comparisons are made retrospectively instead of prospectively
It is still the right way even retrospectively if you think in probability distributions. And, of course, anything “ignoring risk” is automatically the wrong way to think about the markets :-)
The closest direct analog is a crash—if I go from being able to buy one share for one dollar to being able to sell my one share for one penny, one can see this as the value of cash going up 100X.
(This is somewhat contrived when dealing with cash, but it does seem that the foundational level of wealth is food and ammunition. It could happen that the exchange rate between those and cash and stocks skyrockets, and that would be Bad News for a lot of reasons.)
Indirect analogs rely on opportunity cost—because you invested in A and got a 2X return, you missed out on investing in B, where you would have gotten a 2000X return. This is a profoundly unhealthy way to view markets.
For this to work you need for basically all financial assets to crash, not just some particular stocks. Besides, we still have the problem of the unit of measurement. If you want to measure your wealth in consumables (say, cans of beans) then for “unlimited” losses from long positions you need not only a financial crash, but also cans of beans becoming really really cheap. This is.. unlikely.
All in all, there is a real asymmetry between going long and shorting. Trying to construct imaginary situations in which you could lose a lot from being long isn’t terribly helpful.
I think it is the correct way to view the markets once you add risk management. If the probabilities of getting those returns for A and B were the same (and the distributions were shaped the same), you indeed missed out greatly.
Yeah, basically the only scenario I see is cans of beans becoming very cheap in terms of ammunition for unethical reasons.
Agreed—I’m making the assumption that such comparisons are made retrospectively instead of prospectively, and thus are implicitly ignoring risk.
Unethical even in the Zombie Apocalypse scenario? X-)
But sure, if the entire financial system {im|ex}plodes, your shorts aren’t going to do you any good and so we finally achieve symmetry—everyone is fucked.
It is still the right way even retrospectively if you think in probability distributions. And, of course, anything “ignoring risk” is automatically the wrong way to think about the markets :-)