Elon Musk of Tesla versus the short-sellers: so who is right? And Reddit users' GameStop battle: Opinion: Ian McConnell

He also tweeted: “Here come the shorty apologists/ Give them no respect/ Get Shorty.”

Having watched stock markets through several crashes over the decades, there tends to be an air of familiarity about things, even amid dramatic movements and frantic trading activity.

However, the events depicted as a battle between amateur investors, many of them active on social media platform Reddit, and short-selling hedge funds constitute something far less familiar.

The spectacular activity which blew up last week centred on the previously unloved GameStop, a video games and consoles seller with a big bricks-and-mortar presence.

What looked in large part to be activism on the part of an army of so-called amateur investors was directed at hedge funds with huge “short” positions in GameStop.

Short-sellers aim to make money by betting on a share price falling. They effectively sell shares they do not own in the hope of acquiring them subsequently at a cheaper price.

While GameStop has been very much at the centre of Redditors’ fight with the hedge funds, the frenetic activity spread to the likes of cinema chain AMC, as short positions in other companies came into focus.

And the reverberations were felt in the UK, albeit to a much lesser extent, with stocks such as educational publisher Pearson and Cineworld attracting attention in the London market.

The “battle” has not been without humour on the part of the so-called amateur investors and their social media output, with myriad memes and musical adaptations including a song on the topic in the style of a sea shanty among the sometimes elaborate offerings.

However, regulators on both sides of the Atlantic were quick to enter the fray.

In the UK, the Financial Conduct Authority on Friday issued a “statement on recent share trading issues”, in which it declared: “Buying shares in volatile markets is risky and you may quickly lose money. These losses are unlikely to be covered by the Financial Services Compensation Scheme.

READ MORE: Brexit: Ian McConnell : Circus of shambles now in full swing. Happy now, Brexiters?

“Broking firms are not obliged to offer trading facilities to clients. They may withdraw their services, in line with customer terms and conditions if, for instance, they consider it necessary or prudent to do so. Firms are exposed to greater risk and therefore more likely to need to take such action during periods of abnormally high transaction volumes and price volatility. We will of course take appropriate action wherever we see evidence of firms or individuals causing harm to consumers or markets.”

What is particularly interesting about the whole situation, from a general perspective, is that it has shone a spotlight on the short-sellers. It has raised questions about the real-world effects of short-selling, and whether this practice has any merit at all.

It goes without saying that hedge funds can make big money from short-selling, although this is not, as shown to dramatic effect last week, a one-way bet.

Arguments have been advanced that short-selling makes financial markets more liquid and efficient.

There have, of course, been restrictions put on short-selling by regulators at times of crisis, including in the UK and US.

Amid the global financial crisis, which got under way in earnest in 2008, a temporary ban on short-selling of some financial stocks was put in place in the UK. Similar measures were introduced in the US.

European countries including France, Austria, Greece, Spain, Italy, and Belgium put in place temporary bans on short-selling amid huge market turbulence triggered by the onset of the coronavirus pandemic back in the spring.

There has been much academic debate on the effectiveness or otherwise of such curbs.

However, it is interesting that regulators have seen fit from time to time, amid financial market turbulence, to ban this practice, either for certain stocks or more generally.

There is clearly much room for debate over short-selling, its effects, and whether or in what circumstances it should be permitted or not.

One thing that seems clear is that short-selling is, in terms of its short-termism, at the opposite end of the spectrum to patient capital.

Patient capital can be hard to come by in these days when the attention span of corporates often seems unable to stretch beyond one quarter.

Stock market-listed companies of course – while some are naturally inclined towards destructive behaviours such as relentless, indiscriminate cost and job-cutting with the loss of talent and all that entails for future development and revenues – are also driven to short-termism by investors refusing to take a long view.

This is a particular pressure for companies which are struggling and/or are in sectors that are in structural decline, and the appearance of hedge funds is often about the last thing these businesses need.

What drives a short-term buck for a hedge fund will quite often be the opposite of what is good for the long-term future of a business, its employees, and its ability to create wealth over years and decades.

The supposed efficient operation of markets – which those supporting short-selling might put forward as an argument for the practice – is very different indeed from long-term good.

READ MORE: Ian McConnell on Brexit: Keir Starmer U-turn dismal as Tories unable to run menodge

Interestingly, a major Scottish investment trust has been among those blazing the trail when it has come to patience and a long-term view.

The giant Scottish Mortgage Investment Trust, managed by James Anderson and Tom Slater of Edinburgh fund house Baillie Gifford, has been a long-term investor in Mr Musk’s Tesla, a pioneer in electric vehicles, energy storage systems and solar power.

The trust is also invested in Mr Musk’s unquoted SpaceX venture.

It is always heartening to hear Mr Anderson consider very long-term trends, and talk about investment in cutting-edge companies as a force for good in society.

Such discussion is a refreshing change from the headless chicken short-termism that at times seems omnipresent in corporates and financial markets.

In an exclusive interview with The Herald last June, Mr Anderson said it is “absolutely right both in economic and moral terms” to back what Mr Musk is doing.

The fund manager observed Tesla had been the biggest contributor to Scottish Mortgage’s performance in the year to March 31, 2020, as he underlined the speed at which the global transition from fossil fuels to renewable energy was occurring.

Mr Musk, who as of this week has 44.8 million Twitter followers, had hit the headlines when he tweeted on May 1 last year: “Tesla stock price is too high imo (in my opinion).”

He also tweeted: “I am selling almost all physical possessions...”

Asked for his view on these comments last June, Mr Anderson replied: “I think that I have to accept that for someone to attain the sort of task that he is doing, not just in one company but in multiple companies – we are shareholders in SpaceX as well – I think that to do those sort of tasks you need to be a very unusual type of personality, with extraordinary determination, extraordinary brilliance. You and I would probably not be offended if I said we would not be able to land a rocket on [a] boat. I think you get, with that, some aspects that are…unusual in a less palatable direction.”

Mr Anderson said Scottish Mortgage in terms of its position and society as a whole had to consider both of those aspects in looking at the net benefit.

READ MORE: Brexit: Ian McConnell: Experts will tell truth of Brexit while Tories indulge fantasies

While noting he was not saying there were not lots of things he might disagree with, or might cause angst, Mr Anderson added: “[It is] absolutely right both in economic and moral terms to back what he is doing.”

Mr Musk has flagged Tesla’s mission to help reduce the risk of “catastrophic climate change”.

It is easy to see good for society going hand-in-hand with major financial gains and wealth creation as a result of patient investing in this context.

In contrast, it is very, very difficult indeed to love what hedge funds do from a societal perspective. As it is with short-termism, and its destructive potential, in general.