Analysis

The act of short selling is far older than the stock market, and it’s where we get the term “bear market”

March 2, 2020

Many people today do not know the origin of basic finance terms we use today. From ‘long’ and ‘short’ to ‘bull’ and ‘bear’ markets, many of these terms predate our modern financial system.

Today, we will explore the history of ‘bearskin jobbers’ and how they led to one of the most common terms in the stock market today.

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Back in February, we discussed the origins of why we go ‘long’ and ‘short’ stocks.

In the article, we highlighted how the ancient tally stick eventually turned into an early form of a transaction receipt, allowing two parties to keep track of the original agreement.

The ‘buyer’ was given the long part of the stick, and the ‘seller’ ended with the short end.

The tally stick dates as far back as 40,000 years ago, meaning the terms ‘long’ and ‘short’ have been around far longer than the modern stock market.

The same can be said for another set of terms investors use just as frequently to describe the market.

If you’ve turned on CNBC lately, you’ve likely heard the commentators mention that we’re currently in the middle of the longest ‘bull market’ in history or that the next ‘bear market’ might be just over the horizon.

These are terms investors use every day, and yet many don’t know what they actually mean or their origins.

To be clear, bull and bear markets describe specific situations. A bull market occurs when stocks have gained at least 20% since the most recent market low, while a bear market is the opposite – when securities have fallen at least 20% from recent highs.

A cursory internet search of these terms would yield overly simplistic explanations which hinge on the concept of a fictitious battle between a bull and a bear, as depicted in the image below.

Many sites would have you believe the terms are derived from the way these animals would attack.

For instance, a bull uses its head and horns in an upward thrust to attack, while a bear is likely to ‘strike down’ its paw.

This is a convenient overlap with the real explanation, which can be tied back to the early 18th century.

For starters, the idea of a ‘bear’ is connected to an old proverb that warns not to “sell the bear’s skin before killing the bear.”

This in turn is connected to an old trick practiced by a group of people called “bearskin jobbers”.

In the early 18th century, so-called ‘jobbers’ were basically wholesale merchants. They would buy supplies from craftspeople and sell them to the public.

At the time, bearskin was a popular commodity. Some of these jobbers tried to take advantage of this by selling the bearskins while the hunters were still in hunting season. Some jobbers may have had connections that allowed them to make better predictions.

By doing this, bearskin jobbers were essentially short-selling bearskins. After selling the skins, they would have to buy them back from the hunters at the end of the season.

If there were plenty of skins to go around, the jobbers could buy them cheaply and keep the rest of the profit for themselves. However, much like a modern short-seller, if the price was high at the end of the season, the jobbers were still liable to pay the full price.

Over time, the term ‘bearskin jobber’ was shortened to ‘bearskin’ and eventually settled on ‘bear.’

The term mentioned frequently in accounts of the South Sea Bubble of 1720, in which a number of short-selling ‘bears’ caused massive losses to investors in the South Sea Company.

Around the same time, references to an opposing investing philosophy began popping up in literature.

Probably the most famous reference is from poet Alexander Pope, who found himself writing about the very same South Sea Bubble:

“Come fill the South Sea goblet full;
The gods shall of our stock take care:
Europa pleased accepts the Bull,
And Jove with joy puts off the Bear.”

With this poem, the bear and the bull were pitted against one another, and this is likely to stay the case as long as financial markets exist.

All the best, as always,

Joel Litman & Rob Spivey

Chief Investment Strategist &
Director of Research
at Valens Research