Stop Being Upset With Short Selling

Doesn’t matter how you look at it. Short selling is necessary to the vital health of the markets. It creates a balance to the equation, much like a board of directors pounding on a CEO to deliver good results. Anyone who tells you otherwise either works for a company that is heavily shorted or does not have their emotions in check.

I’ve long maintained that there is nothing wrong or illegal with taking a short position against a company. Investors see situations differently and investment tools to facilitate these decisions provide a warranted pull on the market to keep pricing in check (as much as it can). Varying speculation is what creates a move towards equilibrium in asset class’s pricing.

In publicly traded companies, stock compensation is a huge part of salary for executives and employees alike. So of course, any executive seeing a heavy portion its company shorted is going to be upset. However, how why is this a bad thing? Maybe management needs to be put under the microscope a bit. If an individual affiliated with a shorted company feels this is unjust behavior, then focus on building a better company. If your business strategy is sound and viable, then the idea of worrying about heavy short selling is superfluous in the long term.

In my view, this is a wonderful method to avoid myopic thinking and a rouge CEO leading the company to disaster.

Management always needs to be challenged. This is what derives a good business model and produces good products. in essence, the true cornerstone of capitalism is the ability to deploy tools like short selling, which helps enable and support those roots of capitalism. Another aspect is the financial reporting of a company. Any publicly traded company on any one of the major exchanges is subject to heavy regulation and scrutiny. This protects investors. Disclosures exist so investors can ascertain or infer that the financial reporting of a company is either sound or in the dumps (like we see with many Chinese stocks who fraudulently report incorrect numbers) is another way to keep companies from reporting bad financials in terms of non-disclosing, financial issues, etc..

Short sellers are the only players with a strong financial incentive to uncover frauds and bring them to light. Let’s not forget the infamous dot com bubble; had short sellers uncovered the mess earlier, it could have help many investors from losing extreme amounts of capital. Thus preserving higher liquidity the markets.

Don’t get mad at short sellers, even if though they profit from bad news. Investing is zero sum…somebody wins, somebody loses. This dynamic exists in the market and in many business landscapes.