Dear Reader,
Back when it was my job to try to help my clients’ share prices go up, I regarded short sellers as a kind of natural enemy. My clients were making stuff and selling it and shipping it to customers and trying to make an honest living and it just seemed… unsporting to want to bet against that.
Now that I’m on the sidelines, I’ve had the opportunity to reconsider the issue from a different perspective.
Anybody who believes that a stock is undervalued can buy it, and, as things stand, anybody who believes a stock is overvalued can sell it. If short selling were not permitted, the only people who could sell stocks would be those who already own them. That would create an imbalance in the market that would impede efficiency and price discovery.
So, I’ve come around to the view that short sellers have a role to play in the capital markets ecosystem, even if I personally prefer rooting for people’s success.
Some short sellers do go about their business unscrupulously.
One way to do this is to borrow a page from the political playbook and commission what amounts to an opposition research study to dig up as much dirt as you can on a company and then feed it to friendly journalists.
A variation on this theme is to provide the oppo dump to the SEC first and then provide the same research to journalists along with the news that the SEC has been provided with the same facts.
It only takes a slow news day for this to become a headline like “Is Company X cooking the books? The SEC has been provided with evidence that it is” and then all hell breaks loose. The headline itself can sometimes cause a big enough dip in the share price to let the short seller cash out their position.
So what are we to make of trading firm Hindenburg Research, which takes short positions and then publishes their analysis online for anybody to review and scrutinize?
Keep reading with a 7-day free trial
Subscribe to The Armchair Strategist to keep reading this post and get 7 days of free access to the full post archives.