Commenting on ideas claimed to support the goodness of stock short selling by SovereignJim
(libertarian)
Saturday, December 19, 2009
I have extracted, made bold and commented on, key ideas from each paragraph of an article at "http://mises.org/" that supports short selling.
discovering fraud Yes they sometimes sell short a stock being falsely promoted. However consider the victims of such a fraud. The short seller is capturing cash that owner victims could possibly recover by later discovery of the fraud. Also possibly taken from a supposed victim is the opportunity sell at a profit objective reached. Punishment should be applied to a fraud perpetrator not to its victims. In addition what they perceive as a false promotion may simply be a case where the company is trying to cheaply raise cash by new stock issue for expansion or other income producing actions.
information-revealing process A short seller hides rather than reveals information. A decline in a stock's price hides a certainty that owners are selling if short selling is allowed.
Allowing short selling increases the number of people with an incentive to discover valuable information about firms' prospects. Surprise! A true statement, but not worth the cost.
valuable Negative information Calling a short sale, as opposed to an owner sale, information is grossly wrong. A tape or chart viewer can NEVER tell which is which.
To attack or restrict short selling is then to restrict the market's ability to elicit and integrate all available information. An elaborate falsehood based on the lie that a short sale provides information. A trade provides valuable information only in the absence of short selling.
Restrictions on short selling are analogous to a voting process where there are only the possibilities of voting yes (owning shares) or abstaining from voting (current non-owners), but "no" votes (selling what you do not own) are impossible. A false analogy in that one must be registered before casting a non-fraudulent vote. The equivalent of registering to vote, in stock trading, is to own the shares being sold or to put up the cash for a buy.
Short selling, which allows profits to be made from negative information, is akin to another aspect of a competitive financial market hostile corporate takeovers. A false akin. Buying shares to take control of and operate a company is far different than selling shares that one does not own. Selling is NOT akin to buying.
Short sellers have been portrayed as heartless opportunists, benefiting from bad outcomes. But they are no different from doctors who profit from our illnesses, or teachers who benefit from our ignorance, or locksmiths who benefit from criminal acts. Short sellers give heartless opportunists a bad name. Forcing bankruptcy on a firm can be heartless but is necessary for an efficient free market economy. There is a BIG difference between doctors and teachers compared to short sellers. Locksmiths benefit because of a threat from criminals. What short sellers attempt to accomplish is BAD. What doctors, teachers and locksmiths attempt to do is GOOD.
What is called short selling in the stock market is common in all sorts of businesses. A farmer who sells on a futures market when he plants, before he has produced his output, does the same thing. What such a farmer does is NOT the same thing. He is signing a contract to deliver a product at a specified point in time which the buyer has good reason to believe he can do because of a demonstrated ability to do so.
Short sellers who are betting their own money on being correct often uncover what regulators miss, as they did at Worldcom, Enron, Tyco, etc., showing themselves as more effective market policemen. Now they are elevated to policemen. Who assigned them to police the market? How about a detailed description of the good they did with Worldcom, Enron and Tyco.
Regulators then object precisely because their inadequacy is revealed. An example please.
Opposition to short selling also confuses correlation with causation. Selling short only lowers the price sooner than would otherwise occur. Global Warmers confuse correlation with causation. The "only lowers" sentence says the correlation was the cause.
Opposition to short selling is often no more than objecting to its effects on a particular stock the opponent currently owns. Notice the switch from "Short selling is good" to "Opposition has flaws".
Short sellers are also attacked for allegedly spreading negative rumors that sometimes turn out to be false. But false positive rumors are regularly asserted by a far larger group who benefit by pumping up stock prices, from managers to brokers to financial talk show touts. Those guys lied so I should be allowed to lie. Or is the above a claim that no one has been convicted of spreading negative rumors?
Short sellers are also criticized whenever they are wrong. But holding them to a standard of correct expectations is an impossible standard. No one has perfect foresight. No, they lose money when they are wrong while being thanked for a lower price by new owners.
Firms do not always stop their aversion to short sellers at negative attitudes. They often directly attack them. Poor babies. Attacked by people attempting to protect share owner wealth.
Perhaps most telling about the assaults on short selling is a 2004 NBER study that discussed the fact that "Firms use a variety of methods to impede short selling. And why in the hell is that wrong?
Short sellers receive widespread condemnation. But it is undeserved. Thieves who steal from banks and corporations receive widespread condemnation. But it is undeserved as banks and corporations are evil.
By the way did you notice what a fine job short sellers did for investors during the dot.com bubble.
Did you like this article? If you did, Thumb It! 0
thumbs so far
The views expressed
in this article are those of SovereignJim only and
do not represent the views of Nolan Chart, LLC or its affiliates.
SovereignJim is solely responsible for the contents
of this article and is not an employee or otherwise affiliated
with Nolan Chart, LLC in his/her role as a columnist.
Posted By: Walt Thiessen
Date: 2009-12-19 12:43:41
Why do you insist on holding short sellers responsible for lousy investment decisions made by long buyers? Why should long buyers be guaranteed a way out of their bad decisions? You know, there's a really easy way to defeat a short seller: have more buyers than sellers. When that happens, short sellers lose.
Blaming short sellers for busting bubbles and profiting from the poor decisions of others is ridiculous. After all, you don't blame long buyers for profiting from the failure to invest by people who sat on the sidelines after a venture works out!
Now, if you were writing about short sellers who violate the law in their short-selling activities by failing to follow the established rules and requirements for short-selling, that would be reasonable. But targeting legitimate short sellers for investing smartly is ridiculous.
