I’ve actually been meaning to write a defense of short selling and was planning to mention legendary short James Chanos who uncovered fraud at Enron when nobody was paying attention. I’m glad to see he took to the pages of the WSJ to make the case for himself.
Given that shorts are gambling money on a stock going down, there will always be bad actors who spread false information that causes problems for healthy companies. But overall, I think markets could benefit from healthy doses of skepticism. Short-sellers are often the only force keeping markets sane when people are consumed by irrational exuberance, and if investors actually heeded short sellers’ warnings when times were good, our markets would be a lot more honest and stable.
I remember covering the Tyco collapse as a financial reporter and the only people who turned out to be reliable in the end were the short sellers. When the stock began tanking in early 2002, I’d call up analysts at the major brokerage firms, and almost all of them would tell me that there’s nothing wrong with the company, it’s just nervous markets and rumors being spread by shorts. Those analysts ended up looking like fools (and as the scandal unfolded, it came out that one of the most enthusiastic analysts had been exchanging gifts with convicted Tyco CEO Dennis Kozlowski).The short-sellers were vindicated. The same thing was true for the housing bubble.