Short sellers aren’t getting their fair share of respect for the role they play in uncovering lemons, writes Don Bauder in SanDiegoReader.com
Short sellers, as you know, borrow a stock, sell it, and hope to replace the shares at some later date after the stock price has dropped. They profit on the difference in stock prices.
Although the executives in the companies they short may resent such a public display of lack of confidence, in most instances, writes Bauder, short sellers are doing exactly what the marketplace wants them to do. Namely, to dig deep into companies’ financials and uncover problems that aren’t being disclosed by management.
A classic example from recent days was the 2008 collapse of Lehman Brothers. Lehman’s chief executive blamed short sellers for hastening his firm’s demise. But as it turned out, Lehman had been seriously manipulating its books and it took the short sellers to reveal it.
San Diego seems to have its share of high profile short sellers. Among the ones Bauder profiles is Donn Vickrey, co-founder of the Scottsdale, Arizona-based research company, Gradient Analytics, which was sued for its expose on Biovail, a Canadian pharmaceutical company. Although Gradient was widely criticized in the media, the suit was later dropped after the Securities and Exchange Commission discovered that Biovail had repeatedly overstated earnings, hid losses and actively mislead investors.
Speaking of shorting: there have been many positive reviews for Michael Lewis’ new book, The Big Short, profiling a handful of Wall Street outsiders who profited handsomely from betting against the excesses of the sub-prime mortgage fiasco in 2008. It’s apparently both an entertaining and quick read.
What are your thoughts? Do you think short sellers play a valuable role in the market or simply push distressed companies over the cliff? Have your read The Big Short yet? Add your comments below.