I’m struck by the wave of CEOs complaining about short selling.  Meeting or beating earnings estimates would seem to be a better strategy. 

As CEO, you may not like short sellers, or agree with what they do, or how they do it or the impact they have.  However, it’s harder to dismiss the logic  and the validity of short selling. 

Information has always been asymmetrical in the market.  At any given moment, the number of sell ratings on S&P 500 stocks is about 5%.  Ninety-five percent is buy or hold.  There is a bias in the market toward buying stocks and a bias away from selling stocks.  But every stock that is bought is eventually sold, and the information asymmetry works against investors in making their decision.   

Hard as it is for senior executives to hear this, short sellers perform a valuable function in the marketplace because they offer a differentiated opinion.  This is valuable in its own right for market integrity reasons.  But it also delivers a subtler benefit to chief executives they may not recognize.  Just as a positive opinion brings out the devil’s advocate in everyone, so too does a negative opinion.  In this sense the views of a short seller help the longs bolster their conviction. 

Further, no CEO wants their investors to hear the opinion a short seller has about their company. But at 40 years and counting watching the markets, and working with a variety of CEOs, I have never heard who wants to diminish the number of investors who have access to the reasoning behind a buy rating.  Again, this is highly asymmetrical and ultimately which undermines market efficiency. 

Of course, an unflattering view of a company’s prospects is unwelcome.  But anyone who is smart enough to ascend to the top leadership of a public company is smart enough to understand that investors deserve to hear the other side if they were so inclined.   

This idea, in theory, is likely well understood by public company executives.  But even if they accept the logic, then it’s the tactics they don’t like:  the planting bad news stories in the press, the publication of large and overtly negative slide decks that are distributed to create negative sentiment and the spreading of rumors.  

But it’s no different than what some long only investors as well as the companies themselves do.  When analyst appears on CNBC to discuss their “conviction buys”, it’s the same as a short investor talking to the press about a stock they don’t like.  Many companies themselves are engaged in extensive influence campaigns with the express purpose planting positive stories in the media.  I know this because I’ve helped them do it.   

Sometimes the tactics used by short sellers are deemed unfair because they are carried out in an illegal manner.   This is true and unfortunate. 

But this argument is so easy to dismiss that I wonder why any chief executive would say it. There is cottage industry dedicated to pumping up the price of stocks by any means necessary, legal or illegal. And again, no chief executive in recent memory has complained that their stock price is too high, regardless of what happened to cause a spike in the price.

The short selling that is most reviled by executives is episodic.  A stock that has risen rapidly gets “attacked” by short sellers who profit from the immediate decline their contrarian opinion provokes.  The “attack” can occur through covert means, like those mentioned above or by simply announcing a short position. They also occur un announced and the disclosure is made only in the ordinary course regulatory disclosures. 

Perhaps the purest example of this was the regulatorily mandated disclosure by Michael Burry that he was short Palantir and Nvidia.  Burry didn’t “announce” anything other than filing a 13F and posting his position on his site. And he wasn’t even short shares.  He simply bought put positions.  This no different than announcing a buy recommendation. Nothing illegal there, and nothing more controversial than putting his money behind his convictions.  But the reaction was histrionic. 

Short-term markets are irrational and get a lot of things wrong.  Long term, markets are highly rational and get a lot of things right.  The episodic nature of some — but not all — short selling can make it painful in the here and now for executives, and long only investors.  But ultimately, it’s a blip on the screen because senior executives of public companies hold the trump card.   They can prove the shorts wrong by delivering a stellar performance and delivering losses to them that know no bound.