In defense of short sellers

Read James Surowiecki’s insightful New Yorker column on the short selling of securities.

He notes:

Short sellers are investors who sell assets (a company’s shares, say) that they have borrowed, in the hope that the price will fall; if it does, they can buy the shares at a lower price, return them to the trader they borrowed them from, and pocket the difference. In effect, they are betting against a company’s stock price. As a result, they have, historically, been regarded with great suspicion…

But the fears of short sellers are largely unjustified:

Even when short sellers aren’t uncovering malfeasance, their presence in the market is useful. If you think of a stock price as a weighted average of the expectations of investors, restrictions on short selling skew that average by shutting out people with contrary opinions. It’s a bit like setting a point spread for a football game by allowing people to bet only on one side. When a team of Yale management professors did a study of forty-seven stock markets around the world, they found that markets with active short sellers reacted to information more quickly and set prices more accurately.

I’ll second his conclusion that “The case against these bears is a lot of bull.”