Monkeys, I was going through this article on Roger Ackman's Pershing Square Capital Management: http://www.newyorker.com/magazine/2017/03/06/fina…
The author mentions that "Short sellers are generally reviled by corporations as malevolent opportunists" but Ackman thinks it as a way to fight evil.
I think short selling, and in fact public short selling, where you share your concerns in a public way, is an incredibly healthy thing, not just for the capital markets but because the regulators do not have the resources to find these things.
What are your views? Is short selling an ethical thing to do?
I don't see why selling short would be viewed as unethical. I think it's just that rather than having a positive long-term/short-term stance on the performance of a company, you have a negative. one. For instance, I think a company such as Fitbit is an example of a company that could be shorted. I haven't checked their financial information, but I believe the company can be replaced entirely by applications on phones. I don't really see the "malevolence" in investing against the success of a company.
No, not unethical. It adds efficiency to the market, and it's not a one way street-- it can also burn the short seller during a short squeeze while simultaneously rewarding the bulls with a quick pop. Corporations complaining about short sellers should be more worried about turning their corps around than complaining about investors... If anything, investors wouldn't be taking out a large short float if the corp wasn't running like crap.
Opportunists? Bro, this wall street. Bulls make money, bears make money, sheep that are too afraid to take chances get slaughtered.
If anything, in theory the existence of short-sellers should make for more efficient markets since it makes prices revert closer to their true fundamentals than just letting the long only funds be. It is also very clear why company management teams don't particularly like them - often they would attack the management's integrity (if it's an accounting / fraud based short) and it also makes their options / stock take a dive.
There's also truth that certain types of shorts can be malicious (e.g. when a fund outright slanders a company by going public with their opinion when they're in fact simply wrong). Having said that, many disputes, especially on the accounting / fraud side, if the company is actually innocent / operates a decent business, should be resolved quite quickly. If the company has nothing to hide, it should be more than happy to clarify the situation as long as they're not being asked to disclose commercially sensitive information from a competition point of view.
Roger Ackman? WTF.
Short selling is a part of life. Corporate heads are probably very risk averse and never faced a real challenge in their life.
You know,William Ackman kinda looks like Roger Sterling, silver hair and shit.
This is true. I think to have that hair makes you rich and successful, the way Hyundais have a similar body as a BMW, so that people will want to buy it.
The long lost co-founder and twin brother to Bill.
There is nothing wrong with short selling at all. They are opportunistic, but so is every trader/investor. It is zero sum for those that are in and if they want to go short, they should be able to do so.
What is unethical about being honest and put your money where your mouth is by saying a company sucks?
Why is this even a question? You make investments for profit not to be ethical. You know what would be unethical? If a fund manager (that is allowed to short) sees a prime short opportunity and ignores it to be "ethical", at the expense of his/ her investors.
So i fall firmly into the shorting is good for capital markets and leads to more efficient price discovery etc. camp but work with a couple of (older) guys who firmly believe short selling is unethical.
The argument for it being unethical is that (contrary to what BobTheBanker thinks) we, as investors play an important role in the proper functioning of capital markets and subsequently the economy. That function being that we are in charge of allocating the limited capital resources within an economy efficiently by identifying and investing in good, profitable companies that lead to economic growth.
Short selling arguably is an unnecessary function in this process. If investors are successful in their endeavours to identify profitable companies, the fact that capital resources are limited means we cannot invest in them all, meaning bad companies (those that one might short) do not get financed. Holders of shares in companies that represent poor investment opportunities will sell them in favour of better opportunities (because capital resources are limited) causing the shares to reprice to a level where they may represent good value.
It can be argued that instead of identifying these overpriced companies and creating a correction, short sellers piggy back on the back of already falling prices, causing exaggerated movements in share prices in an effort to make a quick profit.
Again, not my view but always helpful to consider the other side of the argument.
Capital Market would not exist without short selling. Shorting a stock is absolutely necessary to make exchanges work harmoniously. There is nothing wrong with expecting the particular company to go bust. Survival of the fittest at its finest.
That's not true, capital markets could function just fine without short selling.
(mis-post)
I don't think short-selling is necessarily unethical, but Bill Ackman's strategy walks the line between trade-hyping and the old "short and distort" routine. Herbalife is a good example: he kicked off his campaign with two-hour presentation explaining why the company is an illegal pyramid scheme and doesn't qualify as a legitimate MLM. He also alleged that the FTC had an ongoing investigation into the company, which (if it did at the time) was not public info. The agency did announce it was looking into Herbalife later down the line, but ultimately settled with them to implement policy changes rather than criminal charges or forcing the company to completely rework its business. Ackman probably covered part of his short when the stock tanked initially, but knowing him I'd be surprised if he didn't have a lot of exposure to the rebound.
It doesn't really bother me that his highly-publicized conclusions were wrong, but the fanfare (and his ensuing feud with HLF investor Carl Icahn, their profanity-laden phone-in war was easily the most awesome thineg I've seen on CNBC) probably caused the FTC to jump the gun on announcing its investigation. It's more than possible the feds would have uncovered more pyramid-like behavior if the company hadn't been forced to react to such scrutiny.
I believe it is ethical, but my background and work is in the commodity sector which could lead to a disparity between those in other sectors
Roger Ackman? ROGER? No srsly, Roger?
Why is this even a question? Of course it's ethical. Investors need an instrument to profit if they think a company should trade lower than it does...if shorting is unethical then so is going long.
I don't have an issue with short selling itself, but I do think that individual HF analysts tend to act in an unethical fashion when they solicit information from company management teams. When the hedgies are meeting with a CFO/CEO at a conference, the company generally has no idea whether they are investigating a long or a short idea. Often you can tell from their line of questioning which side their thesis is leaning but I'm not sure the management teams/ IR's pick up on this. I think increasingly companies are realizing that it is not in their best interest to meet frequently with long/short analysts and some are going as far as to only meet with long-only's (which is great for me!)
I personally think there needs to be more disclosure and transparency with 13-F filings that shows the net positions as opposed to only the longs.
I'm struggling to understand why the management team should waste time worrying about if the investor is on the short or the long side? Management should just provide as good of a disclosure as they can and just get on with running the business and not playing games who to meet or not to meet based on the investors' view on the company. That's not why they're there for.
They should provide full disclosure for sure but they are under no obligation to walk individual analysts/PMs through every nitty gritty detail of a story, particularly when they may be inhibiting the firms' ability to raise capital at more attractive rates. If there is a long term investor that is likely to be a good partner for them over a period of several years, then I think it's well worth their time to make sure people understand the story, but I'm not sure how it benefits them to talk to the market neutral shops. As you said, they should "just get on with running the business".
I guess if you want to argue that it reduces vol over time to be transparent with the l/s shops, that is a fair argument, but I just don't think there's a return on brain damage there.
I would make the case that short selling is more ethical than investing. Short selling p)imposes a cost to shady/poor business practices and forces firms to be transparent. Of course, this assumes that a strong and "clean" firm will perform in bear markets. How many sketchy operations and questionable practices have been exposed by short sellers?
It isn't the short bet itself that is in question as unethical. Its the sort of thing that you see with Ackman where he uses his money and contacts to generate negative press and push federal investigations of his target in order to cause the company failure outcome he desires
No, it's not "unethical". To be fair I'd say that execs that to go this far to avoid long/short analysts are probably into something fishy. Their duty is to inform the numbers and data in the most accurate way, to all parties interested.
I think you should look at some of the BS companies that have been able to survive to burn foolish investor capital because they are either too small, no float, or both
It is not that short selling itself is unethical. It is the way some investors tend to go about it. If you plan on shorting a company that you think is going to fail, there is no need to proclaim it. When large investors trash talk a company so that the share price goes down to help their short, that's where the line between ethical and unethical is crossed.
Agreed. There are several ways to look at it:
Unethical- you hold a short position, proclaim it, then profit right away as this news hits the tape, but before the company can defend.
Mildly unethical- you hold a short position but have to "motivate" others to see it your way. For example, Ackman and MBIA. Yes, he ended up being right, but it took years of explanation to the SEC/rating agencies and the housing crisis for him to be correct.
Ethical-if you short a company, don't tell anyone, it falls, you take profits.
When XYZ fund manager is on CNBC speaking positively about a name and the stock rises (he profits), nobody ever seems to even blink......So why when a fund manager discusses a company he doesn't like and has a short position (and profits).... why is that wrong or worse than profiting on the long side?
I think the ethical argument is interesting...but it comes down to human beings feeling morally obligated to be cheerleaders rather than "booers".
Often times when a bull comes on CNBC and pumps a name, the stock tends to move only a fraction vs. when a short article comes out on seeking alpha or a manger publicly displays a short idea.
This was a great post.
Nobody cares if you're the lemming talking about XYZ going to the moon. But if you announce you've taken a short position, everyone treats you like you pissed in their Cheerios.
Short books let you know who ACTUALLY knows what is going on.
It's contrary to the original pupose of the financial markets, which was to allow companies access to capital and for investors to make long term investments in the growth of businesses they believed in. It's also mean spirited. But it's definitely not unethical, as it's within the rules of the game they call trading
The one thing that no one has mentioned here is liquidity. I work at a long only high yield shop and in some cases traders will short us the bond we are looking for. Everyone wins in this situation, we believe in the paper, the trader doesn't but we are now long when it may have been hard to source etc. This is true in all shorting, in order to short someone else is getting long. Now at least in bond land there can be some funny stuff that goes on (hedgies often short new deals in soft markets because there's no carry cost till the new deal settles).
Now regarding ethics of publicizing shorts I don't see the issue. Short sellers tend to do some of the best due dilligence of any investor because inherently the market is going to grind higher over time. To justify a short one needs incredibly high conviction. If the lemmings blindly follow a short and pile on this should be any long investors wet dream because they can get longer cheaper!!
The Ackman criticism is bit off in my opinion. When someone is an activist investor, he is his own catalyst most of the time. Part of that requires going to the media pushing your views loudly to change the sentimate on the company, either positively or negatively. Many stocks are a confidence game
I think you're a bit off on your assessment of activist investing being largely about "changing the sentiment on a company". Activist investing is actually getting some sort of change done - be it kicking out crap management and replacement with someone more competent, trying to help guide management towards a business clean-up in the form of e.g. deleveraging by selling of random loss-making business units or a number of other things. Definitely not about sentiment change - that would definitely be unethical / illegal if what you're shouting is just for sentiment's sake.
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