The modern Cassandra-short seller should not be blamed

December 6, 2012 at 2:33 pm Leave a comment

Short selling is a tough business, Warren Buffett can attest to that. He said recently “Charlie(Munger) and I have both talked about it. We probably had a hundred ideas of things that would be good short sales. Probably 95 percent of them at least turned out to be, and I don’t think we would have made a dime out of it if we had been engaged in the activity. It’s too difficult.”

Warren also believes that short sellers are useful in uncovering fraudulent accounting and other problems at companies (from his 2006 annual meeting). Another famous investor,Seth Klarman in his book “Margin of safety” argued that short sellers are a useful counterweight to the widespread bullishness on Wall Street.

Therefore, as long as Muddy Waters did not break any laws such as naked selling, they should not be blamed for short-selling Olam. In fact, investors in Olam should thank them for uncovering a possible failing company and enable to exit the company first before it fails. Unfortunately, Temasek Holdings did not heed (or pretend not to heed) Muddy Waters warning since they will be selling at a big loss, but isn’t it better to incur a short,sharp pain than a long,bitter pain?

This ST forum writer raised an important question on why Olam was targeted among many companies worldwide.

“IF A company’s long-term fundamentals are solid, no amount of short-selling or actual selling can throttle the price of the stock for long

The reason: Smart money will be waiting to scoop up such a stock at some price level. Conversely, no amount of cash injection will save a fundamentally rotten stock.

Second, short-sellers, especially institutional ones, are welcome fuel to the bullish trend of a fundamentally good stock.

Such short-sellers will keep coming back and a point will be reached – the parabolic top – which will ultimately force their capitulation.

Third, the force that moves the price of a stock or currency up or down permanently is not hedge-fund driven. The vital drivers are large institutional investors like pension or unit trust funds, which stake out a significant position in many stocks.

For example, the reason billionaire investor George Soros successfully bet against the British pound in 1992 arose from the massive selling of the currency by an aggregate of funds and other central banks and institutions.

The might of the latter proved too much for the British central bank to defend a fundamentally weak sterling.”


Entry filed under: Watch your step. Tags: , , .

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