Thursday, November 4, 2010

Short Sellers: "Don't Make Markets More Efficient"

Marty Whitman had the following to say about short sellers during an interview with Barron's:

In the history of man, the markets have never been better than they are now for shorts. But some of these fellows are out to destroy businesses, such as when a business needs continuous access to capital markets... 

He added...

Shorts, with present methods of communication that include blogs and cable television, might be able to bring any of them down. Because some of these value people are so good and so powerful, we at Third Avenue don't invest in companies that need relatively continuous access to the capital markets...

Whitman doesn't think short sellers help to make efficient markets:

They don't make markets more efficient. I think they could serve a real function. I am very concerned about their influence... 

I tend to agree. It doesn't make sense to vilify short sellers (which happens too often), but it's possible that the practice of short selling at times does more harm than good.

Think about it this way. We know price discovery happens during the sale of a private business or farmland without short sellers. So it's, at the very least, worth questioning whether short selling is as vital to price discovery for stocks as some seem to think.

Check out the full interview:


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