Valuable reading from expert Gary Weiss of Business Week:
THE BALONEY BLITZKRIEG MARCHES ON: Since there seems to be such a high level of interest, as evidenced by the comments I received before I even broached the issue, I guess I'll toss in my two cents on all this "naked shorting" baloney. I devote a chapter to the subject in Wall Street Versus America, but here's the executive summary:
First let's be clear about something: short selling, "naked" or not, is good for investors. That's a proven fact that has been demonstrated time and time again. However, since short-selling wagers on stocks declining, it is viewed as almost un-American and has been used as a scapegoat since the Crash of 1929 and before. However, you need short-selling if you want to have smoothly running, efficient markets. You need that negative input in the process of pricing stocks.
Unfortunately, the mechanics of short-selling have always made it hard to short the stocks that require shorting the most -- illiquid, frequently manipulated, microcap stocks. The Securities and Exchange Commission, via Regulation SHO, actually made it harder for professional traders to short microcaps. That's because to do so you have to do it by "naked" shorting, and SHO pretty well stomps that out.
The SEC should have made it easier to short crap stocks. Instead they made it harder. Now is that dumb, or what? I personally have never shorted a stock and I think it is foolish for amateur investors to try -- almost as dumb as it is to speculate in microcaps. But hey, if you're going to bet on the damn things, you should have the ability to short them as well as buy them, just as you can with large-cap stocks.
And if that drives down the price of the stocks -- so much the better. If the companies are any good, the shorting gives investors an opportunity to buy them at discount prices. I love a bargain, don't you?
So it's really very simple, but the short-bashers have swathed the whole thing in baloney so much, gummed up the debate with so many red herrings and distortions and incorrect assumptions, that it's really a shame. The shame is that a lot of the people who are most upset about shorting of their fave companies would actually benefit the most if it were allowed to flourish. After all, these are great companies, right? And if their companies aren't so great, their beef should be with the companies, not the shorts.
In my book I go into detail on this, but that's the summary.
One thing I find disturbing about this naked shorting business lately is how the anti-naked-shorts have engaged in some really underhanded, cynical tactics to advance their stupid cause. Lately they've been -- oh my, how unique this is! -- bashing the media left and right.
For example, I've seen circulated on the Internet supposed exchanges of correspondence and communications from reporters (note this post and others on the SABEW blog). The transparent aim is to drum up a phony hate-media hysteria. Note the reference to an unrelated payola scandal in this anti-shorting website, replete with this swill:
How many journalists do you think Wall Street pays off every year to write agenda articles? 1% of the total? 2%? 5%? 10%? If there are 500 financial journalists in NY and the surrounding areas, 2% would be 10. Anyone naive enough to think this is an isolated issue is living in a fool's paradise.
This kind of bonehead rhetoric is typical of the Baloney Brigade. And as for the ranting by Overstock's Patrick Byrne about Sith Lords and such -- the only journalistic issue that I see is that some people in the media have actually taken it seriously. I saw one broadcast journalist, a gent I respect, actually give a platform to some of this silliness.
Journalists have a duty to their readers and viewers to call that kind of rhetoric what it is -- baloney. Funny how I keep coming back to that word.
posted by Gary Weiss at 8:35 AM on Jan 22 2006
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Jim said...
I think your confusing "investng" with "gambling". Most Americans think it is inheritly wrong to be able to sell something you don't own, no matter how "good it is for investors".
1:05 AM, January 23, 2006
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craig cunningham said...
Ok, I'm bored out of my mind, so I'll bite.
Since Gary now endorses breaking the law, I figured I'd chime in.
Gary, I don't think anyone ever said shorts were bad or LEGAL shorting was a bad practice.
You suggest that the SEC has made the practice of shorting harder. Well, that of course isn't true.
First, the SEC is one of the biggest waste of taxpayer's money. They remind me of the scene in "office space" when "the bob's" said "What would you say ya DO here?"
The SEC doesn't DO anything. They don't enforce any laws. The SEC enforcement division is the equivalent of a guy sitting at a desk reading a newspaper.
They further, by their own admission haven't enforced reg SHO ONE SINGLE TIME. Hardly stamping the practice out.
Grandfathering all the previous fails hardly supports this "rigorous enforcement" that you suggest as well.
Gary, please get a grip. Naked shorting is illegal for a reason.
By the way, have you seen my shares? Two of the companies I bought that just happen to be on the reg SHO list just happen to not be deliverable for oh, like T+25 days now.
1:44 AM, January 23, 2006
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Gary Weiss said...
Craig -- You are right to be dissatisfied with the SEC. They have traditionally failed to provide useful assistance to investors in microcaps. A good example is Regulation SHO, which made it harder to short the stocks that need to be shorted the most.
Investors really have to watch out for themselves. Rather than obsessing on short-selling, naked or otherwise, you should examine whatever company it is in which you have purchased shares. Is that company any good? I've seen the most abysmal, doggy companies insanely framed as "naked-shorting victims" when any fool can see that these companies' stocks were in the doghouse because they were dogs.
My problem with the Baloney Brigade is that they have filled the Internet and airwaves with a lot of nonsense that detracts from the real problems investors face. One of which, and I would guess you face this problem, is that there are thousands of amateur stock-pickers out there engaged in the losing game of trying to beat the market.
You might want to think about the folly of buying individual stocks. Amateurs are lousy stock-pickers. That has been proven time and time again. When it comes to microcap investing, amateurs are creamed repeatedly.
Don't fall into the trap, Craig, of letting the hucksters of the Baloney Brigade fill your head with a lot of red herrings.
If your stock is peforming poorly, you should go back to the drawing board and ask yourself why that is the case. I think you'll find that the reason is that it's just not a very good company.
10:00 AM, January 23, 2006
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Gary Weiss said...
Jim -- You raise two good issues. One is that investing is not gambling. That is true, and I deal with that in my book. Small investors who try to pick stocks and "beat the market" are regularly taken to the cleaners.
The second is public hostility to short-selling, which is also correct. However, it's been proven time and time again that short-selling is good for the markets, particularly in the cruddy corners. Unfortunately, the Baloney Brigade has latched on to that longtime hostility to promote their stupid agenda, which actually hurts investors and favors stock promoters and small-stock shills.
Rather than deal with the fantasies promoted by the Baloney Brigade, in my book I describe the reality of short-selling, including naked short-selling. I describe how in one instance all those nasty naked shorts actually shut down a boiler room that was creaming investors. The FBI didn't.
Mind you, as I also say in the book, shorts are not angels -- they are just Wall Streeters out to make a buck, and their ranks are populated by the same crooks and bums that you find among the "longs."
10:08 AM, January 23, 2006
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