Is short selling wrong?

By Stephen Lansdown | 03 Oct, 2008 

It was inevitable that short sellers would be highlighted as a major problem in the current financial fallout. I must confess to have never been comfortable with the idea of short selling, always believing that you invest into a company to benefit from the expertise of its management and profitability in the form of appreciation in the share price and the dividends that the company pays out. You take a long term decision based on how you feel that company is going to perform over the long term. 

Others will of course look at trying to spot a share which is going to go up quickly, take their profit and move on to the next one. That is not wrong but in my view is speculation and not what investment is all about. Short selling is a legitimate investment tool when you feel that a company is overpriced and that its long term prospects are not good. In the same way as you might buy a company for its long term growth prospects you sell it on the basis that those prospects are not there. In other words you hedge your position. 

Although I may not like it there is no way we should be blaming short sellers for causing recent market declines. They may have exacerbated them but it is a bit like blaming the arms dealers for civil wars. They may not help the situation but they are not the root cause.