Research In Motion, Short Selling & Slavery!

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I’d like to begin by highlighting an excellent comment that was recently posted by Richard – the comment was concerning an older post entitled “Short sellers are the muggers of the financial industry.”

“cheers Mal – hey your comments on short sellers is really myopic.
short sellers are at time speculators just like long buyers; people with stock options can be short sellers, people with long positions are short sellers in different accounts and comparable industries like the rails, arbitragers are short sellers TSX vs NY etc. Brokerage companies have to have the stock in their portfolios and then have to lend them – why do mutual funds allow their stock to be loaned?
Short sellers keep poor CEO’s honest or at least allow the shareholders to rally and try to can them; too bad that didn’t happen at Nortel which never had any good executives.”

First of all, my position on ‘short selling’ is a moral one. Abraham Lincoln mulled the issue of slavery prior to and during his presidency – he gave due consideration to the pros and cons and rationalizations by westerners and southerners who profited from the business of slavery. In one of his letters, he finally took the position that “If slavery is not wrong, then nothing is wrong.” I feel the same way about selling property you do not own. Probably the most significant economic, legal and moral developments in the history of civilization evolved from the right to own property. Just because short sales occur and are insitituionalized, does not make them right.

A common argument is that the practice of selling short creates more efficiency. As Richard suggested: Short sellers keep poor CEO’s honest or at least allow the shareholders to rally and try to can them; too bad that didn’t happen at Nortel which never had any good executives.” I survived at least two episodes where Nortel (to stay with the example) was butchered by markets. Rampages by short sellers destroy shareholder value – the ‘short and then cover’ trading pattern is a self-fulfilling exercize having nothing to do with the underlying property…..the property is just a poor pawn in the game. If I could sell your home (naked) short, and then cover – no consideration at all would be given to the fact that when it’s market value plummeted and the bank called it’s mortgage – you and your family would have been robbed of the fair value of your house in the first place, and forced to live on the street in the second place. Who would ‘lend’ their home to a third party to do this?

Consider the damage done to Research in Motion in a matter of weeks. During this period, all investors pretty much knew the Playbook launch was coming and would have some bugs (RIM has never pretended to be Apple), and also that apps would be slow in coming. The functionality of the device, unlike an iPad, is embodied in the device itself rather than add on applications – it’s not a plaything but a business tool with a slightly bigger screen for BB users. Newer models of the BB smart phones were also coming, but we’ve known since the Tsunami that their launch would likely be delayed. No meaningful “new” information has come available, so why the ugly stock chart? It’s so easy (thanks to today’s virtually immediate dissemination of news, rumour and trading information) to create a panic by agressively selling short, which cause others to sell (short or not) in a panic – then cover at a profit (buy for less than you sold it for) regardless of anything to do with underlying company.

Short Sellers on a Rampage

I’m no genius, but as an analyst with at least some experience I can assure you there’s no reason innocent shareholders (i.e. those who “own” the property) should suffer a 25% hit in the value of their property so strangers who don’t even own the property can sell and profit from a fabricated but tolerated loophole. Again, what the property is “worth” has nothing to do with the volatility artificially created – the volatility is driven by unadulterated greed. Greed isn’t necessarily immoral, but the source of gain (like slavery was a 150 years ago) in this case is indeed.

I would argue (convincingly) that short sales have CAUSED poor management practices over the past decades, and NEVER would cure them. The senior executives of companies like Nortel and a plethora of other public companies are measured and paid according to the performance of the stocks, not the performance of the companies; and their only incentive is to provide information (even if false) that will support a higher price and ward off short sales. Management will adopt any means possible (Enron) to stay on the ‘buy list.’

If my opinion about short sellers (muggers of the financial industry) is myopic, then so was Lincoln’s abhorrence of the institution of slavery myopic.

Invest to Live, Live to Ride

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