How Being Short Enables Investors to Be More Long

By The Acquirer’s Multiple via Iris.xyz

One of our favorite Jim Chanos interviews is one he did with FT Alphachatterbox in which he explained how short selling provides ‘long-side’ investors with an insurance policy saying:

“Being short with a good short seller who’s producing nominally minor positive returns in a bull market enables you to be more long.”

Here’s an excerpt from the interview:

[Matt Klein] Congratulations. One of the things that seems particularly challenging about short selling, and you mentioned this just now, is that there are a lot of institutional biases against short-selling. The entire sell side industry, much of the financial media, a lot of politicians, they think if things are going up that it’s good. Your 401K is richer.

There’s a lot of psychological pressure. You don’t want to be against the crowd. How do you, as an investor, deal with that and be able to on the one hand stick with the position when you think it’s correct, and also not be so bull headed about it that you ignore the conventional wisdom when it’s actually right?

[Jim Chanos] Well first of all, to get to the preface of your question – “up is good and down is bad” – of course while on the surface that seems right we always forget that having Grandma Klein pay too much for stocks can be bad.

Short-selling is an important check on the marketplace. In fact Bill Sharpe in his Nobel Prize acceptance speech pointed out that frictionless short-selling is essential for the efficient market hypothesis and the capitalised pricing model. And so it is an essential part of the marketplace, but the trickier part of course is doing it right and doing it well, and that is much, much tougher.

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