Short Sellers Like Andrew Left Are Essential to Market Health

The act of short-selling is arguably the riskiest one in all of capitalism, and certainly the riskiest one in all of investing. That’s true simply because there’s realistically no limit to the losses a short seller can sustain. More on the previous truth in a little bit, because it’s very telling about the absurdity of the SEC’s lawsuit against “famed short seller Andrew Left.”

For now, it cannot be said often enough that investment, not consumption, powers economic growth. Since that’s true, accurate prices in the stock market enable more informed allocation of investment capital to its best and highest use. It speaks to the too-often unsung importance of short sellers to progress.

When their research indicates to them that a company’s shares are overvalued, short sellers go into the market in order to borrow those shares from an existing owner. Short sellers pay for this privilege, only to sell the shares. They’re “short” them because the owner has loaned the shares out to them, not given them away.

Which means short sellers must eventually re-enter the marketplace in order to buy back the shares they sold short in order to return them to the owner. Assuming short sellers are correct, their profits are the difference between the price they sell the borrowed shares for, and what it costs them to buy back the shares at a later time or date.

Think here about the dangers involved. As with all aspects of life, everyone’s got different opinions about everything. This is particularly important in light of what Left does for a profession: if everyone agreed with him about which shares were due for a correction, his work would be superfluous. Translated, Left is going short shares about which there’s not remotely a consensus.

What this means for Left and other short sellers is that if they’re wrong about which companies are in bad shape, or at least in worse shape than the consensus, they could suddenly be short shares quite a bit more valuable than the ones they borrowed and sold. Here’s why the potential losses are unlimited. Stocks can rather quickly become attractive when they previously weren’t on the way to massive losses for the short seller.

To use but one high profile example of many in recent years, Nvidia shares have soared since 2023. What this tells readers in loud fashion is that before its monumental run, there was the opposite of consensus about its future. Which is a short way of saying that more than a few courageous investors were short its shares ahead of the company’s rapid ascent to the most valuable in the world club.

Please keep this in mind with the SEC’s suit against Left top of mind, and that according to the Wall Street Journal accuses him of “routinely making exaggerated or misleading statements about stocks to quickly profit on price moves caused by his reports.” The same Journal front-page story reports that the “indictment returned by a Los Angeles grand jury accused Left of essentially trading on his name and reputation” borne of Citron Research’s (Left’s company) track record of sleuthing “lemons” or otherwise overvalued public companies. In reality, Left should be lionized.

That is so because in equity markets that – as evidenced by their popularity with institutional and retail investors – have a persistently upward tilt over longer time horizons, individuals like Left are taking major risks to bring reason to the pricing of shares. And in doing so, they’re helping to make markets much more efficient by risking their wealth on helping other investors (large and small) protect their own wealth by bringing a skeptic’s eye to a marketplace pregnant with optimism. And there’s more.

It’s not just that short sellers introduce more selling pressure where there perhaps isn’t, as evidenced by their borrowing of shares to sell, short sellers also protect investors precisely because they’re buyers if and when investors suddenly agree with them that certain companies are undervalued. That’s how they profit from this most risky of trades: in order to return borrowed shares to owners, short sellers bring essential buying power into markets when they’re most needed.

At present, Left faces “criminal charges” from an entity (the SEC) that attains its ill-gotten swagger from a federal government that never has to worry about being wrong given its legal access to the earnings of the most economically productive people on earth; productivity that’s enhanced by people like Left crucially willing to point out demerits in corporations where investors only see merit. As always, the Nvidias of the world remind us of just how courageous and difficult Left’s work is, and why this lawsuit should disappear as quickly as it arrived.

Republished from RealClear Markets

Author

  • John Tamny

    John Tamny is a popular speaker and author in the U.S. and around the world. His speech topics include "Government Barriers to Economic Growth," "Why Washington and Wall Street are Better Off Living Apart," and more.

    View all posts
Scroll to Top