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Thursday 4 December 2008

The market’s favourite scapegoat

Christopher Fildes on short selling

A financier with a following can refine this technique, much to his own advantage. Once he has bought a share, he allows the word to get out; his followers pile in and the price goes up. This confirms their belief that he has a magic touch. Thanks to them, he can close his position and move on to the next share. Anyone in the City with a working memory can think of wizards like these. In the end, their touch may desert them and their disenchanted followers drift away, but another wizard will be just around the corner. While they last, these long buyers are nobody’s favourite scapegoat. They rock no one’s boat and they profit from no one’s misfortune. By pushing share prices up, they can make us all richer — or at least sustain that illusion. Even the regulators are in no particular hurry to go after them with traps and poison.

The short seller’s life is more hazardous. For a start, his risk is unlimited. If you buy a share and it falls, the most you can lose is the money you paid for it, but if you go short on a share and the price then goes up, there may be nothing to stop it. No wonder short sellers set themselves limits and must be prepared to close their positions in a hurry. They may then be caught in the rush for the exit, or they may reset their limits and hope for the best.

They know, too, that even the most despised shares can find friends. Clive Cowdery made his fortune by giving the kiss of life to ‘zombie’ funds closed to new buyers by the life assurance offices. Now he has seen value in bombed-out mortgage banks. Bradford & Bingley, he says, would be a good place to start. This must have jolted B&B’s short sellers — there are four on the FSA’s list. Then he backed away, and so did the B&B share price.

The market has its own ways of imposing its disciplines on short sellers and punishing them for their excesses, or some of them. Nor can they even expect to be admired for being right. They never have been. Seventy years ago, in Where Are the Customers’ Yachts?, his Wall Street classic, Fred Schwed analysed what he called the vague, universal indignation they aroused. They were typecast as villains. In good times, he said, nobody minded the short sellers except their families, who minded going bankrupt. In bad times they were a receptacle for blame. At such times, Schwed thought, investors should ask themselves the definitive question: was my money stolen or did I just lose it? Answer: you probably lost it — but let’s put it down to financial villainy. Go after the usual suspects, and better luck this time.

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