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Kass: In Defense of Short Selling

Other times (more often than the above condition), individual securities or sectors are embraced by market participants and levitated to unimaginable valuations, which also creates an opportunity on the short side.

Mainly, it seems to me that opportunities to challenge biases are much more pronounced and more easily identifiable on the short side, no matter what the market conditions are, mainly because those searching for such weaknesses are substantially in the minority. And few are comfortable with the short side, which makes for an inefficient market.

Investors want to look on the bright side. Individual and institutional investors and corporate managements are invariably biased and bullish. How else to explain that nearly every money manager interviewed in the media is constructive? As well, consider whether you have ever witnessed a media interview with a corporate executive who was bearish on the future of his company. In my numerous appearances on CNBC, I have rarely (if ever) encountered such an animal. When is the last time you saw a downbeat CEO on Jim Cramer's "Mad Money?"

Warren Buffett put this more eloquently in his description of corporate truth telling in a letter to Berkshire Hathaway (BRK.A)/ (BRK.B) shareholders in the late 1980s. In explaining his absence of an interface with management, he wrote that "corporate managers lie like ministers of finance on the eve of devaluation."

As always, Buffett was ahead of the times.

That said, poor management, frauds and eroding company or industry trends always will be in fashion, regardless of market conditions. This occurs despite the appearance of short selling as a mug's game or as a losing proposition based on the headwind of longer-term positive historic trends in equity returns.

Finally, more than any time in history, it can be argued that the secular headwinds (e.g., fiscal imbalances, structural unemployment, debt-laden private and public sector balance sheets, etc.) to worldwide economic growth represent powerful gusts that challenge a smooth and self-sustaining trajectory of global economic growth.

These factors (and others) are likely to lead to a more tentative and inconsistent growth backdrop in which corporate managers will likely find it more difficult (than in the past) to navigate the currents.

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