Short Sellers Are Self-Serving, Nutty, and Often Right

Short sellers don't kill companies. Usually they just make sure the corpse gets put in a coffin.

Photographer: Getty Images

Short sellers don’t kill companies. Usually they just make sure the corpse gets put in a coffin.

When the investor Steve Eisman issued his report on the for-profit education industry, the head of the for-profit colleges’ trade association called him a “self-serving nutcase” who was “in the business of ruining the reputation of colleges.”

Just over four years have passed since Eisman presented that report at an investment conference. Share prices of most of the for-profit college industry have tanked since then (though a couple have recovered from the lows of 2013). Last week Corinthian Colleges — one of the of the five education companies Eisman focused on in 2010 — announced that it might not be able to continue as a going concern.

Shares, you’ll be unsurprised to know, plunged. The company’s shares are now at 40 cents a share, down from around $14 when Eisman gave his presentation. Now the company has signed a deal with the Education Department to sell or shut down its schools, which enroll 72,000 students. Corinthian Colleges is a good company to think of the next time you hear a trade association president or company chief executive complain about short sellers. Eisman’s report was one of rare times that a short sellers’ case was so compelling that regulators really took notice. Since Eisman presented it, the several states’ attorneys general, the Justice Department, the Education Department, and the Consumer Financial Protection Bureau have opened investigations or inquiries into its operations.

With Corinthian’s schools shutting down or changing owners, the results of some of those investigations may be moot. From an investment standpoint, they’re moot as well. Any prudent short sellers would have long ago taken their profits. There’s no point in waiting to the bitter end.

The story of Corinthian stands as an excellent example of how the profit motive works to spur legitimate government inquiries. This is not an easy way to make money. Most often the companies that short sellers like Eisman or James Chanos turn their fusillades against are flying high, and there’s a good chance (hello, Herbalife!) that they’ll fly even higher for a while. Betting against companies or industries that the market loves only makes sense if you think there’s a fundamental flaw that will make them fall apart in the long run.

So, basically, short sellers as a group are self-serving nutcases. They are self-serving by definition — just like everyone else in the stock market. And they’re nutcases because if they weren’t many of them would put their money in an index fund, an altogether more reliable way to earn an income. The main thing that critics of short selling have wrong is that folks like Eisman or Chanos are not in the business of ruining companies’ reputations. Usually, they’re just calling attention to companies that are already ruining their own.

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