Several reasons can be given for ‘selling short’, some of them more compelling than others.
If you accept TMF’s 13-step program as a decent-enough overview of how to get started investing, and if you have read Step 6 carefully (“Discover Great Businesses”), why wouldn’t it occur to you that some of the companies you investigate will be discovered to be really lousy businesses, like, they can’t even pay current bills from current income, to cite just one red flag. If their other financial ratios also suck majorly, indicating dismal prospects, then why would you not conclude --as noted Yale economist, G W Bush, once said of the U S economy as it was correcting in 2008-2009, “This sucker’s going down.”?
If you, as investor, think you have discovered in a company’s numbers the possibility for growth of share price and are willing to buy their stock, then why aren’t you willing to sell short a company when you discover in their numbers the likelihood of share price decline?
Both actions --buying ‘value’ and selling ‘lack of value’-- have to be understood as ‘fundamentalist investing’ in exactly the same sense, or neither are.
The best short-sellers, it is claimed, are far better fundamentalists than ‘longs’, because they have to be to bet against the crowd. I’ll leave that argument to the academics to arbitrate. But it is blatantly obvious the two use the same data, the same investigative tools, and have the same goal, which is profits from the difference in prices. One buys and then sells. The other sells and then buys. So their differences are merely directional, and both should be allowed to wear the same halo (or not).
But aside from the fact that short-selling is simply classic, Ben Graham-style value investing, there’s another reason why short-selling in a bear market makes sense. If you’re long in a declining market, it isn’t fun to open financial statements and to see the damage being done. ‘Whack’, ‘whack’, ‘whack’ isn’t fun to endure, no matter how necessary it might be in the overall scheme of things. To want to banish price declines would be like wanting to banish ‘Night’ because you prefer ‘Day’, or ‘Winter’ because you prefer ‘Spring’. One is a mirror image of the other, and both are necessary. Why not accept them?
Arindam