Don't Sell The Shorts Short

Short-sellers don't get any respect. No surprise there: They can take one of Wall Street's darlings and smear its reputation in a jiffy with tales of financial intrigue and corporate malfeasance. Their dogged and persistent bad-mouthing can drive corporate executives to distraction--and push stock prices to new lows. So when nervous executives and the big guns on Wall Street orchestrate a short squeeze, the shorts take a drubbing.

These days, of course, the shorts are in their element. A down market, or even a jittery one, gives them a chance to say "I told you so." But it's not just this market that validates the contrarian view.

Consider how often short-sellers have been hounded for telling stories of accounting irregularities--only to be proven right several months down the road. Or how often they have correctly, if prematurely, pricked the balloon of overblown expectations for new products. To be sure, many short-sellers employ questionable tactics, and some have even engaged in prohibited activities such as selling short without borrowing the securities. But short-sellers are clearly outgunned when measured against the Wall Street elite's publicity machine, which almost always tells a bullish story. So here's a word to the wise investor: Keep an ear tuned to what the short-sellers have to say.

Before it's here, it's on the Bloomberg Terminal.