In capital markets, we’re hungry for drama. Every story has a hero and a villain, a clash of egos and a roller-coaster story line. It’s more engrossing than any episode of Game of Thrones.
That hunger comes at a cost. When we see the world as a clash of good vs evil, we lose nuance. Active investors are sometimes perceived as opportunistic scavengers, passive ones are tagged as ‘dumb money’. Long-term investors become the chivalrous, ESG-compliant knights. Short sellers are cast as evil ‘value destroyers’ – to borrow a phrase from Elon Musk.
It’s ridiculous, of course and can lead to unintended consequences. We’re seeing that right now with a one-time darling of the European tech scene: Wirecard AG.
Almost two years ago, a series of articles in the FT raised concerns about this famous German payments firm. The company’s Singapore offices were raided by the local authorities. Noise grew in the German media that the company was the victim of a conspiracy theory, orchestrated by short-sellers.
As a result, shorting the stock was temporarily banned, between February 18 and April 18, 2019. The share price stabilised, the villains were defeated and we all lived happily ever after.
Only we didn’t. Today, Wirecard is the subject of numerous investigations as the firm is missing €1.9bn in cash and has allegedly inflated its financial results, deceived its auditors and possibly hired groups of hackers to target investors and hedge funds who shorted their stock. The CEO has resigned and since been arrested. Last Thursday, the company filed for insolvency. The chain of events has been more dramatic than a Hollywood thriller, as yet another chapter unfolds in this twisting saga.
In reality, this is an extreme case of poor governance, to say the least, one that saw 95% of Wirecard’s share price evaporate in five days. Now, the company’s approach to governance is facing a long-overdue reckoning: sunlight is the best disinfectant.
History has taught us time and again that in cases of colossal governance issues, short sellers aren’t the issue. We’ve seen it with Enron, with Sino-Forest and now with Wirecard. In capital markets, we try to promote the ability for investors to find issues with weak corporate governance or to detect fraud, by enabling them to make money by short-selling the shares of the suspected company.
Short sellers also get it wrong. For every Wirecard, there’s an Ocado or a Tesla, where short sellers didn’t believe in the economic viability of the company and were proven wrong by a great management team that created tremendous value. The beauty is that everyone can have an opinion and can put their money where their mouth is.
Long story short (pun definitely intended), if we want strong, efficient markets, we need short-sellers. If we’re serious about ESG (let’s not forget what the ‘G’ stands for), we need short-sellers. We need sticks as well as carrots.
But more than anything, we need to acknowledge that the creative narration of investment strategies, long vs short, good vs evil is just noise. We may laugh. We may cry. But at the end of the day, it shouldn’t dictate our investment decisions.