2010: Is having short sellers speak out healthy for our markets?

AUDIENCE MEMBER: Hello, Mr. Buffett and Mr. Munger. This is a shareholder from New York. One could argue that a major contributor to the great bubble was that there wasn’t a healthy and open debate. That all the opinion and all of the money was on one side of the trade.

And I was thinking about this recently as I read Christine Richard’s new book, “Confidence Game,” about Bill Ackman and his battle with what was once the largest bond insurer, MBIA.

The story also reminded me of David Einhorn and the questions he raised about Allied Capital and Lehman Brothers. We now know that they were 100 percent correct, but at the time that they first spoke up they were attacked by the companies, pilloried by the media, ignored by the accountants of those firms and the rating agencies, and perhaps most alarmingly were investigated by the SEC for daring to go public with their bearish analyses.

And I can tell you that watching what happened to them, it’s a real deterrent to anyone else speaking up and raising similar questions.

So I’d be curious for your thoughts on this, and is having short sellers speak out healthy for our markets?

And in general what should be done to encourage a greater diversity of opinions so that we can avoid future bubbles? Thank you. (Applause)

WARREN BUFFETT: Yeah, I don’t see anything wrong with people who are positive or negative speaking out, as long as they’re willing to be held responsible for the kind of statements they make. I mean, there are — obviously —

Well, take the extreme example. If there were two banks in town, and I owned one of them and I was of kind of a devious type of mind, I might go out and hire 50 people to stand in line in front of the other bank, and I would probably not have a competitor before long.

So you can do things on either side, the long side or the short side, that I would regard as certainly unethical and in many cases should be illegal.

But anytime you attack the conventional wisdom, you’re going to meet with a lot of opposition because you’re threatening people’s positions.

When we would talk about the efficient market theory 30 years ago when it was absolutely de rigueur that — and virtually every finance department in the country, major schools, you either had to swear allegiance to it or you were not going to be promoted.

You know, people don’t like that. And any institution, when they get a threat from the outside, they will attack both the threat and the threatener.

But that exists on both sides. I have no problem with short selling, and I have no problem with speaking out responsibly about your reasons for doing so, any more than I have on the long side.

There have been some very bad practices on the short side, and there have been some very bad practices on the long side, in terms of people trying to literally spread things that are untrue.

But that has probably been more on the long side over the years than on the short side, by some margin.

Charlie?

CHARLIE MUNGER: Yeah, I think to some extent you’re criticizing the wrong people. In many cases, the accountants that allowed the lousy accounting are the ones that ought to be held in the dock. And they get very little criticism in America and that’s a mistake.