Sam Altman and Alex Karp are learning to hate one of Elon Musk's most frequent enemies

Just like a long line of executives before them, leaders of some of the world's hottest firms are learning to hate an age-old enemy: short sellers.

Last month, Palantir CEO Alex Karp had a meltdown of sorts about the subject. When asked about short sellers, aka investors betting against the company's stock, Karp unloaded on the naysayers.

"They could pick on any company in the world. They have to pick on the one that actually helps people, that's actually made money for the average person, that is actually supporting our war fighters," Karp said on CNBC. (It should be noted that some would debate that characterization; Palantir is often criticized for its work with the US government on surveillance and immigration enforcement.)

"These people, they claim to be ethical," Karp continued, adding that "they're actually shorting one of the great businesses of the world."

Sam Altman, the founder of OpenAI, also recently expressed his discontent with those who are skeptical about his firm's valuation. While his company is private, Altman said he sometimes wishes it were public so that he could take it to short sellers.

"There are not many times I want to be a public company, but one of the rare times that it's appealing is when those people are writing these ridiculous, 'OpenAI is about to go out of business,'" Altman told the Bg2 Pod in October. "I would love to tell them they could just short the stock, and I would love to see them get burned on that."

And while he hasn't been as outspoken about short-sellers per se, Nvidia CEO Jensen Huang responded to AI bubble concerns during the firm's earnings call in November, saying "there's been a lot of talk about an AI bubble," and "from our vantage point, we see something very different."

These rising titans of the AI era are the latest business moguls to direct their ire at short sellers. The distaste for investors who put their money on the line to bet that a company's shares will decline is a decadeslong tradition. Tesla CEO Elon Musk has famously battled investors who have bet against the electric vehicle maker. GameStop CEO Ryan Cohen has called the practice "un-American." The pushback it's understandable: executives put a massive amount of work into building and running their companies, and when someone bets against them, it can feel personal.

However, CEOs like Karp need to understand that attracting the attention of shorts is part of the natural life cycle of a company and a healthy market mechanism that allows a range of views to compete. One could even argue that Karp should take pride in the fact that he's grown his company to a size that draws such fervent skeptics. In a sense, it's a badge of honor. He's made it to the big leagues.

Big enough to short

Investing in a company you believe in is straightforward: simply buy the stock. Betting against a company by shorting its stock, on the other hand, is a bit more complex. To do it, an investor borrows shares from their brokerage and agrees to return them by a specified date. The investor then sells the borrowed shares in the open market. When it's time to return the shares to the lender, the investor purchases the agreed-upon amount at the prevailing market price. If the price of the stock falls within that time, the short-seller can then buy back the shares at a lower price, earning a profit. If they got it wrong and the company's stock is higher, well, they've lost money. For example, if you think a company's stock is overvalued at $100 a share, you can borrow 10 shares from a broker for a total value of $1,000. You agree to give the shares back at the end of the month. On the day the deadline hits, if the stock has fallen to $50 a share, you buy up the amount you need to return and pocket a tidy $500 gain. But if that stock were to get hot instead, and rises to $300 a share, you're out $2,000 — a nasty hit. It goes without saying that short-selling can be extremely risky. While a long investor can lose all of their money, a short-seller can, in theory, lose infinite sums.

It's especially tricky to short small companies. Since there are fewer investors buying and selling their shares, even small amounts of buying can cause the price to rise dramatically. This can create problems for short sellers if they suddenly need to return the shares to their lender, a process known as covering their position. If the supply of shares is low and demand suddenly increases, it can drive the price of a stock through the roof, cutting the short seller even deeper. It's a phenomenon known as a short squeeze, and it's what famously happened to short sellers Gabe Plotkin and Andrew Left during the GameStop saga.

"Short sellers absolutely want to make sure they have plenty of liquidity, and so that's why it's so dangerous to short something that's pretty small," said Ryan Kelley, the chief investment officer at Hennessy Funds, which manages around $4 billion.

Derivatives markets, more complex financial products that allow for even more exotic bets on the direction of a stock, also become larger when a stock becomes more prominent, thereby providing the opportunity for more people to bet against a company. After all, to short a stock, you need an investor to lend shares to you.

"The reality is, as companies get bigger, the derivatives market in companies grows. And as the derivatives market grows, there's more folks that will be taking positions," said Maurits Pot, the founder of Tema ETFs, which manages around $1 billion after launching in 2023.

So, the fact that Palantir is drawing short-sellers is, in a way, a badge of honor for Karp. When you get as big as Palantir — which is up 1,720% since its IPO in October 2020 — short bets are going to happen. Sure, some of these increased bets are because there are more people who think the company is on the wrong path, but a lot of times, short interest can increase for more technical reasons — many of them to do with the size of the company. When a company grows, so does the variety of opinions on its stock performance. And that's OK.

Why the market needs short sellers

There are several reasons shorting is a necessary component of a robust market.

First, short-sellers act as a check, helping to call out companies for a range of bad behaviors, from corporate malfeasance to incompetent management. On the extreme end, short sellers have used research, data analysis, and information gathering to expose cases of serious fraud, accounting tricks, and blatant deception. For example, fraudulent behavior at the pharmaceutical company Valeant was exposed in 2015 when short-sellers sounded the alarm about the firm. On the more quotidian side, investors betting against a company have called out executives and management teams for taking a company in the wrong direction. Some individuals will do it publicly, sharing their thesis for why a stock is overvalued. But since the amount of short interest can be tracked, a rising number of quieter short bets can make investors and regulators more aware of the risks associated with a particular firm. In these instances, short sellers have a financial interest in seeing the stock go down, but they are also trying to serve the public interest.

"It's a possibility that people can be adamantly against the way you're running a business," Kelley said, "and it should be that they're able to actually put their money where their mouth is — in other words, short the stock and be vocal about it."

In other cases, short sellers may not think the company itself is doing anything egregious, but rather that other investors in the market are overreacting. Tesla's stock has often traded at nosebleed valuations due to its fanatical investor following, drawing short interest simply because it has traded above its fundamentals at times.

Of course, there are bad actors — some short sellers have been charged with taking a short position on a stock and then drumming up negative headlines about the company to send its share price tumbling, sometimes coordinating with other short sellers. In other words, not simply talking their book, but being disingenuous or lying. These more questionable motivations make short sellers an easy target, and are likely what raised Karp's rankles. But the notion that short-selling in and of itself is harmful is not fair, Pot said.

"The idea that you can't be shorting, I think that's — I wouldn't say it's anti-competitive — but it impedes the natural impulse of the market, which is that there are companies that are shorted for good reason," Pot said.

"Short selling is core to the market," Pot continued, "and I think as long as short selling doesn't become a coordinated, speculative attack, I think it's part of the regular functioning of capital markets."

In this same vein, short sellers can temper the euphoria in bubble periods. When the market is ripping and Wall Street strategists are loath to issue a downbeat, bearish forecast, it can be helpful to hear arguments for why a standout stock or a particularly hot market theme has gone too far. And because losses can be infinite for short sellers, putting their money where their mouth is tells you about their degree of conviction. It's essentially what Michael Burry — who gained fame shorting the housing market leading up to the 2008 crash — did a few weeks ago, when he questioned the assumed rate of depreciation on GPUs, arguing that they'll become obsolete in just a couple of years. With this argument now at the top of investors' minds, you might argue that stocks are more efficiently priced.

Another important role that short sellers play is providing liquidity in the market. While an investor would ordinarily hold their shares, lending them to a short-seller to auction off to the market allows these shares to continue circulating through the system. And when they eventually have to cover their positions and repurchase their shares, they provide exit liquidity to people looking to sell. Higher liquidity levels enable investors to enter and exit positions more quickly and at closer proximity to the market price.

Executives like Karp shouldn't take short-selling to heart. Instead, they should recognize its important market function, and wear it as a feather in their cap — a sign that their company is maturing into adulthood.

William Edwards is a senior investing reporter at Business Insider primarily covering the US stock market and the broader economy.