“He who sells what isn’t his’n must make it good or go to prison.” The amateur speculator soon learns this little Wall Street jingle and is often deterred by it from making a short sale. It is essential, however that he understand the mechanics of short selling, its economic function and perhaps the ethics, if any, of such a transaction.” Philip Carret 1930
Q2 hedge fund letters, conference, scoops etc
“When I first started to put out sell-side research in the early 1980’s, I believed that going short was simply the mirror image of going long. I assumed that all the attributes used on the long side could be reversed on the short side. I no longer believe that.” Jim Chanos
“Short investing is not the opposite of value investing. Short investing is actually the opposite of growth investing. It is much more dependent upon checks of the growth story.” Paul Isaac
“We do short individual equities from time to time, but we short with respect, experience, and proper sizing and stop-loss levels.” Kyle Bass
“For the most part, we avoided the damage in the short portfolio [in the tech bubble] by refusing to sell short anything just because its valuation appeared silly. We reasoned that twice a silly valuation is not twice as silly. It is still just silly. Kind of like twice infinity is still infinity.” David Einhorn
“If I ask someone who runs a long/short equity fund who is 20% long and 20% short, if they’re levered, the most likely answer would be no. In reality, if you’re short anything you’re levered, because if it “Volkswagens” you, you’re going to lose all your money.” Kyle Bass
“While we love catalysts on the long side, we require them on the short side. Valuation shorts are always tricky.” Shawn Kravetz
“A basic principle in going short is that there has to be a catalyst.” Steve Cohen
“I need to have conviction in all my shorts about either a company specific catalyst or a macro catalyst.” Whitney Tilson
“With our shorts we’re even more focussed on catalysts and we’ve found our performance has improved since we created an entirely separate investment process around them.” Richard Vogel
“Catalysts are a higher priority for shorts because time is generally not on our side given that the market goes up longer term. Occasionally we will short on valuation without a specific catalyst, but that can be risky because an excessive valuation can easily become more excessive. In those cases there are two things we like to do to mitigate our risk. First we generally make the position sizes smaller. Second we try to use the law of large numbers to our advantage. For example, if we’re anticipating that a glamour stock’s revenue growth will mean revert, it’s easier to do that with a company that has billions of dollars in sales facing natural deceleration. Also from a maker cap standpoint, its a lot harder for a company with a $45b market cap to double than it is for a company with a $45m market cap.” Rolf Heitmeyer
“Many of my shorts over the years have been management teams that are repeat offenders. Some of these guys, no matter where they go, hype whatever the current product, idea, concept or whatever flavor of the day people want to hear.” Marc Cohodes
“You have to remember that if you are shorting a leveraged company, with 90% of the capitalization in debt and 10% in equity, a 50% decline in the stock only wipes out 5% of the total capitalization. You have to look at the total capitalization” Jim Chanos
“We’re looking for companies [to short] with weakening moats, often coupled with a resulting deployment of capital into areas in which they have no competitive advantage. Even better is when they’re deploying not just excess capital, but leveraging the balance sheet to do so” James Chrichton
“The goal should be that in the middle of a storm that puts all the less-seaworthy boats at the bottom of the ocean, your boat, battered as it may be, makes it back to shore. Short selling helps you do that.” Zeke Ashton
“As our mentor Julian Robertson used to say, short selling is a bit like going to the gym. You’re not just going to show up one day and become powerful, you have to put in the reps on a consistent basis.” Chase Coleman
“Our favourite short opportunities are companies that are highly leveraged, need access to capital to survive, require substantial management judgement in the determination of their reported earnings, and have fundamentally bad business models. For equity shorts, we have an additional criterion that there is a “ceiling on valuation”. A ceiling on valuation is what we deem to be the equivalent of a margin of safety for long investments. In other words, we look for equity shorts where the conventional bounds of valuation for a particular business protect us from material stock price increases.” Bill Ackman
“One painful lesson on the short side has been that mere absurd overvaluation is not sufficient reason to be short.” Whitney Tilson
“We do not generally engage in the short sale of overvalued securities, believing that short-selling could effectively increase, not decrease, portfolio risk in certain kinds of markets.” Seth Klarman
“A few thoughts should be kept uppermost in mind. One is: never sell a stock, because it seems high priced. You may watch the stock go from 10 to 50 and decide that it is selling at too high a level. That is the time to determine what is to prevent it from starting at 50 and going to 150 under favourable earnings conditions and good corporate management. Many have lost their capital funds by selling a stock short after a long upward movement, when it ‘seemed too high’.” Jesse Livermore
“Shorting great companies on valuation is a formula for going broke.” Shad Rowe
“You need to be careful though, that you are not selling short simply because prices are high. Never sell short unless prices are astronomically expensive, and you detect negative change coming.” Jim Rogers
“Investors often become emotionally attached to companies in which they’ve made a lot of money, so I’ve found that in the first year or so after a company starts to make excuses for falling short of its historical success, the market reacts in a very benign way. That can give us an opportunity, if we believe the situation has fundamentally changed, to make attractive bets on the short side.” Brian Zied
“If you’re interested in shorting stocks, it’s very labor intensive. You probably have to do 6x the work that the longs do. You have to have the courage and faith in your work. I used to say, 96% of the time, you go home feeling and thinking like you’re an idiot, and you get paid 4% of the time. So when you have a good day, you have a great day. But your bad days are numerous. It takes a certain mind and mindset to be able to deal with that. Most people just can’t.” Marc Cohodes
“Part of it is the fear in the back of every manager’s head that stocks can go up infinitely but you can only make 100 percent on the short side; stocks can only go to zero. My reply to that has always been: I have seen more stocks go to zero than infinity.” Jim Chanos
“I believe the internet bubble made its ultimate top the last day the last short seller could no longer afford to hold his position and was forced to cover. Market extremes occur when it becomes too expensive in the short term to hold for the long term.” David Einhorn
“Any company with a management team that focuses on, mentions, is bothered by, or attempts to squeeze short sellers, is almost definitely a short.” Marc Cohodes
“Shorting is not a criminal trial. It doesn’t have to be beyond a reasonable doubt. There just has to be a preponderance of evidence” Jim Chanos
“Shorting stocks to me is like a cattle drive, I am confident that I will be right and make money, but in getting the cows from Omaha to Fort Worth, I will probably end up with some arrows in my ass. I just want to make sure they are not in my back. So that means you can be dead right on the fundamentals, but if your timing is wrong, you are wrong and better adjust. That took me a while to learn, but it’s important.” Marc Cohodes
“A short cannot be a fundamentally long term position. In the long game, the upside is unlimited. Your downside is 100%. In shorting it is opposite. Shorting is also essentially borrowing, so you need money and time on your side. If time is not on your side, you can be right but lose all your money. The best kind of short usually has some kind of fraud. In those situations, management is determined to keep the fraud. Look at Bernie Madoff, 20 years time. You cannot afford to borrow money for 20 years. So shorting is a short term game. When those positions go against you, there is huge leverage that can utterly crush you.” Li Lu
“As long as no-one cares about it, there is no trend. Would you short Nasdaq in 1999? You can’t be short just because you think fundamentally something is overpriced. You can wait until people start to care. So you are selling the market on the way down not the way up.” Colm O’Shea
“Another thing we like to do on the short side is to see things start to break down before we get involved.. we’ll typically miss the top.” Alan Fournier
“In general, on the short side we focus on poor fundamental and competitive situations, hopefully with weak management teams, more than we focus on valuation. In other words, we have no problem shorting cheap stocks where we see long-term structural or competitive problems. And we never short stocks purely for valuation reasons. As we have all seen over the last year, unreasonable valuation can often become more unreasonable.” Lee Ainslie
“Valuation itself is probably the last thing we factor into our decision. Some of our very best shorts have been cheap or value stocks. We look more at the business to see if there is something structurally wrong or about to go wrong, and enter the valuation last.” Jim Chanos
“In most walks of life the early bird undoubtedly gets the worm, but in selling short it is mostly the tardy sellers who succeed.” Gerald Loeb
“We do not short to hedge. If we are uncomfortable with the risk in the position, we simply reduce or eliminate it. By having a portfolio of worthwhile longs and worthwhile shorts, we achieve a partial market hedge without having to spend capital on negative-expected-return propositions” David Einhorn
“Our long and short portfolios are each designed to be standalone portfolios and not hedges, pair-trades, or specific offsets.” Yen Liow
“Our short exposure is achieved by shorting individual stocks, which I think is increasingly unusual these days. But to us, it’s critical, because we want to add value on both the long side and the short side. If you use market-related indexes to create your short exposure, by definition it’s not going to add value.” Lee Ainslie
“My version of short selling at the portfolio level might be considered special-situation short selling. It will happen on occasion in stocks that are not generally heavily shorted, and only in cases where I have developed or can independently confirm an original investment thesis that recommends such action.” Michael Burry
“We don’t short in order to call ourselves a hedge fund, but when we think we can make money at it.” Leon Cooperman
“A stock should never be sold short because its price looks too high.” W O’Neil
“A key problem for investors who short a company that is subject to government oversight is that the government, even when it acts, does not move at the speed of the stock market. Two years might make a prompt government investigation, but it is an eternity for investors such as Greenlight reporting monthly results, even in a long term strategy” David Einhorn
“The danger is you get squeezed on that short. Bob Wilson, a very famous short seller, famously said that nobody ever gets rich publicising their shorts. You want to get rich quietly. I don’t go on CNBC trying to talk a stock up.” Leon Cooperman
“I prefer situations in which I can have five shooters on the target rather than one. For example .. I think I can win on a bubble, on fraud, on lack of reserves, on the macroeconomics, on money laundering. There’s a zillion ways I can win.” Marc Cohodes
“For my shorts, I look for a bad management team, and a wildly overvalued company in an industry that is declining or misunderstood.” Julian Robertson
“While on the long side we’re concentrated with a one or two year time horizon, on the short side we’re diversified with a time horizon of two weeks to two months.” Alex Roepers
“With shorts, we take a lot of little bites, rather than concentrate. We’re looking for bad business models, bad accounting, bad people or bad valuations. Our short book regularly adds to overall performance, sometimes only a little and sometimes much more.” Chuck Akre
“We have a portfolio of shorts, historically 40 to 50 names in the US. The most a position can be in any of our funds is 5 percent. ypically alarm bells go off at 4 percent.” Jim Chanos
“We purposefully limit the fund’s overall short exposure to a modest portion of the portfolio and we keep it heavily diversified in recognition of the short-term volatility these positions can entail.” Anthony Bozza
“On the short side, maximum position limits can serve as an important ceiling to reduce losses from large short investments that are going the wrong way.” Lee Ainslie
“One thing we try to do a bit differently on the short side is to have an investment philosophy, not a trading philosophy. We believe the companies we short are worth significantly less over a 12 to 18 month horizon and we have position sizes that allow us to live with short-term fluctuations while our thesis plays out.” Allan Fournier
“When we’re short, we look for deteriorating industry conditions, company-specific fundamentals at risk and liquidity issues. We will short a good company, even a cheap company, if we think reality will fall short of current expectations. The best way I’ve learned to short is by making mistakes on the long side – in value traps, for example – and then recognising when others are making the same mistake.” Larry Robbins
“Because there are more ways to get hurt on shorts than longs, we typically keep the position sizes smaller and pay even more attention to liquidity and how crowded the trade is. There’s no worse feeling than being stuck in a short as it’s going up.” Curtis Macnguyen
“A common mistake traders make in shorting is that they take on too big of a position relative to their portfolio. Then when the stock moves against them, the pain becomes too great to handle, and they end up panicking or freezing” Steve Cohen
“Our view is that short selling may not in most years be worth the time and effort you spend on it, but you do it precisely for those years like 2008 when shorting not only offsets losses on your longs, but also produces capital that allows you to average down on the long side.” Zeke Ashton
“I think making money on the long side is a more fruitful activity, but from a portfolio-management standpoint, the shorts give you the staying power to live through difficult market conditions. In a perfect world, you should be able to make money on both your longs and your shorts in the long run.” Dan Loeb
“You don’t see any Fifth Avenue mansions built by bears” James R Keene [from Bernard Baruch’s ‘My Own Story’]
“One important thing to understand is that there are many easier ways to make a living than shorting stocks. If you want to make a lot of money on Wall Street, shorting stocks is not what you want to do.” Marc Cohodes
“Shorting is a very difficult game. If you look at Jim Chanos who’s got one of the best track records long-term among all short-sellers, Jim is a very smart forensic accountant. He called Enron before anyone else called it. But if you look at Jim’s track record over the last 20 years, his average return is 2% per year. What that means is the average company he shorted lost 2% of it’s value annually which is ridiculous. He’s making these bets because he is assuming they are 50%, 70%, 80% 500% overvalued and he ends up with a record of 2% annualised.” Mohnish Pabrai
“The 9.5% long term upward bias of the stock market is one reason that shorting stocks generally is a bad business. To do as well as a market that tends to provide a 9.5% annual return, a shorter of stocks must find stocks that decline by at least 9.5% per year or that underperform the market by 19%. There are not many investors in the world who can outperform the stock market by 19% per year, and thus I imagine that there are not many investors who can find stocks that will underperform the market by 19%. Furthermore, when an investor is long a stock, the most he can lose is his original investment – and his upside is unlimited. When an investor is short a stock, his loss potential is unlimited if the stock happens to appreciate sharply, and his profit is only equal to the value of his original investment. Thus I believe that shorting stocks is a miserable business, except for rare investors who have extraordinary abilities to predict when individual stocks or when markets decline sharply.” Ed Wachenheim
“Three things about shorting make it a miserable business. On the long side, you have 100% downside but unlimited upside. On the short side, you have 100% upside and unlimited down-side. I do not like that math. Second, the best short has some element of fraud. However, a fraud can be perpetrated for a long time. Of course you borrow to short, so they could really just wear you down. That’s why I could be 100% right and bankrupt at the same time. But, you know what, you go bankrupt first! Lastly, it screws up your mind. Shorts just grab your mind and take away from the concentrated effort that is required to do proper long investing. So, those are the three reasons why I just stay away from shorting. It was a mistake on my part. I shorted for a couple of years. I don’t discard people who are really doing well at shorting – it’s just not me. If I want to add a fourth reason, it is that the economy overall has been really growing at a compounding rate for 200-300 years, ever since the modern science technology era. So, naturally, the economic trend favours long positions rather than short.” Li Lu
“I’ve probably had a hundred ideas of things that should be shorted, and I would say that almost every one of them have turned out to be correct. And I’ll bet if I’d tried to do it and make money out of it, I probably would have lost money, I would have had no fun, and the opportunity cost, as Charlie said, would have been enormous. Because if somebody’s running something that’s semi-fraudulent, they’re probably pretty good at it and they’re working full time at it and they’ve succeeded for a while and they may keep succeeding. And if they succeed and you go in at X and it goes to 5X, you know, all you’re hoping after a while it that it goes back to X again or something of the sort. It’s a very tough psychological game to play. Few people may be well-suited for it. I would never put any money with a short fund, but not because I would think it would be ethically wrong. I just think they’re unlikely to make money.” Warren Buffett
“I don’t short anymore because it creates mental tension for me. Which I don’t want. And it interferes with the other side – what is too low that I should be buying? So I have no interest in shorting because I think it screws up your head.” Martin Sosnoff
“It’s really hard making a lot of money being short the risk premia. Every once in a while you make money because markets collapse, but in the long run you’ll make more money being long markets.” Jim Leitner
“If you buy a stock and it goes down the most you can lose is the money that you put up. And when it goes down you have a smaller problem and you don’t worry about it. But if you short a stock and it goes up, you’re sick, you can’t even breathe because you can have unlimited loss potential. You can die and be incapacitated and lose every dime you have. [Shorting] is not a good solid business.. I gave up short selling because it becomes all consuming. You think you’d feel better as you get older, but it feels worse. You’re looking for bad outcome all the time. You have a happier life looking for good outcomes.” Shad Rowe
“Being short and seeing a promoter take the stock up is very irritating. It’s not worth it to have that much irritation in your life.” Charlie Munger
“Generally speaking, I think if you’ve got some very good ideas on businesses that are undervalued, it’s really unnecessary to do any shorting out of the market.” Warren Buffett
“We made our money by being long some wonderful businesses. We didn’t make it by a long-short strategy.” Charlie Munger
“Warren Buffett once told me about the difficulty of shorting the stocks of companies run by crooks, because they’ll fight dirty to save themselves. ‘The crook’s life depends on it’, Buffett said.” David Einhorm
“We also don’t engage in short-selling. We’re not fans of shorting stocks for two main reasons: One, we don’t like the math; shorting exposes you to unlimited liability with limited potential for gain—the opposite equation of investing ‘long‘. Two, shorting has the potential to cause distracting agitation that could create unintended consequences.” Allan Mecham
“We’re always long. You guys should know one thing: the markets go up over time. If you try to play the short game at the wrong time, you’ll lose money. You don’t want to be short markets over a long period of time.” Craig Effron
“I’ve done well in bear markets. I’d love to sit here and tell you I made it shorting stocks. It’s always very difficult in a bear market. They don’t trade with rhythm, you get these vicious rallies, you get squeezed out of shorts and people play all sorts of games. I always made it in Treasuries, because Treasury yields would go down dramatically.” Stanley Druckenmiller
“I believe their are several fundamental disadvantages to short selling, [fighting the natural upward trend of the market, unlimited downside/limited upside, size of position increases when short not working, uptick rule, borrow requirements, betting against management team with greater knowledge, limited talent pool with experience] and as a result we want to maintain a positive bias.” Lee Ainslie
“Investors often fail to realise that the more successful a short position is, the quicker it declines as a portion of the portfolio and needs to be replaced by a new short position. That is the reverse of a good long idea. You can run good long ideas forever, and we intend to try.” Terry Smith
“As an equity trader, I learned the short-selling lessons relatively early. There is no high for a concept stock. It is always better to be long before they have already moved a lot than to try to figure out where to go short.” Joe Vidich
“In shorting it’s much harder to underwrite your downside which is something crucial to keep in mind.” Ed Bosek
“People make trades without a good reason. They step in front of freight trains. They short stocks because they are up, as if that were a reason. They’ll say ‘I can’t believe the stock is so high,’ and that’s their total research. That makes no sense to me. My response is: ‘You have to do better than that‘.” Steve Cohen
“If I make you a few percent a year being short, in effect I’m an insurance policy. I’m protecting your downside and I’m paying you a small amount in dividends. But think about it. You could then go twice long the market, be short my portfolio, and have 2X the market plus a few percent, minus your cost of the additional carry. And that’s the proposition, and that’s why short selling alpha is so prized in the marketplace when you can find it, because it enables you to be more long. As I keep saying to people: I’m in the insurance business.” Jim Chanos
“People say shorting is a waste of time and you never make money. I’d say just breaking even on my shorts allows me to be 120% long and still not have a lot of volatility. Shorting is and should be a profit center, but the benchmark people use to compare against is often wrong.” Ricky Sandler
“It’s difficult to have hard and fast rules. When you short stocks, you get involved on a carnival ride that’s called ‘anything goes,’ which includes buy-ins, manipulations, fake tenders, and all sorts of shenanigans which can cause stocks to gyrate in a crazy fashion. Before I short anything, I have a few protections. First, I always assume the short can double on me. I size the position accordingly. Second, I guard against ‘thesis creep.’ If the thesis changes, you better get the hell out. If you don’t, you’ll clearly get buried. As long as your thesis is pretty good and your analysis is right, you can hang in there. Third, I never, ever, ever get involved in what I would call open-ended situations. I’ve never been short a drug company that can theoretically solve a big problem. I have avoided pie-in-the-sky names. To use an analogy, I’m not interested in climbing into a tree and wrestling the jaguar out of the tree. I’m interested in someone shooting the jaguar out of the tree, and then I will go cut the thing apart once it hits the ground. Instead of open-ended situations, I like to short complete pieces of garbage with fraudulent management and horrifically bad balance sheets. I look for change, I look for ‘if this goes away tomorrow will anyone miss them’? What do they do well?” Marc Cohodes
“In most successful short sales, we lose money gradually for a period of time until we suddenly make a large gain – often in a single day.” David Einhorn
“I normally lose [on shorts] first then hopefully win. I do look for breaks in the fundamentals first before I dive in. When the market begins to care is anyone’s guess.” Marc Cohodes
“On the short side, periods of frustration are not uncommon and are typically followed by periods in which short selling is quite rewarding.” Lee Ainslee
“Timing is delicate, sometimes exquisitely so. To go short on the right stock at the wrong time (on the way up) may be horrendously expensive. Ask those who went short Litton, TelePrompTer, Levitz Furniture, Memorex, and many others – rightly but too soon. I knew a man who lost everything selling short in the summer of 1929, at the height of the bull market. He didn’t have the reserves to hold out until autumn.” Roy Neuberger
“When they first went public I noticed the top two guys in management wore wigs. I am 10/10 in shorting guys who wear wigs. It’s another indicator of mine. I don’t know what it is with guys who wear wigs but they make great shorts.” Marc Cohodes
“Over the years, we have uncovered many of our best short opportunities in mundane and competitive businesses that have experienced a significant increase in their valuations following an unsustainable increase in margins and earnings.” Anthony Bozza
“Ideally I would like to go short companies that are expensive relative to their sector and where I expect profit warnings over the next few years. The problem is that these bad companies have the greatest risk of being takeover targets… You can be long a good stock at 7 times earnings and short a bad stock at 15 times earnings, and some stupid foreign company comes along and pays a 50 precent premium to buy the bad company.” Martin Taylor
“The shorts generally have the tougher time of it in this world. I mean, there are more people bowling stocks for phony reasons than there are burying stocks for phony reasons. So I do not see shorts as any great threat to the world. If enough people shorted Berkshire stock, they would have to borrow it and they would pay you to borrow your stock and that’s found money… it’s a tough way to make a living. It’s very easy to spot phony stocks and promoted stocks, but it’s very hard to tell when that will turn around. And somebody that’s promoted a stock to five times what it’s worth, may very well promote it to ten times what it’s worth, and if you’re short, that can get very painful.” Warren Buffett
“Be very wary of a company that shows two things .. lots of management stock sales from different people, but more importantly management departures, if you are seeing a company when 10 or 15 or 20 people are leaving within a year or two.. look out.” Jim Chanos
“When I sell something short I am not trying to create a hedge, I am trying to create a profit. We do this by identifying stocks that are both overvalued and deteriorating. In many cases there is something wrong that we have unearthed that is not widely understood in the market.” David Einhorn
“The two best indicators of a company on its way to bankruptcy – rapidly shrinking revenues and a quickly rising debt level.” Scott Fearon
“In the world of shorts, you’re fighting dividends and borrowing costs. Therefore the bar is higher to justify our shorts, as we have to overcome these costs.” Neal Nathani
“One of the first rules of short selling is you have to find something everyone owns to short, or it doesn’t really make money.” Russell Clark
“One of the models we look at is a wonderful checklist by Marianne Jennings, it’s from a book called ‘The Seven Signs of Ethical Collapse’. I will tell you at both Valeant and Enron, the CEO’s and the situation fit about 6 or 7 of them. One of them is ‘Innovation like no other’, another is ‘Larger than life CEO’s and a compliant board’. Another one is ‘Good works in one area tries to atone for evil in another’. There’s a number of companies we are short now that fit that checklist almost perfectly. We keep an eye on these kinds of things. When you get bad governance and messianic leadership, you have trouble on your hands.” Jim Chanos
“The problem of crowding is most acute in our shorts due to the risk of unlimited loss and the potential for cancelled borrow arrangements. Here we do tread carefully. As you are aware, we are guarded in disclosing our shorts to anyone and we do on occasion limit the size of our positions, or eliminate them altogether, when we perceive a position to be tight in the borrow market or crowded by equity long-short investors.” Andrew Halvorsen
“What makes common stock prices so hard to predict is that a general liquid market for common stocks creates, from time to time, either in sectors of the market or in the whole market, a Ponzi scheme. In other words, you have an automatic process where people get sucked in and other people come in because it worked last month or last year. And it can build to perfectly ridiculous levels, and the levels can last for considerable periods. Trying to predict that kind of thing, sort of a Ponzi scheme which is, if you will, accidentally thrown into the valuation of common stocks by just the forces of life, by definition that’s going to be very, very hard to predict. But that’s what makes it so dangerous to short stocks, even when they’re grossly overvalued. It’s hard to know just how overvalued they can become in addition to the overvaluation that exists.” Charlie Munger
Article by Investment Masters Class
