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9:06 am
February 12, 2011
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Jae Jun
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Good points made by Tilson about the different types of shorts.
- outright frauds
- industries in decline or facing major headwinds
- weak or faddish business models
- bad balance sheets
- imcompetent, overly excessive promotional and/orcrooked management
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6:01 pm
February 4, 2011
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Jae Jun
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I fully understand what you are saying but its just a personal preference.
Having a small short position in an overvalued market does of course help when the market tanks and limit losses. Definitely more ways to short than one.
My point is just that the short term is capable of being a lot longer than one can fathom.
If you short companies that are unknown, or just not popular, not being driven by greed and madness and cheerleaders, there is full well the potential to produce results as you suggested.
But just as a personal preference, I think i'll just stick with basics. I dont think i would enjoy being wrong about a short.
But who knows, maybe I'm not giving this strategy of shorting enough thought.
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2:51 pm
February 4, 2011
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somrh
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Jae,
I don't understand why you're insisting that long-term
shorting is more dangerous than short-term shorting. If anything, the
long-term will smooth things over – as Graham notes, the short term the
market is like a voting machine while the long-term it's more like a
weighing machine.
Tilson shorted Netflix which I would argue is a
good company that is likely overvalued. I'm not suggesting
overvaluation alone is a good criteria. It never makes sense to short a
good company – at least, I've never read anyone who advocates shorting
advocate shorting a good company. And I think Montier's screen is an
example that captures both overvaluation and deterioration.
That's
not to say I'm not sympathetic to what you're saying but I feel as
though you aren't addressing the strongest part of the argument I'm
suggesting.
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10:46 pm
February 2, 2011
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Jae Jun
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Tilson pretty much admitted that shorting based on overvaluation isn't a good idea.
http://www.marketfolly.com/201…..osure.html
Which again reminds me that unless there is any of the following
- accounting fraud
- aggressive revenue recognition
- cryptic language regarding management related parties
- boastful management
- (cant remember anything else at the moment)
it really isn't worth shorting.
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1:04 pm
February 2, 2011
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Jae Jun
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my doubt about buying a basket of shorts is that the losses could amount very quickly and rapidly. Since you need the cash to cover, it could get very dangerous. I don't think looking at shorts over a time period is safe. Has to be much shorter.
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8:06 am
February 2, 2011
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somrh
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Jae, I remember seeing an interview with Einhorn (and if I have time later I'll see if I can find it) where Einhorn looks both for overvaluation and deteriorization. Obviously fraud is a good case of deteriorization but it isn't the only case.
Consider a basket of high P/B combined with low Piotroski score. Piotroski found that the portfolio was negative IIRC (although pretty close to flat.) This simple screen fits what Einhorn has in mind. James Montier's screen is similar (he uses P/S instead of P/B and adds high asset growth to the mix) in that it identifies overvaluation and deteriorization. The portfolio over a long period of time resulted in annualized yield of -6% over the period he studied.
I think overvaluation alone isn't sufficient. A simple example can illustrate this. Suppose that, say, Apple issued some bonds which were traded up to a high price such that the YTM is 1%. If the bonds are 10 years long and there is no price correction ever, the bonds will return 1% per year. So shorting them would be unprofitable. So although Amazon, Salesforce and Netflix may all be overpriced, shorting them even over the long term might result in a loss.
So shorting an overpriced, high quality growth stock is probably not a good strategy that doesn't mean that's the only possible strategy. I'm not entirely sure what that strategy is (I'm sympathetic to Montier's strategy to a degree) but there are obviously additional risks/costs with shorting that makes things more complicated (e.g. many shares are hard to borrow and either can't be obtained or have to be obtained by paying a fee).
And one bad scenario is the acquisition scenario when some dumb company comes along and pays a premium for junk (or maybe it wasn't junk?).
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12:55 am
January 24, 2011
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Jae Jun
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First of all, I highly recommend the book "Art of Short Selling". After reading that book, I realize what true short selling is, and honestly it is not something I can do at the moment. True short selling is what Einhorn managed to do with AIGN and Jim Chanos with Baldwin United and Enron.
Note that in all 3 cases, not one of them were for overvaluation reasons.
The book makes it clear that you should never short based on valuation. Doing so it just like an investor buying purely because a stock has a low PE and not doing anything further.
The most difficult thing with true shorting is that the companies are fraudulent and these companies will do anything to inflate their stock price. This means extreme pain and if you can't handle the speculation involved, you are bound to lose your mind and sleep.
I don't have that kind of cash to cover a position.
So that's my answer for the first 2 questions. As for 3, if yo uncover fraud in the company, of course they will try to come out against you. But these true shorts end up saving the economy and peoples money rather than let the crooked management milk all the money they want.
True short sellers have my highest respect. Traders who short stocks I couldn't care at all. Just pumpers.
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7:36 am
January 22, 2011
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somrh
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Afew initial comments (again, some context can be gleaned from the options thread)
1) I agree with itconsultant that overvalued growth stocks (NFLX is one example given in the options thread) probably doesn't fit the bill for a good short candidate. At least the successful short sellers seem to agree with me on this one. Consider David Einhorn's comments regarding, specfically, NFLX: Einhorn Interview.
Overvalued fraud and earnings manipulation seem to be a favorite of successful short sellers.
3) With regard to the social issue, I think it's quite interesting. David Einhorn's experience is quite illustrative. A company that was committing 8 figures of government fraud was ignored by regulators (SEC, SBA, etc) for years until it finally gave them a slap on the wrist. Not to mention the many investors who lost a lot of money in the process. But the SEC (initially at least) was more concerned with these evil short sellers. After Einhorn gave his speech (see here) the SEC investigated him for price manipulation. Einhorn points out the double standard (many other investors gave speeches regarding long positions they held but no one is concerned with price manipulation on that side of the coin.)
The main point is that it's a violation of the intent of free speech, namely, the free exchange of ideas. And there is concern that corporations and government regulators wish to silence critics of stocks. But that public criticism plays an important part of how financing works in the US. The efficient use of funds requires it and we are damaging our future.
Interestingly, it may not be just big hedge funds that are under heat but people like you and I who post on the internet. See this blog as a possible example. While most of the posts are hearsay and I'm not sure how much of it is accurate, it wouldn't surprise me in the least. A poster at the Fool who gave both positive and negative reviews of different stocks no longer posts as often. This may have been a result of legal action by a company that he criticized.
That stuff is scary and the US government seems to be letting the tricksters and fraudsters get away with severe and destructive crime while avoiding criticism that might harm their schemes.
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7:14 am
January 22, 2011
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somrh
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Post edited 6:18 am – January 22, 2011 by somrh
This thread is an offshoot from the thread on options so there's some good discussion there. Any thoughts, ideas, etc are welcome.
To give this some structure (some of which is motivated by some posts in the option thread by mals and itconsultant):
1) What, if any, stocks make for good short candidates?
2) What is the general risk/reward structure for shorting and would Graham classify it as "investing" or perhaps as "rational speculation" or some other classification?
3) And perhaps to give this a more broader social context, what about the social perception of short sellers? This would include not only other investors, but corporations and even government regulators.
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