By Investment Master Class. Originally published at ValueWalk.
Article by Investment Master Class
“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
“We do short individual equities from time to time, but we short with respect, experience, and proper sizing and stop-loss levels” Kyle Bass
Shorts
“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
“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
“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
“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
“Shorting great companies on valuation is a formula for going broke” Shad Rowe
“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
“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
“I need to have conviction in all my shorts about either a company specific catalyst or a macro catalyst” Whitney Tilson
“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
“With our shorts we’re even more focussed on catalysts and we’ve found our performance has improved since we created an entirely seperate investment process around them” Richard Vogel
“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
“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
“In general, on
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