Professional Documents
Culture Documents
After Elephants
An Investors Guide to Wall Streets Toughest Job
Guy Judkowski
Contents
Chapter 1: Introduction ......................................................................................... 1
Chapter 2: Beginners Luck .................................................................................... 4
Chapter 3: Keeping it Simple .................................................................................. 7
Chapter 4: Slowing Sales and Rising Inventory Levels ......................................... 10
Case Study: Fruit of the Loom (FTL) ............................................................. 11
Chapter 5: Slowing Sales and Rising Accounts Receivable .................................. 14
Case Study: Alpharma (ALO) ........................................................................ 15
Chapter 6: Totality of the Circumstances Approach ............................................ 18
Earnings Quality Issues .................................................................................... 18
Case Study: Fossil Corp. (FOSL) .................................................................... 19
Case Study: American Italian Pasta (AIPC, PLB) ........................................... 22
Differential Disclosure...................................................................................... 24
Case Study: Serologicals (SERO) ................................................................... 25
Management Quality ....................................................................................... 27
Case Study: Orthodontic Centers of America (OCA) .................................... 27
Fieldwork.......................................................................................................... 30
Case Study: Safeskin (SFSK) .......................................................................... 31
Chapter 7: When a Short Just Isnt Working ........................................................ 34
Chapter 8: The Increased Difficulty Level of Successful Shorting ........................ 37
Chapter 9: Conclusion .......................................................................................... 41
Acknowledgements.............................................................................................. 43
Chapter 1: Introduction
The owner of the firm had once been the head of Drexel Burnham
Research (which later became famous and ultimately infamous in the 1980s due
to Michael Milken and junk bonds). While in his office one day, I noticed him
reading a newsletter called Financial Statement Alert. The service highlighted
between 5-8 companies per month that were using aggressive accounting
techniques in order to manage earnings.
My interest piqued, I read all the back issues in short order. Next, I went
to the library and read as much as I could on short selling. I learned about NYU
accounting Professor Abraham Briloff who in the 1960s wrote papers criticizing
how companies manipulated earnings. I also located a copy of Thornton
OGloves Quality of Earnings (1987). This book laid out in great detail how
forensic accounting helps identify earnings quality problems by emphasizing the
importance of detailed analysis and investigation of a companys financial
statements. Identifying problems before they are well known creates excellent
opportunities on the short side.
The sections that delved deeply into accounting bored me. I admittedly
was not interested in learning all the nuances of accrual-based accounting. I did
find fascinating the sections on due diligence, working capital red flags such as
high accounts receivable and inventory, and the concept of differential disclosure
(seeking out wording changes in federal filings and company announcements).
Perhaps some of my legal training helped me to be more naturally attentive to the
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necessity of critically reading federal filings and proxy statements. The premise
that slowing sales coupled with deteriorating working capital is a red flag made
common sense to me. After all, my stepfather owned a furniture store so I had a
front row seat to the importance of managing your cash flow, not allowing your
inventory to pile up, and the importance of collecting on your receivables.
Within two weeks of reading these materials, I created financial screens
able to identify companies experiencing slowing sales and working capital
problems. Armed with this powerful tool, in 1993 I began publishing a short sell
newsletter called The Accounting Workout.
Initiation
Initiation
Close-Out
Close-Out
Gain/
Company
Date
Price
Date
Price
Loss
Brooktree (BTRE)
10/19/93
$13 7/8
12/1/93
$11
+17%
11/24/93
$35
12/20/93
$23 7/8
+32%
12/13/93
$39
1/1/94
$16
+46%
12/20/93
$5
1/10/94
$3 5/8
+31%
Empi (EMPI)
1/10/94
$20
Open
Open
Open
Pyxis (PYXS)
1/21/94
$70
Open
Open
Open
1/31/94
$25
NA
$27 7/8
-9%
2/23/94
$22
3/24/94
$13 1/2
+40%
3/22/94
$16 5/8
Open
Open
Open
Brooktree Corp, down 17% in 6 weeks; Fruit of the Loom, down 32% in
4 weeks; Eagle Hardware & Garden, down 46% in 4 weeks; Regal
Communications, down 31% in 4 weeks; SLM International, down 40% in 5
4
weeks. There was a small loss (9%) in Cooper Tire & Rubber and 3 open short
recommendations (Empi, Pyxis, and Alaska Airlines) when I stopped publishing
and left to work for a hedge fund. I later co-managed a successful short-biased
hedge fund for 13 years and also published short sell reports (The Accounting
Workout (1993-1994), The Short Sellers Report (1996-2006)) and co-published
red flag newsletters (Balance Sheet Watch (1998-2006), Earnings Workout
(2011-2012)).
I have a somewhat unique perspective because I published research and
managed short portfolios. Few who publish negative research ever actually
manage money and those who manage shorts almost never publish research. I comanaged my short-biased hedge fund which had a total net return of +58.7% over
the period 2000 to 2013. During the comparable time period, the Russell 2000
went up +131.4%. If you were a market bear, investing in our fund would have
been a much better decision than shorting the Russell 2000. Our fund was
popular with several large institutional investors who used us to hedge long
portfolios. They liked our fund primarily because losses were generally much
lower than our competition during up markets while we still made money in
down markets.
To give some perspective on my research business track record, below
are some performance statistics on Balance Sheet Watch, which I co-published
from October 1998 to August 2006. The goal of the service was to conduct a
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disciplined, methodical search for flawed companies that we believed were likely
to under-perform the Russell 2000 over a 6 to 12 month period. We highlighted
over 1,000 companies in Balance Sheet Watch.
Performance Metric
1,038 total companies
A. Declined 30% or more using a cover price 6 months after
initial write-up
B. Closed below the write-up 6 months after the initial report
C. Traded 30% below the write-up price within 12 months
D. Traded 50% below the write-up price within 12 months
Hit Rate
% (# companies)
19% (204)
53% (570)
42% (452)
19% (201)
risky to short a company that relies on acquisitions for growth. Wall Street likes
organic growth, but they absolutely adore growth-by-acquisition. Acquisitive
companies need financing from Wall Street to fund acquisitions and Wall Street
does not usually like to bite the hand that pays their fees. Growth-by-acquisition
also complicates analysis. By doing frequent acquisitions, companies have
accounting flexibility to massage reported earnings quarter after quarter and
mask slowdowns in organic growth. There have been some great shorts involving
acquisitive companies, but great patience and a large loss tolerance are essential.
These are qualities that most people, including myself, do not possess.
Another benefit of focusing on slowing sales and deteriorating working
capital is it allows an analyst to quickly exclude problematic areas. For example,
I have always been fascinated by short sellers who focus on frauds, drug
approvals, and financial shorts. Over my career, I published short sell reports on
companies like MedQuist, ArthroCare, Impath, and American Italian Pasta
Company. Ultimately, the United States Securities & Exchange Commission
accused these companies of various accounting irregularities. However, my short
thesis for each of these companies was never predicated on financial wrongdoing.
A complete fraud like Enron requires a lot of financial acumen and patience. On
the surface, everything at Enron looked great and my screens could never have
unmasked Enrons problems. The same logic applies to binary events like drug
approval submissions before the FDA. I never like to bet on what any
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government agency may or may not do. Financial shorts are also difficult since
these companies have maximum flexibility to manage earnings by making
reserve assumption changes. In 2008, financial shorts worked amazingly well,
but the catalysts were as much systemic as company-specific. I do not believe my
methodology is nearly as effective in predicting financial stock performance. In
sum, I believe the most fertile sectors to find short ideas using my process are
consumer-discretionary, retail, healthcare (excluding drugs), and technology
(preferably simple to understand companies). I also exclude most cyclical
industries since the stock performance of a cyclical company is often more
closely tied to business cycles and commodity price changes than company
specific issues.
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pressure volumes further. This causes even higher inventory levels. Eventually, a
company has to cut prices in order to reduce this inventory.
It is also helpful to analyze gross margin trends. Deteriorating gross
margins are obviously negative, but the implications of this are fairly well
understood. I am more intrigued when despite slowing sales and rising inventory
levels, gross margins are improving. This is particularly interesting if the
company is a manufacturer. A producer can sustain or improve gross margins by
operating plants at full capacity. However, if sales do not pick up and inventory
builds, manufacturing activity eventually has to be curtailed. This hurts plant
utilization, reduces economies of scale, and adversely impacts gross margins.
Case Study: Fruit of the Loom (FTL)
Source: Bloomberg
The significance of stagnant sales growth coupled with bulging
inventories has proven itself repeatedly over my 20+ years of short selling. On
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13
Source: Bloomberg
The implications of unusually high accounts receivable was clearly
displayed in the January 2002 issue of Balance Sheet Watch when I featured
specialty generic pharmaceutical company Alpharma (ALO). Alpharmas sales
growth had been slowing all year. On November 6, 2001, the company
announced 2001 third quarter (3Q01) revenues and earnings in-line with
previously reduced guidance and Wall Street expectations. A week later on
November 14th the Company surprised investors when it negatively revised the
results that had just been released the week before.
15
In a press release,
16
$16.55. The earnings miss and guidance shortfall should not have been a shock to
any analyst who had paid attention to Alpharmas accounts receivable.
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growth.
Nonetheless, I was not surprised when 4Q earnings also showed signs of strain.
As I noted in my February 24, 2012 follow-up, Fossil reported better than
expected 4Q EPS of $1.87 vs the $1.77 consensus estimate on lower than
expected revenue of $830.8 million vs the $841.5 million estimate. 4Q earnings
quality was extremely poor with a lower than expected tax rate of 27.3% (vs the
35% consensus estimate) adding $0.21 to the bottom line. Excluding the impact
of the lower tax rate, EPS would have come in at $1.66 or $0.11 below investor
expectations. On the surface, FY12 EPS guidance of $5.40-5.50 is in-line with
investor expectations of $5.44, however adjusting for the tax rate change and
using the old tax rate assumption, EPS guidance would have been $5.15-$5.25,
well below expectations. Further, FY12 revenue guidance came in slightly below
the Street at $2.95 billion vs the $3.0 billion estimate. Additionally, the company
issued 1Q12 EPS guidance $0.90-0.92 vs the $0.98 consensus. Using Fossils
old tax rate, 1Q EPS guidance would have been $0.85-0.87.
On the call,
management also reported that it expects a lower share count in 2012. Given the
lower tax rate and share count assumption along with deteriorating gross margin
and operating margin, much of FY12 earnings growth guidance appears to be
lower quality.
I also highlighted the continued unhealthy pattern of slowing sales and
rising inventories. In the prior quarter, management forecasted that, in terms of
Q4 we do expect inventory increases to be in line with sales. This forecast
proved incorrect as inventory growth exceeded sales growth in the fourth quarter.
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Finally, despite the continuing benefit from favorable FX, 4Q gross margins
decreased year-over-year and were below consensus estimates. Management
commented, This decline was principally driven by an increase in the cost of
factory labor in certain watch components. In the prior quarter, the Company
wrongly predicted that, production cost increases are expected to remain stable
over the balance of the year.
After a brief dip, Fossils stock price revived. Finally, however, on May
8, 2012, Fossils stock price plummeted 29% after the company reported
disappointing first-quarter sales and its second-quarter forecast also missed
estimates. The earnings quality in both 3Q and 4Q was poor and proved to be
very useful in predicting that Fossils near term prospects were not as rosy as its
supporters believed.
Case Study: American Italian Pasta (AIPC, PLB)
One-Time Gains in Operating Earnings and Capitalizing Interest Costs
Source: The Short Sellers Report, July 29, 2002
Source: Bloomberg
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that In FY01 and FY00, approximately $2.6 million and $2.0 million of interest
cost was capitalized. The company does not reveal the amount of interest
capitalized quarterly so it is unclear what the impact has been during FY02.
My fieldwork, which included numerous conversations with industry
participants and tracking industry sell-through data, cast serious doubt on
managements rosy forecasts. The feedback I received supported my initial view
that the accounting changes were part of managements efforts to paint a positive
picture of the companys prospects. Proving a short thesis sometimes feels like
peeling off the layers of an onion. The foundation of the thesis, however, should
always start with a straightforward set of red flags such as sales deceleration and
working capital deterioration. Accounting changes and fieldwork should support
(or refute) the primary thesis. Absent sales deceleration and working capital
deterioration, I do not believe that they should be the main pillar that supports a
short thesis
Differential Disclosure
Focusing on sales deceleration helps pinpoint when a companys
problems may trigger a negative reaction from investors. Another important way
to assess the timeliness of a short idea is differential disclosure (the practice of
seeking out wording changes in federal filings and company announcements).
There are computer programs available that automatically highlight wording
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changes in federal filings, but I have found them less useful than actually reading
and comparing two documents side-by-side. Computer programs show every
single discrepancy, but cannot discern which changes actually have meaning.
Furthermore, it is often useful to compare and contrast a quarterly conference call
transcript with either a previous quarters call or with a federal filing submitted
for the current quarter.
Case Study: Serologicals (SERO)
Source: Bloomberg
One of my all-time favorite illustrations of differential disclosure
occurred in Serologicals Corp. (SERO-The Short Sellers Report, February 22,
1999). The company provided specialty human antibodies and related services to
major healthcare companies. In my initial report, I summarized the short thesis as
follows, SERO stock trades with a P/E multiple in excess of the Companys
estimated 1999 growth rate. We view slowing internal sales growth, deteriorating
25
gross margins, rising accounts receivable and inventory DSOs, and significant
insider sales as major red flags. Consequently, we are recommending the short
sale of Serologicals ahead of its 4Q earnings release (scheduled for release on
March 1st).
One of the primary reasons I was confident that 4Q could disappoint was
a subtle change made by Serologicals in its 3Q 10-Q. In the 1Q and 2Q quarterly
filings, Serologicals stated, The Company believes that any adverse impact it
has experienced or may continue to experience as a result of the factors described
above, including decreased collections of antibodies and delayed or reduced
shipments thereof, will be short-term in nature. The September 10-Q included
the above warning, but deleted the comment that the negative impact would only
be short-term in nature. In my report, I wrote, We view this deletion as a
significant red flag and as a strong indicator that significant fundamental
challenges continue to face Serologicals.
On April 16th, 1999, the company announced that it expected a
significant 4Q earnings shortfall because two international customers cancelled
orders. The stock price plummeted 50% following the announcement. The
following year, on April 11, 2000, Serologicals announced that it would restate
the first three quarters of 1999. The company said it discovered errors that
resulted in an overstatement of sales and an understatement of cost of sales and
other expenses. The company also said its revenue recognition policy, as it
relates to the timing of recording sales under an existing arrangement with a
26
Management Quality
Management quality is also an important factor to consider when
assessing a short idea. Key factors include:
Source: Bloomberg
27
Mr.
Bartholomew Palmisano Jr., son of the CEO, served as CFO from 1998 through
2001. Collectively, especially given all the other red flags, I concluded that
management quality was low. This raised my confidence level that OCAs
problems would likely fester.
In the first quarter of 2004, the company disavowed its previous revenue
recognition policies. The 10Q stated, The determination of fee revenue under
our prior revenue recognition policy required significant judgments by
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Fieldwork
Red flags uncovered through the forensics process can often be
confirmed through solid fieldwork. Such fieldwork might consist of speaking
with competitors, suppliers, distributors, channel checks, store visits, or
analyzing social media trends.
30
Source:Bloomberg
An example of this is a short sale recommendation that I made on
Safeskin Corp (SFSK) in The Short Sellers Report on October 26th, 1998. In my
initiation piece, I summarized the thesis as follows: In 1998, Safeskins gross
margin has increased 600 basis points y/y to 52.3%. Much of this improvement is
tied to devalued Asian currencies, manufacturing efficiencies, and stable pricing.
Street analysts project that Safeskins gross margins will remain at 52%
throughout 1999. We disagree. In recent months, Asian currencies have
appreciated versus the dollar. We believe this development could begin to have a
negative impact on Safeskins gross margins by Q4. In Q2, inventory increased
48% y/y on a 30.5% sales increase (absent a small acquisition, revenue growth
would have been 26%, in-line to slightly below Street estimates) while other
current assets and debt rose.
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The key issue was whether Safeskins gross margin improvement was
sustainable in the face of currency headwinds and bloated inventory. The
company participated in an industry where it was very easy to identify the main
players: Ansell Perry, Johnson & Johnson, London International Group, and
Wembley Inc. Through perseverance, I developed a good rapport with the
Johnson & Johnson and Ansell Perry managers. I learned that Safeskins revenue
growth benefited the previous two years from the change in mix in the acute care
market (driven by concerns over allergenic reactions to powder) from powdered
to higher priced powder-free latex examination gloves. Revenue growth in the
future would be driven more by new units sold rather than conversion of sales
from powdered to powder-free.
Safeskins competitors were slow to recognize the growing demand for
powder-free gloves and had under-invested in powder-free production. By 1997,
however, the entire industry began building new powder-free facilities.
Throughout the first half of 1998, Safeskin benefited as many of these projects
had not yet been completed. When I wrote my report, however, I was well aware
that industry production was ramping and that a glut was inevitable.
Competitors informed me that Safeskin had been offering several months
of free glove supplies to prospective customers and had increased the use of
rebates. As I wrote in my report, In fact, we have heard of one instance where
Safeskin effectively (by using rebates and free supplies instead of formal
price cuts) offered powder-free gloves at $49.00 per case to a hospital in the
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Premier network, which is 23% below its official Premier price of $62.90 per
case. We spoke with several competitors and each one acknowledged that
prices have declined by over 5% in the past six months and that there is
concern regarding escalating price declines. Compounding these concerns,
some competitors believe that hospitals are much more aware that
manufacturers have not passed on the majority of the savings derived from
lower production costs caused by the devaluation of Asian currencies.
I recommended Safeskin as a short sale on October 26 at a price of
$32.50. After the company announced disappointing 3Q earnings on October 29,
the stock price dropped 42% in one day. If only all shorts would work out so
painlessly!
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The case studies I cited are all representative of the approach I use
whenever I am considering a short. I also have a graveyard for ideas that did not
work. In my career, sometimes companies I have been short get acquired. It hurts
the same way ripping off a band-aid hurts, but then the pain is over quickly.
Other times, I have been plain wrong. A company claims problems are temporary
and the company then backs up the claim with a strong quarter. I have never been
afraid to admit that I am wrong when the opposing evidence is clear and
convincing. These losses are easier to accept.
The situation is more difficult when the numbers still support the short
case, but Wall Street ignores the negative and embraces only the positive. This
occurs frequently. Sometimes, the market trend is so strong that bad news is
ignored by investors. This was the case in 2003, late 2006, and most of 20092013. Sometimes, there are specific sectors to avoid. The Internet and technology
sector between October 1998 and March 2000 is a good example. Short sellers
had many opportunities to short successfully during that time period if they could
just resist the temptation to short egregiously overvalued and overhyped tech
stocks.
There are also battleground stocks that I ignore. Over the past decade, for
instance, Amazon has crushed more than one hapless short seller. I also feel it is
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an uphill battle to focus on shorts that have well-known issues repeatedly ignored
by bulls. In the 1990s, America Online (AOL) repeatedly beat earnings
expectations in great part due to an accounting decision to capitalize a significant
percentage of marketing expenses. It was apparent to me at that time that member
growth was all AOL bulls cared about. Eventually, AOL announced a onetime
write down of these capitalized expenses. This decision basically validated the
short argument that earnings were being over-stated. Instead of tanking, AOL
bulls rejoiced and the stock surged. Investors concluded that future earnings
would be enhanced since these expenses would now never hit the income
statement.
For many, regardless if 100 or 100,000 shares are involved, it is much
easier mentally to initiate a short position than it is to cover a short position. For
me, it has always been naturally easier to take a loss than to ride a winner. Too
frequently I book small profits instead of displaying greater patience when a
short idea is just starting to work. For most people, however, I think taking a loss
is more difficult. I believe in using price strength to increase a short position, but
only if the position is less than full. Once the position is fully weighted, the worst
mistake is to keep increasing the size of the short position as the stock price rises.
I am more likely to reduce the position size or even cover entirely if it becomes
apparent that I under-estimated the desire by bulls to get long the stock. I simply
am more comfortable re-shorting when the set-up improves rather than riding out
35
the turbulence without a stop loss. There is no one correct way to implement risk
control, but it is extremely important to outline the factors that would cause one
to cover a short and then adhere to those rules.
I always imagined myself becoming the short selling worlds equivalent
of the legendary Philip Carret. Mr. Carret started one of the countrys first mutual
funds and had an investment career that lasted over 8 decades. I figured that only
someone with 8 decades of experience could really figure out how to play the
short game successfully. In my mind, short sellers age like dogs so 11 years of
actual short selling experience would logically equate to 77 years of long
experience. Ergo, it would take a little over a decade to duplicate on the short
side the equivalent long knowledge that Carret acquired over his life time. But
what I did not realize is that short selling is really a game where the rules
constantly change. It is not impossible to achieve success, but so few are
consistently successful. After all, there is a reason why Jack Schwager has only
interviewed one short seller (Dana Galante, a former research client of mine with
phenomenal trading instincts) in his Market Wizards series. Nonetheless, my
experience helped me gain insights into how to avoid some common pitfalls
associated with short selling. Unfortunately, I have had to learn each lesson the
hard way, sometimes more than once.
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While the 21st century has had severe market declines in 2001, 2002, and
2008, profitable short selling year in and year out has become more difficult. One
major negative is the enormous growth in the hedge fund industry itself. The
ability to borrow certain stocks is more difficult than before. A bigger issue is the
tendency for many long/short funds to crowd into the same names. There are
many managers who are outstanding on the long side and therefore
understandably focus their attention on their long portfolios. As a result, some of
these hedge funds, which manage multi-billion dollar portfolios, often rely on the
same third party services for idea generation and/or frequently talk among
themselves or through the press about the same ideas.
Many long/short funds are individually disciplined regarding their short
positions, but individual discipline collectively often leads to much greater
volatility. For example, a long/short fund may limit a short position size to 1% of
capital, but for a $20.0 billion fund, that still represents a $200.0 million short
position. If the short position is in anything less than a large cap stock, covering
the position is not easy in even the best of times. Since so many funds are
catalyst-driven and/or use strict stop losses, there is often pronounced volatility
37
following earnings events and at obvious stop loss points such as moving
averages and/or new 52-week highs.
The implementation of Regulation FD has had a significant, albeit
unappreciated effect on short selling. On August 15, 2000, the SEC
adopted Regulation FD to address the selective disclosure of information by
publicly traded companies and other issuers. Regulation FD provides that when
an issuer discloses material nonpublic information to certain individuals or
entitiesgenerally, securities market professionals, such as stock analysts, or
holders of the issuer's securities who may well trade on the basis of the
informationthe issuer must make public disclosure of that information. In this
way, the new rule aims to promote full and fair disclosure. The regulation has
noble intentions, but has caused two interesting consequences.
One, the rule basically ensures that companies will add every
conceivable boiler plate warning to federal filings. Prior to Regulation FD, risk
factor disclosure in annual filings was sparse while virtually non-existent in
quarterly filings. In addition, prior to easy online access to federal filings (pre2000), investors had to order an investor packet by mail. As a result, federal
filings were read less frequently. Consequently, when there was a warning or risk
factor listed in a federal filing prior to regulation FD, it was a very important
piece of information. Since filings were not as widely read, it was possible for a
diligent short analyst to gain a very important investment edge.
38
and analyst estimate clearinghouses such as First Call are compliant and basically
accept the non-GAAP earnings as the proper comparable to published estimates
even if frequently the same non-GAAP metrics were not used in original Street
estimates. Therefore, the comparison is not apples-to-apples.
Enormous
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Chapter 9: Conclusion
There is no question that superior returns are achieved more easily from
the long side than the short side. Some long/short hedge funds like Greenlight
Capital and Pershing Square have become identified as short sellers. I have
always found it surprising that Greenlights founder, David Einhorn, is known as
a short seller when in fact his firms superior returns over the years are derived
overwhelmingly from long performance, not short selling. Greenlight and other
successful hedge funds have some of the brightest minds in the business and have
virtually unlimited resources to hire private investigators, lobby politicians, and
use the media to further their case, yet even they do not generally find the going
very easy. This is not to argue that short selling has no value or even that it is not
possible to make money on the short side. Short positions reduce portfolio
volatility and lessen drawdowns during market declines by hedging long
positions. In addition, short positions can be a standalone profit center that is
additive to overall performance. However anyone who wants to implement a
short selling strategy needs to understand that even professional short sellers do
not create great fortunes from the short side so one might as well formulate a
cohesive, simple-to-understand methodology that can be implemented both cost
and time effectively.
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In sum, I have always practiced the craft with the knowledge that the
stock market has historically risen two-thirds of the time. Many short sellers have
strong opinions that the stock market is egregiously overvalued and they have
unshakable conviction in the short positions that they select. This mindset can
create large losses as the market can become even more overvalued. Bulls often
ignore rotten fundamentals longer than a short seller can stay with a position. I do
not have strong opinions on market direction or valuation. I prefer to focus on
process, including a strong appreciation for the necessity of risk controls. I am of
the opinion that that it is preferable to reduce exposure in companies that remain
fundamentally flawed if the alternative means greater volatility and/or suffering
large drawdowns. I believe that by adhering to a clearly defined methodology
that can be followed, an investor can use short selling both as a standalone profit
center as well as to hedge long positions.
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Acknowledgements
Disclaimer
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