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Short Selling And Emotional Investing

|Includes:AZN, BMY, MNK, Mallinckrodt PLC (MNK), PFE, PVCT

So far in my short time spent in the investing world, I've noticed a disturbing attitude that "longs" have against "shorts". It seems on speculative stocks the long side tends to get emotionally attached to the company. This emotion then blinds the poor soul into hating all who oppose their investment thesis instead of simply disagreeing, which in the end can be incredibly costly.

Short-selling: An Overview

Short selling has been around as long as stock exchanges, the goal being to make money off of declining securities. It helps the market by providing liquidity, and uncovering fruad. It hasn't always been, but it is perfectly legal. However, many people cannot abide by someone else making money while they are losing it.

A History of Hatred

Short-sellers have almost always been hated. When someone else's money is set to directly profit off of another person losing money, they tend to take it personally.

After the South Sea Bubble collapsed many people blamed short-sellers, despite the fact that the company was run by inexperienced management, inventories were rotting, and the stock market as a whole was overvalued.

Napoleon, in response to the uncertainty that gripped the stock market following the French Revolution, declared short-selling to be unenforceable gambling contracts, punishable by imprisonment. By betting against France the speculators were considered treasonous and unpatriotic.

In the panic that followed the crashes of 1907 and 1929 in the U.S., people searched for someone to blame. When news broke out that the famous speculator Jesse Livermore was short the market and profited from the crash, the public found their villain and nicknamed him "The Boy Plunger".(Livermore took his own life in 1940 without leaving a note or explanation. Though unproven, some people speculate it was the belief that he caused the Great Depression that pushed him to such an action.)

In 1995 the Malaysia Finance Ministry proposed caning as punishment for short sellers, thankfully the ban on short-selling was lifted altogether. (Short-selling is debated in many Muslim countries as Sharia law prohibits one from selling something they do not own.)

Two Case Studies

We will now look at two pharmaceutical companies with devoted followers and dedicated opposition. While each company falls under a different rating under the risk spectrum, I consider them both speculative and thus applicable to the presented argument.

Questcor Pharmaceuticals (QCOR)

QCOR is a pharmaceutical company whose business is based on its single product, Acthar gel. Acthar is used to treat multiple sclerosis, infantile spasms, and nephrotic syndrome, and is approved for 19 different indications including rheumatic disorders, collagen diseases, dermatological diseases, and respiratory diseases. As a whole the company has used Acthar and its huge margins to deliver outstanding results for shareholders:

EPS 2011-2014
  2011 2012 2013 2014
Q1 $.20 $.61 $.76 $1.40
Q2 $.23 $.69 $1.35 -
Q3 $.37 $.97 $1.68 -
Q4

$.47

$1.09 $1.67 -

QCOR Chart

QCOR data by YCharts

If one spent $10,000 on QCOR in the beginning of 2010 that investment is now worth over $190,000, or over an 1,800% return. The story of Questcor is close to its conclusion however. On April 7th, 2014 it was announced that Mallinckrodt (NYSE:MNK) was buying QCOR for $5.6 billion. Shareholders will receive $30 cash and .807 shares of MNK for each share owned.

Questcor of course wasn't without its risks. The company was investigated for downplaying insurance risks in 2012 and "unethical marketing practices" in 2013, and Citron Research had QCOR in its crosshairs. Whether or not the above mentioned risks would affect the value of the company is a decision for the individual. However it is foolish to completely ignore (and in some cases not even read into) these risks and allegations.

Quoth the Raven has by far been the most vocal short-seller on Seeking Alpha regarding Questcor. With 13 articles critical of Acthar, management, and the merits of the business, he/she has attracted a flood of attention from the devoted longs. Many of the points presented in the articles are genuine concerns: Acthar itself is a 60 year old drug that was acquired from Aventis, who claimed a "dwindling market for the drug", possible intentional mislabeling of Acthar which could be construed as fraud, and possible shady transactions with the Chronic Disease Fund being just a few. Instead of acknowledging these risks, making a decision, and stating their disagreement, QCOR shareholders lashed out against the author, reverting to accusations and in some cases childish tantrums. Here are just a few comments from the articles:

Is there some way that we can petition to SA to ban Raven from releasing any more articles?

Bottom line is Andrew left is a twice convicted fraudster. In addition you birdman emulate his actions in every possible way, even to the extent of reproducing his felonious materials in your supposed "original works". You most certainly do not rate nor gain any respect for your less than erudite opinions. I would suggest that you watch your back because this whole package of lies and sham may very well come back to haunt you. Look for another nest away from AL/Citron's snake pit of deception.
Note to SA editors...we are talking about a convicted fraudster to whom you gave a stage here at Seeking Alpha. Shame shame on you.

We love your dogged determination. I'm guessing atleast three more "articles" from you on QCOR in the next several days... Have you done a cost analysis to see how much your time is costing you relative to how much you've lost on QCOR? At least I know I'll be entertained by reading the comments section in your articles. Kind of like watching Jim Cramer: lots of hot air, occasional substance, but really just self-serving "advice" with some marginal entertainment value.

Watch out shorts, word on the street is the SEC is asking shorts to cover before they're cited in stock manipulation.

Birdie! Crying wolf again?
Tired, non true hot air

YAWN

After the news of the buyout was released, these comments emerged:

I am so happy right now. Such gratification. What a massive gain today. Maybe Quoth and his buddy Left will end up in debtor's prison. Good riddance.

One can dream....

Quote the Raven...Ouch !!!!! this will drain you financially and morally too...All your short thesis goes down the drain....

I hope QTR and Citron had a good supply of KY

Let me be clear, this does not represent the majority of the comments on QTR's articles. Most of the comments, while unsubstantiated and immature at times, did not go to the lengths shown above. However the posters of these comments followed from article to article posting the same types of insults.

In the spirit of full disclosure, I have taken long positions in QCOR. In 2012, I started a small position in mid-august and sold in mid-September (thankfully just before the ~60% drop after the Citron report.) In 2013 I started a position in April and sold in May because I didn't like the run-up compared to the earnings report.

Provectus Biopharmaceuticals (PVTC)

Provectus is an investigational biopharamceutical company with two drugs, PV-10 and PH-10. PV-10 is hoped to successfully treat Melanoma, Liver, and Breast cancer, and PH-10 for psoriasis, and atopic dermatitis. The drug is developed from a red food dye called "Rose Bengal" that is also used in textiles. It works by attacking cancerous cells without affecting the healthy cells surrounding the tumor, which would be a vast improvement in the way cancer is treated today.

Given these drugs work the way they're supposed to, the potential is huge. A focused cancer drug that has minimal side affects could be worth billions upon billions of dollars. None of the big players, Pfizer (NYSE:PFE), AstraZeneca (NYSE:AZN), Bristol Meyers (NYSE:BMY), etc would allow such a company to remain independent for long.

Provectus has yet to generate any revenue, which of course, isn't unusual for such a company, and shareholders have endured a rollercoaster of volatility, especially recently.

PVCT Chart

PVCT data by YCharts

The Pump Stopper is the first on Seeking Alpha to actively write on the short side of the company. The main points in support of the short thesis are the company's questionable ties to shady stock promoters, foggy and confusing accounting practices, excessive executive pay and shareholder dilution, failure or hesitation to disclose necessary information, and a history of failure in similar endeavors among the key players.

The devotion among believers in PVCT is especially passionate. As would anyone who believed they were invested in a drug that could change the world. Below are some of the comments from the articles:

You published blatant lies and I for one hope $PVCT starts fighting back legally against such attacks. So far their stance has to not waste their time with such ignorance and behavior. They have chosen to spend their time fighting the war on cancer, not the war on ignorance.

I BELIEVE you are associated with other shorterers to take this stock down...I BELIEVE that your article along with some of the others are setting cancer research and cures back years.

faceless The Pump Stopper = Adam Fstein

(I added the link.)

The pump stopper is garbage... can't believe these bears at all... their case is so weak.. its like looking through a window with no glass at a bull farm.. you can see all the BS and smell it too.

The next comment fully embodies the blind passion people can get caught up in:

A post filled with so many outright lies and innuendos is the kind of thing the Great Deciever strives to spread through the world.
His goal is to bring despair, loss and mistrust to all via his deceptions.
This article has the marks of the Great Deciever all over it. Consider the company it is trying to ruin. A small firm that has a product that will bring relief and peace to hundreds of thousands of patients and their families at a lower cost with fewer side effects. The answer is in powers greater than ours. Negative articles written with verifiable truth, not lies and 1/2 truths serve a purpose . They help keep a level playing field.
The slam piece is trash .

For those who may not know, The "Great Deceiver" is another name for Satan. Not only is this person taking the short attack personally, but they are tying in their Christianity (I assume) with their due diligence. This isn't investing, or even speculation, this is trying to "invest" in a charity or contributing to a cause and hoping to making money with it.

Emotional Investing

The hardest, and most important, lesson for an investor to learn is to detach all emotion from decisions. All actions must precede strict calculations and thorough analysis. Emotion always buys just too late and sells just too early. It forgets to read reports, and doesn't learn from past experience. Emotion is a hungry beast, and its favorite food is money.

No where is emotion more prevalent than in speculative stocks. By nature, "specs" require a "hunch" because the fundamentals are not sound, or the outlook is troubling or unknown, allowing emotion to slide back in. Now someone being short isn't a financial decision on their part, it is a slight against the shareholder. So, instead of being presented with an opposing argument and making an informed decision for or against it, emotion attacks the opposition. Pharmaceutical speculators are especially susceptible, because they feel they are helping the world by endorsing a company. What emotional investors forget however is investing is about profit, nothing more. That's why the numbers are imperative, numbers are black and white, cold, unbiased, heartless, and lack any conviction or passion.

No matter what one's opinions on the ethics or morality of short-selling it is not any more a "scheme" than buying a stock. In one of the Provectus articles, a reader mentioned the disclaimer stating the author was short as if it was some enlightening warning that they were presenting their fellow readers thanks to tireless detective work. Of course bearish articles accusing a company of fraud are going to be written by short sellers, just like the countless bullish articles written by people who are long. Bullish authors receive no accusations of "pumping" however.

Conclusion

Opinions and emotions are completely different things. Opinions are imperative to making a decision, emotions devour cash and energy. One should never have "faith" in a company. " Faith is "the substance of things hoped for, the evidence of things not seen." An investment is an educated guess based on research for the purpose of turning a profit. Blind faith is extremely dangerous in the world of investing, it doesn't use evidence, numbers, or research to justify positions, it only uses accusations, conspiracy, and angst. The end result, as shown above, is quite ugly.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Stocks: MNK, PVCT, AZN, BMY, MNK, PFE