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Chris DeMuth Jr.
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"It's not given to human beings to have such talent that they can just know everything about everything all the time. But it is given to human beings who work hard at it - who look and sift the world for a misplaced bet - that they can occasionally find one." - Charlie Munger I look... More
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  • Shorts Forum 115 comments
    Jan 16, 2014 10:55 AM | about stocks: LULU, SODA, UNXL, IOC, IPO

    Welcome to the Seeking Alpha Instablog Shorts Forum. My hope and expectation is that this forum can be used for anyone with questions or answers regarding the activity of shorting securities. I welcome any and all sincere contributions to the comment section below. Is shorting simply the inverse of buying such that the same research methodologies and standards apply? What are the theoretical and practical issues that one confronts when short selling? What information can be gleaned from the marketplace in terms of short interest in a given security?

    When presenting a short thesis, it is clear that the topic can quickly turn to the shorts themselves. So, this is also an opportunity for short sellers to come clean. Are we inherently manipulating the market? What would that even entail? Is there a conflict between shorting and also presenting that short idea? Are we evil? I look forward to a broad range of contributions. Going forward, I hope that we can turn commenters interested in the shorts (as opposed to the security-level idea) to this discussion to save unnecessary redundancy and tedium that can accompany the debunking of conspiracy theories.

    Themes: Bitcoins Stocks: LULU, SODA, UNXL, IOC, IPO
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Comments (115)
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  • I think short selling doesn't manipulate but rather makes the market more efficient by allowing investors to bet on negative phenomenon. Further, it can provide liquidity as shorts cover (buy) when stocks fall a lot to take profits which can stabilize shares. They also often sell when stocks get very high (keeping bubbles from forming). I think shorting is a critical component of the pricing mechanism in our market.
    When it comes to deciding what to short, I wouldn't short solely on valuation as the market can stay irrational longer than you solvent. Instead, I try to find structurally weak stories that will lead to prolonged challenges (ie Best Buy in 2011 due to Amazon taking share).
    16 Jan, 11:13 AM Reply Like
  • Author’s reply » Thanks for the comments. It seems as if a given behavior can impact a market without manipulating it. In this case, it is a key part of price discovery. Investing on the long side is more dangerous when short selling is not allowed or practical.


    I agree with your point on value. I do not have fundamental only shorts. My favorites are frauds followed by kicking expensive securities when they are (starting to go) down.
    16 Jan, 11:16 AM Reply Like
  • Seeking Profits, did you write a short piece on BBY? I would like to take a look at it if so. I wrote a piece on BBY for another website back in November, a week or so before earnings came out. It was easy for me to stick with the recommendation and in fact made it a quick idea on Sumzero which they also featured.
    16 Jan, 12:24 PM Reply Like
  • This article might be useful for the debate:


    6 Very Important Lessons From 2 Huge Short Squeezes
    16 Jan, 11:13 AM Reply Like
  • Paulo I can't access that link right now, that might be the sites problem of course.
    16 Jan, 11:17 AM Reply Like
  • Author’s reply » (Site problems; the link is correct)
    16 Jan, 11:18 AM Reply Like
  • Paulo, I've now read it, thanks.
    16 Jan, 11:51 AM Reply Like
  • Thanks for setting up this forum Chris. Much needed IMO.
    16 Jan, 11:18 AM Reply Like
  • I like this idea. Thanks for setting this up, Chris!
    16 Jan, 11:19 AM Reply Like
  • Good topic by the way, Chris, thanks for setting up this forum.


    I would say that shorting will always be a niche in the market and on SA. I tend to focus on short ideas, simply because I find it easier to pick apart flaws in a company's business model. The fact that the market is overvalued on the basis of the PE 10 ratio may also have something to do with it.


    Having said that, the very first article I wrote for SA was on how Amazon was undervalued. I screwed up the valuation unfortunately: I gave a price target of $450 (when the stock was at $310), which I had to revise at a later date to $330.


    Once difference between shorts and longs is that those who are short are generally much less attached to the stock, with some cough... exceptions, whereas those who are most bullish about a stock are usually fan boys, who treat the stock and the company like a sports team.
    16 Jan, 11:29 AM Reply Like
  • We have spent a lot of time over the past year on shorting certain stocks before the end of the lock up period. I was wondering what other writers who also short stocks have experienced with this type of trade?


    Thank you Don
    16 Jan, 11:44 AM Reply Like
  • Author’s reply » That is what I'm trying to focus on this year, especially regarding the recent IPOs. VEEV is one example.
    16 Jan, 12:01 PM Reply Like
  • How well did this work out? How do you decide which lock-up expirations to short? Which factors have you found most useful/predictive? A little share of your experience would be appreciated a lot! Thanks
    17 Jan, 08:58 AM Reply Like
  • Shorting stocks is like being the guy who plays the "dont pass" line at the craps table. Aka.. your not the most popular chap in the room even though you might be right.
    16 Jan, 11:44 AM Reply Like
  • Well said :)
    16 Jan, 11:55 AM Reply Like
  • Author’s reply » I've never played craps, but my understanding is that is the best bet in the game.
    16 Jan, 12:02 PM Reply Like
  • Chris, the Don't pass line is the highest percentage play in craps.....but ONLY when taking free odds behind it. The Free Odds bet carries no house edge. The casino makes no profit on it....This is the only bet you can make on a table game where the odds aren't against you (not counting counting cards in BJ with a strong deck or a roulette wheel on a cruse ship that may be tilted a little). Most players aren't smart enough to make the free odds bet. When I play, that is how I always play. Bet one chip on don't pass and back it up with as much as they will let me place on free odds.
    16 Jan, 03:49 PM Reply Like
  • Author’s reply » Thanks. Very interesting; I didn't know that. -C
    16 Jan, 04:00 PM Reply Like
  • Ask Jesse Livermore, the great bear of Wall Street in the 1930's.
    Yup, we shorters are hated in general. The CEO's of firms consider it a middle finger to them (which it is in many cases) and the regulators are all too quick to allow anything to hinder our behavior. Allowing someone to charge 90% to borrow their stock per annum goes against even the most basic usury laws in this country but happens all the time in fees we are charged. Allowing only a limited portion of the stock to be lent out (those in margin accounts with loans on them) can mean even with 3% of float short can still cause you a buy-in. If longs had to deal with what I deal with shorting, the markets would shut down for lack of interest.
    But in the likely New Madmax World environment we've probably entered, I tell all newbies to learn to short to protect what you have. It's the only way you can assure someone/entity doesn't fuck with your pile.
    31 Jan, 05:38 PM Reply Like
  • 99.9% of the investing public has never read 'Remininces of a Stock Operator'- If there was only one man to study, for my money it's Jesse Livermore. Just take note of all the modern billionaire traders that pay homage to the teacher.
    31 Mar, 10:08 PM Reply Like
  • I have read the book at least 5 times. It is both incredibly educational and utterly fascinating
    31 Mar, 11:50 PM Reply Like
  • Hmm, not sure Jesse Livermore is the best role model to have. You know how the story ends, right?


    Plus, isn't "billionaire trader" an oxymoron?
    1 Apr, 12:53 PM Reply Like
  • He lived a roller coaster life, hitting millionaire status and broke.


    I rather not have to go through traumatic cycles like that.
    13 Apr, 09:31 AM Reply Like
  • This could be fun. Timing is everything!
    16 Jan, 12:08 PM Reply Like
  • Those legs!


    I generally assume shorts provide a service to the market, especially in larger issues that have massive momentum, such as TSLA, LNKD, NFLX, and TWTR.


    Shorts are also effective at rooting out broken business models like with GMCR, ANGI, and (sort-of) AMZN.


    Shorts also assist with finding fraudulent activity such as with OCZ and OSTK.


    Additionally, they can bring moral/social and borderline legal issues to light such as with Herbalife, Phillip Morris, and Apple.


    At the end of the day I believe it is ridiculous how shorts are vilified, but as Nathan posted above, many longs have a 'sports team' mantra about their investment and will attack anything contrary to their point of view. I'm not saying that short investors do not do the same, but most of us are looking for short-term corrections and will move on when the story changes. The exception is seen in BBRY, as many shorts from 2010 will still not move on.


    I'm not sure I really added anything of value here, as I'm more interested in discussing the 'top ideas' of 2014. I believe they are ANGI, TWTR, and NFLX in that order (honorable mention to LNKD and TSLA).
    16 Jan, 12:19 PM Reply Like
  • Author’s reply » ANGI is a short idea of ours as is TWTR (via IPO -- I dislike some aspects of NFLX but am not involved. I might kick it when it is down.
    16 Jan, 12:22 PM Reply Like
  • I've been short ANGI for while as well. I think it's ultimately a zero.


    A few others I like here:


    INTC (that's right, Intel).
    16 Jan, 01:26 PM Reply Like
  • PRKR was a short about 10 years ago as well. They have stopped the promotion for a decade or more.
    16 Jan, 09:56 PM Reply Like
  • Agree that ANGI could go to zero.
    16 Jan, 11:49 PM Reply Like
  • Shorting takes a unique mentality. You know when you are short a stock, especially anything of the controversial variety(ie not long established companies that are in stable mode) that about 80% of the time you are going to be dealing with a steady diet of news that is the exact opposite of your view. It's negative reinforcement. Upgrades from analysts, company puff press releases about some customer win or partnership, interviews on cnbc with mgmts saying they are in the 1st inning/opening chapter/just getting started, structured 'beats', and anything else you can think of is the norm. The social media friendly internet has changed that somewhat as platforms like SA make it easier for shorts to step in occassionaly in a very activist manner and call bs. But of course then you have to deal with collateral attacks, manipulation accusations, and instant analyst defenses that at times are simply outright lies.


    So mentality required is very different. And that is even before getting into how to go about shorting, and what to look for. Then managing the positions is completely different from being long, as markets tends to rise slow and steady, and fall fast and sharp. Rarely do you have a slow steady bleeder market.


    But we can say that it is a lot more satisfying when you are right, even if making money on the long side is ultimately more lucrative.
    16 Jan, 12:29 PM Reply Like
  • Chris:


    1) thoughts on the following? While I haven't reviewed in-depth, my "gut feel" is the thesis is solid. However, I've been informed that borrow costs are steep.


    2) Between this picture (rather than, say, a pair of random cargo shorts or gym shorts) and your fondness for the T-Mobile girl, one might start to get the wrong impression about you. ;)
    16 Jan, 12:53 PM Reply Like
  • Author’s reply » I can assure you that this was the most tasteful nominee considered by the committee. Also, besides being in good taste, it is of LULU shorts, so is in context.


    The BPT thesis looks plausible but I of course need to look more carefully before seriously opining.
    16 Jan, 01:00 PM Reply Like
  • BPT is an "avoid on tax headache".


    I actually owned it from around 2008 till last year, and it performed well, but I grew weary of filling out the K-1.


    Because they actually don't even send a K-1, they send an "investor tax guide" that says something to the effect of "We're not actually sure what tax obligations our unitholders may have. Here's some tables. Good luck".


    My father is both an accountant and a tax attorney, he said he's never seen anything like it.


    I feel like short selling BPT would just be an instant audit.
    17 Jan, 12:48 AM Reply Like
  • great topic. I feel shorts are necessary to make a market. But I have to admit I have thought they were kind of eveil or overly pessimistic. This may be a good chance for me to hear from some real shorts. I'm sure my observation was misguided
    16 Jan, 01:09 PM Reply Like
  • Author’s reply » I, for one, am only sometimes evil and somewhat more frequently pessimistic (it is hard for me to accede to being overly so because from my perspective it always appears to be the precisely correct amount given the relevant data).


    Now that I’ve owned up to bouts of both evil and pessimism, I think that the other trope that needs to be dispensed with is “lacking in transparency”. Since mine is a private partnership and, like many things private, does not fully disclose everything, I also own up to “lacking in transparency” up to the level standard in private property. Similar levels of opacity can be found in my truck, home, and other private venues.


    That being said, I am pretty transparent under the circumstances, especially when I’ve fully sized positions. So, the big question to me is this: what are these issues I’m supposed to be transparent about answering? Short critics never really seem to finish the sentence. I fear only that the reality will prove to be far more mundane and yeomanly than anticipated.
    16 Jan, 01:19 PM Reply Like
  • I got a message asking me to join this forum. Haven't we all learned that stocks only go up and shorting is a sucker's game? I haven't.
    16 Jan, 02:12 PM Reply Like
  • Author’s reply » Welcome.
    16 Jan, 02:33 PM Reply Like
  • Alpha Exposure, loved your articles on AFFY. I am also short AFFY now and waiting for the next quarterly update in early February to hopefully burst the bubble on them for sure. Do you still think bankruptcy is imminent?
    22 Jan, 08:06 PM Reply Like
  • Alpha you still a fan of the EXAS short?
    13 Feb, 01:17 AM Reply Like
  • Personally, I will short anything-but not because of anything unique to a particular company. I simply tend to short human nature and man's bias and proclivities. But, in this regard, there are a couple of points: (1) no stock can soar too close to the sun without getting singed, and (2) there are numerous ways to bet against a current price, without shorting a particular stock.
    In (1) above, I mean nothing more than there is a time and place for a 'short' strategy; and, in (2) above, I suggest that actually borrowing stock to short is as suboptimal as buying stock on the long side.
    Again, options provide the superior way to adjust for risk/reward, and I can calibrate with great precision exactly that. However, I do pay attention to articles that note strengths/weaknesses in various enterprises-but only to gauge popular opinion. There are some exceptions-for instance, LULU just gave me negative vibes. On the other hand, I like AAPL products, but provided several comments on how to short AAPL as it fell from grace just a few months ago. So, one can like a company's products, but this game is about making money. It is not about cheerleading a new technology. And, a lot of times, I'm both long/short simultaneously.
    But, this is a great idea Chris. Incidentally, I have an article on my desk entitled "Executive Government and Bankrupt Government"by Christopher DeMuth (Hudson Institute-Feb. 2013). Is that you? Great article.
    16 Jan, 03:00 PM Reply Like
  • Author’s reply » That is my dad. Here is the article for anyone interested:
    16 Jan, 03:26 PM Reply Like
  • I like his thought patterns :-))
    30 Jan, 09:36 AM Reply Like
  • im short JCP
    i have experimented with shorting some momos when they had their minor heebie geebies post Tesla but it all went sour and i got out
    one day they will break and tank big time and then it will be time to short them with both hands - a la 2000
    not sure of the timing, but i suppose we will see the signs
    16 Jan, 03:30 PM Reply Like
  • memshu...I' sold out of JCP in case you didn't see my other comments on other articles. Not that you care...but just figured I'd share. I'm using covered calls now and appreciate what I have learned from you


    30 Jan, 10:20 AM Reply Like
  • Wanted to short MDBX last week - no shares available. The exhuberance around that sector may only be topped by the IPO/momentum binge.
    16 Jan, 03:37 PM Reply Like
  • As somebody wouldn't mind understanding how to properly short better (always above the knees), I've got some general questions.


    1) I like to cost average on the way down as a very long term investor. To cost average up on the short side, is this only logical if each "unit"/dollar amount you continue to short is sufficiently small so the position doesn't overtake your portfolio? This would only apply if I felt the short position would need to be held a while.


    2) Does using a long/short trade mitigate the possibility the short gets out of control on you? I'd imagine it would but just wanted to check.


    3) If you are short, what are some options strategies to unwind the short position, similar to selling covered calls on a long position?


    16 Jan, 03:59 PM Reply Like
  • I usually size shorts very small - typically start in the 0.2% to 0.5% range. Rule of thumb I use is assume something can go up 10X on me. Allows me to sleep at night, average up, and stick with a trade.


    Usually the garbage I short has high option volatility so one of the things I like to do is sell puts after stock cracks - basically committing to cover your short at X price in exchange for a premium. Usually the premiums blow out after a crack so this strategy has worked.


    On occasion I'll buy a deep out of the money call against a short postion as a lunacy hedge.


    When borrow costs get expensive I'll try to short synthetically (sell a call and buy a put).
    16 Jan, 04:12 PM Reply Like
  • All good advice, thanks.


    I'd like to get short a certain stock which has no shares to borrow, so I was thinking of selling deep ITM calls to synthetically short, but the premium differences for the strike dates is minimal. Obviously they know there's a good chance it could tank. Maybe sell a far out deep ITM call and buy a shorter ATM call to hedge a little? Just looking for ideas.
    16 Jan, 05:56 PM Reply Like
  • Isn't the borrow cost usually built into the price of a synthetic short? I mean, if I'm on options market maker, and you want me to write you a put, I need to short the stock at the delta. If I have to pay to borrow the stock, I'm going to charge you, no? I'm asking because I've never looked at this carefully.
    16 Jan, 09:17 PM Reply Like
  • It's a loose relationship between put pricing and borrow cost. Usually the implied vol on the calls and puts is relatively symmetrical but also depend on open interest vs size of float and any other factors. My general rule of thumb is if the borrow cost is 15% or more I'll seriously look at options. Another benefit is no recall risk with option. Nothing worse than having a scam start to tank and having your cheap borrow recalled and offered back to you at a 25% rate. Although I have paid a 100% rate for short periods around events.
    17 Jan, 08:16 AM Reply Like
  • The worst thing that ever happened to me on a short was AOL. I shorted the crap out of that POS all the way up though multiple splits--completely confident that it was a guaranteed dog. And then they used their fake equity to buy a real company, and I was left short a massive media/cable company for pennies on the dollar.


    My shorts right now are LL, IPO, SSTK, a tiny bit of AMZN, and I'm considering re-opening a short in TSLA. AMZN is my biggest loser.


    I recently closed my shorts in IOC and LULU for decent returns.
    17 Jan, 10:02 AM Reply Like
  • I recently priced a synthetic long on shld... It yielded 5% which was 'exactly' the borrow cost at the time.
    The lesson is to use synthetic longs to capture the borrow cost when your broker doesn't share!
    6 Feb, 10:29 PM Reply Like
  • your short positions sound an awful lot like mine! (except for AMZN, too much uncertainty there)
    8 Feb, 08:18 AM Reply Like
  • I think I'm subconciously paraphrasing one of my investing idols, David Einhorn, when I say this, but short sellers are often the de-facto enforcement division of a perpetually useless SEC.
    16 Jan, 04:25 PM Reply Like
  • Author’s reply » Agreed:
    16 Jan, 04:28 PM Reply Like
  • Interesting, didn't know you also got sucked into the drama surrounding the Chinese small caps.


    Do you still follow that sector and/or have any opinions on which ones are and aren't legit? I can't believe they're all fraudulent and there's got to be an opportunity to make some money once all the bad ones have been weeded out.
    16 Jan, 04:56 PM Reply Like
  • Author’s reply » Less so now. IT was really firm-specific. There are probably some that are legit.
    16 Jan, 05:00 PM Reply Like
  • This might seem nonintuitive, but it seems like it's usually smarter to short stocks that actually have earnings, because stocks that don't have earnings aren't really tethered down by traditional valuation metrics, so they can literally go to any price without necessarily appearing that much more overvalued.


    Contrast AMZN, CRM, TWTR, TSLA, and other nonprofitable stocks that have levitated without earnings with ones like SODA and LULU that have been crushed by slight slowdowns in earnings.


    In keeping with this theme, rather than going with some of the tempting non-GAAP charades like CRM, I think CMG is one of the best shorts right now since they're not going to trade at a 50 P/E forever, especially when management keeps warning that same store sales growth will probably come down unless they raise prices.
    16 Jan, 05:50 PM Reply Like
  • SODA and LULU are also non-internet, non-"disruptive" stocks.


    The current bubble seems to based on the "football game" fallacy. If well-known company B is clearly losing, then company A must be winning.
    17 Jan, 01:07 AM Reply Like
  • Amzn,crm, twtr are platforms. Shorting platforms is really tough. Valuing them though is not as difficult as most think as there are plenty of profitable platforms to compare them against both presently and historically. You simply need to accept the fact that they will run at accounting losses for a while if need be as they continually scale. But at the first sign of major reinvesment not returning requisite revenue growth they tend to get rerated. This usually coincides with a failed product launch or some sign of user engagment issues. We have been bullish on all three of these. Tsla is another animal. As the only pure ev auto out there scarcity as well as the lack of a relative comparable are definitely making it impossible to value.


    Consumer brands on the other hand are highly cyclical from an investing standpoint. So while business momentum is strong premium is always there, but when that business momentum tapers for a bit even if it is because of a natural transition/reinvestment period the momo's depart slowly at first and then in mass. So with these always best to wait for first two quarters of lackluster comps as one quarter usually doesn't do it. Lulu is the poster child for that. They told you at start of the yr this would be basically a zero op levg upside yr as they seed international while north america matures. The sheer pants issue and mgmt turnover was icing on the cake, and yet it really took a full six months for market to really price it in. One of our principals was short this name and long kors against it since april because of just that.
    17 Jan, 05:26 AM Reply Like
  • Shorting stocks is fascinating and complicated in most cases. The best idea often becomes a crowded shorts and the liquidity dynamics overwhelm the fundamentals for extended periods of time. I tend to classify shorts as hedges, trading, fundamental or structural. Need to have a catalyst to really ring the register.
    16 Jan, 06:45 PM Reply Like
  • Okay, now that I've finally made it to the bottom of the page:


    Buy puts, Sell calls, or Short the common?


    My belief is that it is best to buy puts when you are swimming against the grain, and switch to shorting the common or selling covered calls when momentum actually turns downward.
    17 Jan, 01:11 AM Reply Like
  • C: you made up an interesting forum.
    Generally I prefer synthetic short without borrowing the common, in order to build the more appropriate position for any specific situation.
    Sometime prefer more puts, sometime more calls.
    17 Jan, 06:23 AM Reply Like
  • From the comments so far you get the feeling that most shorts are event-driven, looking for single names to short. This is certainly the strategy with the most upside potential per trade.


    Another possibility are short portfolio strategies. In light of the current market you might want to take a look at the topic of momentum crashes (short introduction This phenomenon could become relevant very soon.


    Since a lot of investors (professional as well a private) have a momentum bias in their portfolio you might be able to exploit it. A possible play would be to short the long leg of a popular momentum strategy (i.e. 10% highest momentum in S&P 500, a little research should provide you with popular observation periods etc.). Of course timing is crucial, momentum can go on and on and on.... This is the short term oppertunity.


    Since this proposed strategy depends heavily on timing you might want to exploit the crash after it happened. In the mid-term after a momentum crash former the loser portfolio might outperform the winner portfolio for a few months/years. Juicy pair option trades may be possible during that period.


    Any feedback on this is much appreciated.
    17 Jan, 09:22 AM Reply Like


    pri/h52 > 0.9 is pretty much always awesome. Even when the market goes down, recent momentum holds up. Historically, at least.
    22 Jan, 11:09 PM Reply Like
  • Short selling is a very difficult sport. I think it smooths out the inefficiencies in the market than anything else.


    And that is the reason only a relatively small amount of shares are short at any one time in the market. Usually from 2-5%
    17 Jan, 09:25 AM Reply Like
  • For anyone who hasn't seen it yet, Citron is saying the shorts are all wrong about Blackberry.

    17 Jan, 03:42 PM Reply Like
  • One thing that made me laugh was that at the end of 2013 they do the best and worst performing stocks - of the Dow, the S&P and the NASDAQ -, and the best performing stocks were up huge but the worst performers were only down slightly. I think this indicates we are in bubble territory.
    One further piece of evidence is that former hyped alt energy stocks from 2000 are making a re-appearance: Plug Power, Ballard Power and Capstone Turbines.
    17 Jan, 04:26 PM Reply Like
  • HDGE is an interesting quite unique ETF that shorts stocks on a fundamental basis, this is not an index ETF shorting an index or an inverse ETF but a plain portfolio of shorted stocks.
    They offer absolute visibility to the stocks they short every day on their site :
    17 Jan, 11:50 PM Reply Like
  • Author’s reply » Interesting; thanks for the link.
    18 Jan, 07:45 AM Reply Like
  • That is an interesting fund. Tough couple of years for an all short ETF, but that can all change in a hurry. I was surprised at the their holdings though. Not the ones I would have picked. We should have a "short picking" contest, everyone pick 5 shorts and check back in a 3 months or whatever.
    18 Jan, 12:44 PM Reply Like
  • I always find it interesting that the holdings of HDGE are a mix of highfliers and stocks with low to medium beta stocks. IBM has been their top short for a while now. I use their holdings to cross it against any potential long idea I might have. They are short Yelp, Netflix, 3D Systems and Green Mountain.
    18 Jan, 01:34 PM Reply Like
  • I've never shorted but one risk that jumped out at me on some informal back tests was "pharmaceuticals are exceptionally dangerous to short." For example, check out the price on ANIP which went from $1 to $23.84 in the last year. I had that added to a fairly randomly chosen short list (made out of curiosity not out of any good research) which now has a cumulative return of -60% (i.e. a loss). Despite that 6/8 of the short positions had a gain, the one pharmaceutical destroyed the portfolio.
    18 Jan, 01:48 PM Reply Like
  • Ugh, the top shorts in HDGE make no sense, great companies like IBM and CAT selling at historically low valuations, plus fast growing consumer stocks like FAST, TPX, and CONN that would require a slowdown in housing to decline meaningfully.


    All that and only a 3.3% net expense ratio! And as a CEF with such poor performance, I would have throught their discount to NAV would have been higher.
    20 Jan, 10:39 AM Reply Like
  • Illuminati
    First off HDGE is NOT a CEF but an ETF so it trades very close to its NAV by definition.
    Secondly, without even getting into the specific analysis of individual names, great companies can serve as great shorts at times, these are not mutually exclusive premises (see AAPL at 700 or even at 600 or maybe even at 550)
    Cat is certainly not a cheap stock to say the least trading at around 16 times 2014 projected earnings with a growth rate of just around 5%.
    While IBM does not seem expensive at 10.5 times 2014 earnings (projected) they come after the close today with 4q2013 and guidance for next year, their growth rate has shrunk as well to about 6% from 2013 to 2014.
    FAST at 28 times 2014 projected earnings and a much smaller projected 18% growth rate for this year is actually a pretty solid idea for short in my book and TPX is even more overvalued IMHO.
    They do a very thorough fundamental analysis coupled with forensic accounting and actually over the past year they are right in line with both the SPY and MDY (inversely as this is a short ETF so expected to be negative during positive market returns) even after the expense ratio which is accounting for the cost of shorting some stocks in addition to the management fees.
    21 Jan, 03:49 PM Reply Like
  • Thanks for the correction about it not being a CEF, but I guess we'll just have to agree to disagree about the valuation of some of their holdings since I personally feel CAT has been dragged down with the mining sector and it's often good to buy cyclicals when the P/E is high since that's usually the bottom of a cycle.


    Right now I feel the lowered earnings estimates for this year are an overreaction and their long term earnings potential is probably well into the double digits, making the stock super cheap right now.


    To argue that it's expensive you'd pretty much have to count on the continued collapse of the mining industy as well as major slowdowns in China and other developing countries, and it just seems like a lot of their other picks count on an economic slowdown as well.
    21 Jan, 04:11 PM Reply Like
  • HDGE had the market against it. But a fund that seems to do stock picking on the short side should do better than the inverse market. My impression is that their stock picking has performed worse than the inverse market, in 2013 and even worse in 2012.
    21 Jan, 04:49 PM Reply Like
  • Can anyone tell me when, or how low before shorts may cover on JCP?


    if ever...
    18 Jan, 11:55 AM Reply Like
  • I don't short as general rule, but was curious if anyone had thoughts on $LIVE. See
    28 Jan, 04:11 PM Reply Like
  • Author’s reply » Yes, LIVE is a promotion, but just largely corrected.
    28 Jan, 04:26 PM Reply Like
  • what are everyone's opinion of shorting prior to the 6 month lock up period when it's a technology stock backed by several venture firms?


    Chris, Thanks for setting up this Blog
    29 Jan, 06:17 AM Reply Like
  • My experience is that this strategy only works if the market goes "risk off" following the IPO. Otherwise just a ripple at best.
    29 Jan, 07:46 AM Reply Like
  • I think we may be getting back into an environment where shorting can work. I think there needs to be a story, well-publicized, to make the sort strategy work. Maybe not at the level of Bill Ackerman and HerbaLife, but there needs to be enough awareness of the issues with the stock to pop the balloon on disbelief in the reality created, most often, by momentum trading.
    30 Jan, 09:27 AM Reply Like
  • Author’s reply » So, Ya Wanna Buy Thisus Or Ya Wanna Buy Thatun?
    2 Feb, 12:50 PM Reply Like
  • Green Mountain Coffee is a definite short now.


    I think it is priced so perfectly that any bad execution will be reflected in the stock immediately.


    I think it's only worth sub 30.
    6 Feb, 08:22 PM Reply Like
  • Totally agree, I think the recent pop was just a short squeeze since the KO deal would seem to legitimize their financials, rather than anything economic coming out of the partnership anytime soon:



    Adding $4-5B of market cap on the deal when SODA only has a total market cap under $800M?
    7 Feb, 06:53 PM Reply Like
  • Yeah. It was a wild and irrational move.
    7 Feb, 08:34 PM Reply Like
  • I've been studying VIX derivatives for about a month in my spare time. Last week I "punted" and shorted TVIX at $10.5. I can see no better way to capture the vix contango. Of course Chris recommended this short some time ago.


    I'm finally ready to jump on board with a treasury short. TMF borrow cost is 10%; TMF is flawed, but by 10%? Sorry, I just don't see it... I may start to sell calls on TMF, but much more learning is required! (I've been waiting to short treasuries for 4 years)


    I'm itching to short any/all 3D printing companies, but in a rising market It's tough to pull the trigger. I can't wait to start seeing articles about the "failed 3D revolution". (I'm an engineer, and I use them at work. I see 3D printers as a High capital, non-scalable, niche product with declining margins)


    I have to respectfully disagree with the IPO short. I just believe we have another 2-3 years left in this bull market. (imagine your losses if short "IPO" in 1997!) I do agree with Chris's thesis; just disagree on timing.


    My biggest Short...US currency
    Between my RE investments, and margin account I am very short cash. You cannot fight the Fed, and the fed wants 2% inflation! I believe they will finally get it (and more) over the next few years.
    14 Feb, 10:32 PM Reply Like
  • Isn't shorting TVIX essentially equivalent to going long SVXY, just with more leverage? Isn't this risky considering that SVXY is already subject to some pretty large drawdowns, or do you get a high enough premium to offet this risk by shorting a flawed ETN subject to tracking error?
    17 Feb, 02:28 PM Reply Like
  • TVIX has much more tracking error than SVXY. In the last 6months svxy is up 20% and TVIX is down 60%. So the borrow costs of TVIX are well worth it


    YES this is a risky "bet" position size is very small (4%)
    19 Feb, 10:41 PM Reply Like
  • I wouldn't short 3d or ssys right now either
    18 Feb, 07:22 AM Reply Like
  • Still an obvious short is the Dutch housing market. Unfortunately I don't know how to set up that bet. So any feedback is appreciated.
    19 Feb, 03:03 AM Reply Like
  • Don't go to work tomorrow... read THE BIG SHORT instead.


    For what its worth, I "knew" that the US was in a housing bubble in 2006...However, I was not smart enough to figure-out a way to short it. (I had no clue what a CDS was, nor would Goldman Sacs give me the time of day)


    If you can raise enough money (10-100M?) you should be able to find an investment bank or an insurance company to sell you some type of derivative.


    Anyway, the book will help you open your mind to investement vehicles besides easily traded stocks.


    19 Feb, 11:33 PM Reply Like
  • Lewis' other book "Boomerang" is probably even more applicable to a global bet like the Dutch housing market, you'll find similar examples of the same sort of hubris amongst the Dutch banks that their situation was different.
    20 Feb, 02:57 PM Reply Like
  • My latest:

    19 Feb, 10:17 AM Reply Like
  • How bad are the leveraged ETF's? I know they are very good shorts, but are they so bad that it would be profitable to short both the 3x bull and the 3x bear fund, e.g. riskless shorting equal amounts of both YINN and YANG?
    24 Mar, 03:46 PM Reply Like
  • Author’s reply » They are terrible. I am short YINN, for one of many examples. Yes, you could probably make your idea work, but it is not how I use them.
    24 Mar, 03:52 PM Reply Like
  • What kind of borrow rate do you see there for YINN?
    24 Mar, 06:17 PM Reply Like
  • Author’s reply » Hard to describe as I set this up with equity options -- writing calls/buying puts. -C
    24 Mar, 06:19 PM Reply Like
  • Low risk if you can ride the volatility for the long term as the tracking error takes them toward zero. In the short run these can hurt ya.
    24 Mar, 07:50 PM Reply Like
  • Chris, did you ever implement your idea of shorting IPO? Hasn't quite worked out so far, but many of its components seem to be breaking down today and the quantity and quality of IPOs lately seems to bode well for that strategy to start working.
    24 Mar, 04:05 PM Reply Like
  • Author’s reply » Thanks for the question, yes I implemented the idea of shorting IPO and/or its components. Hopefully it will have a good year. We'll see. So far so so.
    27 Mar, 11:18 AM Reply Like
  • The $KING IPO has to be helpful to your cause. For the sake of a healthy market, I hope that your IPO short is somewhat successful :)
    27 Mar, 04:18 PM Reply Like
  • It doesn't add postions until after the companies IPO:



    But yes, it would help (under)performance if it continues tanking. IPO has held up surprisingly well given the recent selloffs in some of its major components like FB and TWTR.
    27 Mar, 08:08 PM Reply Like
  • There are numerous publicly traded trusts that pay out a fixed number of distributions and then liquidate/expire. Some of them are trading at prices well above where they should be based on their remaining payouts (numerous SA articles have been written on these). Salient examples : GNI, WHX.


    Many seem to have repeating price action patterns around distributions. The tricky part is finding a way to express a short opinion that that isn't prohibitively expensive or at risk of being called in.
    28 Mar, 03:58 PM Reply Like
  • Chris (or anyone) I am interested to hear about safety measures you take, shorting is obviously risky, some of your admired money managers won't short (Buffett, Munger, Pabrai) because of the risks.


    The negatives of shorting:


    *Bad tax treatment
    *Historical upward trajectory of market
    *Borrowing costs
    *Terrible risk characteristics - when a long position goes against you it becomes a smaller part of your portfolio, a short gets larger
    *Asymmetric returns - a short can gain only up to 100%, but its loss is unlimited.


    So basically you can't short responsibly without taking very small positions, and even then you have to watch that position closely because a Volkswagen style squeeze could still ruin you.


    What safety measures do you take?


    Can someone take the other side and "sell" shorting to me given these things?
    31 Mar, 07:51 AM Reply Like
  • Author’s reply » Joe,


    Great question and I agree 100% with those negatives and also with pointing out some of the greats who do not short. So, I would start with ceding each of those characteristics. Then, I would also cede that we are talking about small positions. I can have 10% longs but typically only 1% shorts. Then, I agree with watching them closely.


    As for safety, I really like frauds. People who tell the truth are only right somewhat more than half the time but can be wrong some substantial percent of the time. So, truth correlates with the future only loosely. However, lies make for good shorts almost always. Lies are untrue the vast majority of times. So heavily promoted stocks that tip over into the world of fraud can make for very safe shorts.


    Additionally, shorting is a good discipline for value investors. Are you cheering or are you analyzing? If you are cheering your investments, than shorting has no place. If you are analyzing, then it would be reasonable to assume that some subjects meet your criteria and others fall short. Shorting gives you something to do in each case.


    All that being said, this is an explanation of how I think about it and not an effort to convince, as I am not sure that I am right and not really too motivated to convince anyone else of doing things the way I do.
    31 Mar, 08:27 AM Reply Like
  • Thank you Chris, that sounds about right, I don't know if Seth Klarman shorts or not, his old professor Bruce Greenwald does, says open them only if they are going to 0, pretty much jives with your fraud strategy.
    31 Mar, 08:34 AM Reply Like
  • Chris, apologies if my question is too specific. When you short an ETF, such as IPO, it is possible to take more risk, that is to have a bit larger position than 1%, since you are betting against many uncorrelated companies. So what position size would then be still OK for you?
    31 Mar, 08:46 AM Reply Like
  • Author’s reply » Yes. My heuristic is to risk no more than 3% of original capital on a position. I rarely short ETFs (other than leveraged inverse ETFs) but would be willing to go above 1%. With IPO, I have been far more active in the components, shorting specific recent IPOs. But that ETF is a convenient way to get a basket of them at once.
    31 Mar, 09:14 AM Reply Like
  • Chris -- Do you use techniques such as bear call spreads or buy far OTM calls to limit the capital at risk for the position? Or do you just monitor the companies and price quotes really carefully?
    31 Mar, 09:51 PM Reply Like
  • HDGE is one to stay away from, pathetic in my opinion. This forum could come up with a better basket.
    13 Apr, 09:12 AM Reply Like
  • "How many short sellers to screw in a light bulb?
    5 - one to drop it and 4 to try to sell it before it hits the floor."
    13 Apr, 03:48 PM Reply Like
  • I am short NFLX, AOL, ASH, and DNKN. My thesis on each one is here:
    14 Apr, 01:52 PM Reply Like
  • I am short cloud stocks but keep tight stops on them.
    14 Apr, 05:07 PM Reply Like
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