Book Review: 'The Art of Short Selling,' by Kathryn F. Staley

by: SkepticLLC

I'm a fan of the "suggested reading" lists that some of the value hedge funds have circulated among their junior staff, and I noticed the presence of The Art of Short Selling by Kathryn F. Staley (Wiley, 1997) on several. I've always looked for a good book about short selling (there are very few titles focused on this area), so I recently gave this one a try. Based on my reading, I would say that this title falls far short of being the "classic" tome that the field still lacks.

What Is Inside
The book is broken into three main parts

  1. Facts and Practitioners - This is a very rudimentary background on what short selling is, and may have been more appropriate for a time when it was less understood by investors. In any case, the information is very high-level, dated, and won't be of interest to any but the most novice reader.
  2. Categories and Examples - This section is the meat of the book, comprising 65% of the page count. It is broken into 8 chapters that each describe a category of situations attractive to short sellers (i.e. bubble stocks, high-multiple growth stocks, etc.). In each case, the bulk of the discussion centers on 2-4 case studies about companies that were popular 1990's short sales. I'll discuss this more later, but note in each case that the ending was "the shorts were right".
  3. History and General Lessons - Here in the conclusion, there is a 20-page chapter titled "The Six Pillars of Short Selling" which is the most well-organized and concise writing in the book. You could save yourself a lot of time by just reading this chapter to get 90% of the useful information in this title.

Where This Book Falls Short

As you have probably picked up in my tone, I was highly disappointed in this book. The major short-comings are:

Highly dated - I realize financial titles sometimes have a limited shelf life given how fast markets change. However, there is a clear issue here with a book that was written before Reg FD. The discussion of the Wall Street analyst/management relationship is no longer factually accurate. In addition, the examples are so dated that they are probably meaningless to most investors under the age of 40.

Anecdotal style - This is the biggest flaw. The chapters on each "category" of short-selling are little more than a description of a handful of cases where the shorts were right, and usually early, in spotting a bad business or management team. These examples are all hand-picked from fairly well-known early to mid-1990's stock busts (examples would be ZZZZ Best, Coleco, Crazy Eddie). One would expect the discussion of each category to include an overview of the analysis, ratios, research, etc. that would be relevant. However, the author jumps right into the minute details of a hand-picked group of case studies with little discussion of the broader concept. The writing style in these sections seems almost stream-of-conscience, more like a journalist recounting the big events then a professional intending to impart a structured understanding of a concept.

Lack of counterpoint - The author repeats the point (many, many times) that shorts are often early in spotting trouble signs that the market ignores, causing pain as the stock rises and the shorts must wait (sometimes years) for vindication. However, reading this book you'd be convinced that every short sale eventually ends with a stock collapsing into to low single-digits. Maybe this is just another symptom of the anecdotal style. To be generous, I would just say that the selection of case studies shown would do little to educate with examples of where the short analysis might have been mistaken.

Conclusion
The field of short selling still sorely lacks a foundation text - something akin to the position The Intelligent Investor holds on the bookshelf of value investors (and, notably, where older editions remain relevant even with dated information). That there are so many investment books published and so few address short-selling seems odd, and could be an indicator of how difficult success is to attain in this field. Indeed, the best part of this book may be its title: the use of the word "Art", likes Soros' use of the word "Alchemy" in The Alchemy of Finance, clearly acknowledges a shortcoming in the current state of our understanding.

It's hard for me to recommend this book to except to someone looking for historical information on the famous short-sales and corporate fiascos of the 1990's. The best thing I can say about this title is that it is competing in a very wide-open market for information on short-selling, and it could have potential if given a heavy overhaul to modernize the content and provide a better overview of key concepts vs. relying too heavily on anecdotes and stories.



Disclosure: No position