“Shorting is the Worst Job”: Short Seller Andrew Left, Citron Research
No one feels sorry for short sellers when they’re losing their shirts for having dared to short one of the favorite story-stocks that everyone is long and that everyone wants to go up. “Serves them right,” is the normal response. “How dare they bet against me?!”
In China, when push comes to shove, they just arrest short sellers.
“Being a short seller right now is the worst possible thing,” infamous short seller Andrew Left, founder of Citron Research, told Bloomberg Markets.
The risk-reward relationship is out of whack. You can make a maximum theoretical profit of 100% if the shorted stock goes to zero. But you can lose double, triple, quadruple your original investment if the stock keeps skyrocketing. Or you can use options to change the risk-reward relationship, and damage can be more or less.
However impeccable the logic, if timing is off and a temporary miracle happens, or the CEO tweets some ludicrous hype, or rumors of a buyout offer surface, then shorts get their heads handed to them.
It’s the short seller, alone out there, against the aggregate forces that will hype the stock with all their might, supported by the fawning media, and backstopped by a gaggle of central banks.
Someone with a megaphone big enough to trigger a move in the stock has a better chance. Short sellers like Andrew Left, after quietly taking a short position, pull out their big megaphone. They’re on CNBC and Bloomberg and in the Wall Street Journal, and the message spreads from there.
If the stock is a hedge-fund darling, like Left’s infamous target Valeant (with a sordid mess on its hands), the reaction is brutal. Hedge funds, going for the first-mover advantage, try to get out the door first. The selling spree spooks other investors. Investigative reporters swarm around the company. “Sources” begin to talk. Suddenly, the media discover all kinds of crap. Regulators start circling. Congress gets involved. And Valeant’s stock loses 90% in less than a year.
But in this market, short sellers that cannot cause a stock to crash are cannon fodder.
So here’s Left on Bloomberg Markets, discussing what it’s like being a short seller.
“Shorting is the worst job,” he said – even he, with his big megaphone and Valeant trophy on the wall. “If I were invited to career day at my kid’s school, I’d probably miss that day.”
“Being a short seller right now is the worst possible thing,” he said. “I actually started to think that I have like Stockholm syndrome because two weeks ago I said, ‘nothing is going to make this market go down.’ And that night I said, ‘oh my God, when I’m thinking that, then it has to be going down soon.’”
“It’s very difficult obviously,” he added, smarting from his Facebook short.
On June 13, he came out swinging on CNBC in a phone interview. Facebook was “losing an extensive amount of relevancy,” he said. “I am short Facebook.” It was “losing share to Snapchat and overstaying its welcome in other niches.” It wasn’t a “bad company,” he said, it “just will not be a $330 billion company in a year.”
Now, six weeks later, on Bloomberg TV, he was still waiting for the event that would make this bet work.
“It’ll probably be something mentioned on a conference call, talking about a decline in engagements,” he said. “I’m not saying it’s going to be this quarter, and I’m not saying it’s going to be next quarter, but much like we see people discussing Snapchat…. It’s not like Amazon. No one is going to disrupt Amazon so fast. The infrastructure, what it takes to set up the infrastructure, is a lot more. But social networks and what they do – consuming people’s mindshare – can be lost.”
Facebook closed on Tuesday at an all-time high, up 6% since June 13. His megaphone hadn’t been big enough. No investigative reporters are swarming around Facebook. Congress remains suspiciously quiet. They’re all using Facebook. Zuck rules.
The stretched stock valuations and people fretting about these valuations should make his job easier, the interviewer said, but instead, he’s fighting this momentum. Left replied:
“The best stocks to buy right now are the worst companies with no profits. I mean, look, Apple has to come out with earnings. I feel bad for Apple. They actually have to show a profit and show that they’re engaging people and making money. It would be so much easier just to run a company and to say, ‘I’m foregoing my short-term profits for the long term,’ and show me a 2019 model and sell some stock in a secondary [stock offering].”
He didn’t mention the name of the company. He didn’t have to. There’s only one that comes to mind that fits that profile: Tesla. And he didn’t sound like he was going to go short its shares. Once shares have reached irrational levels, there is by definition no rational limit to just how much more irrational they can get. He has enough problems on his hands with his Facebook short.
Update, after-hours, Wednesday, July 27: Facebook just reported earnings. Revenue jumped 59% in the quarter from a year ago. Expenses jumped 33%. Operating income soared 116%. Net income skyrocketed 186%. Shares soared 7% after-hours. If Left is still short FB, he’s got an even bigger problem on his hands.
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