Breaking News
0
Ad-Free Version. Upgrade your Investing.com experience. Save up to 40% More details

Stock Shorts Collapse

By ValueWalk (Jacob Wolinsky)Stock MarketsApr 21, 2021 02:03AM ET
www.investing.com/analysis/stock-shorts-collapse-200574324
Stock Shorts Collapse
By ValueWalk (Jacob Wolinsky)   |  Apr 21, 2021 02:03AM ET
Saved. See Saved Items.
This article has already been saved in your Saved Items
 

Following up on Friday's comments about the carnage among short sellers, this Bloomberg article documents the unsurprising result: Stock Shorts Collapse as No Hedge Fund Wants 'Head Ripped Off'. Excerpt:

Wall Street bears battered by the Reddit crowd earlier this year have yet to regain their gumption, even with stocks at records and valuations near two-decade highs.

The median short interest in members of the S&P 500 sits at just 1.6% of market value, near a 17-year low, according to Goldman Sachs (NYSE:GS). In Europe, a short-covering frenzy has sent bearish bets collapsing like never before in Morgan Stanley (NYSE:MS) data.

S&P 500 Short Interest As A Share Of Market Cap
S&P 500 Short Interest As A Share Of Market Cap

Here's an excerpt on short selling from a draft of a book I've been working on for a while, The Rise and Fall of Kase Capital, which I plan to publish next year...

Over the course of 15 years – before, during, and after my partnership with Glenn Tongue – I shorted hundreds of stocks.

It was intellectually stimulating and led to some of the biggest wins of my career – most notably in flooring firm Lumber Liquidators (NYSE:LL). But overall, it was very costly.

Over my entire shorting career, I lost money – though not a ton, especially in light of the bull market. The real cost was the huge amount of time it consumed. Worse yet, it was the primary reason for my funds' terrible underperformance in 2016 and 2017 – so much so that I finally threw in the towel and closed them.

So why didn't I recognize this sooner and stop shorting entirely? Well, like most self-destructive things, it initially started off so well, which sucked me in, and I got hooked...

I shorted my first stock in April 2002, a little more than three years after launching my business. It was Farmer Mac, at $46 a share. Six months later, I covered at $27. In June, I shorted Orthodontic Centers of America at $24. Four months later, I covered at $11. In July, I shorted GameStop (NYSE:GME) at $18. Six months later, I covered below $10. With three quick wins under my belt, I was off to the races...

I was having so much fun and success, in fact, that I wouldn't even listen to Charlie Munger.

Here's the story...

In 2002, Bill Ackman researched financial-services giant MBIA (NYSE:MBI) and concluded that it was a house of cards. He shorted the stock and published an in-depth report titled "Is MBIA Triple-A?" I thought Bill's analysis was correct, so I also shorted the stock and was publicly critical of the company.

In response, the company planted a negative story in the Wall Street Journal about Bill and me, claiming that we were part of a nefarious group of market-manipulating short-sellers.

As if that wasn't bad enough, only four days later, I received subpoenas from both the U.S. Securities and Exchange Commission ("SEC") and the office of New York Attorney General Eliot Spitzer. Both regulators had obviously read the WSJ story and were following up, demanding all of my e-mails, trading records, research, etc.

I knew I hadn't done anything wrong. Nevertheless, I feared that the bad publicity and these two investigations might put me out of business.

Panicked, I called Warren Buffett for advice. He basically told me, "This too shall pass," and suggested that I speak to his long-time partner, Charlie Munger.

I had never spoken with him, so I asked, "Does he even know who I am?"

Buffett chuckled and said, "Oh, yes, he knows who you are. Give him a call."

So I did – and, to my surprise, his secretary put me right through to him. I still remember his exact words. He started by saying, "You and Bill are absolutely right on MBIA. The idea that anyone would ever think that MBIA is triple-A is so ludicrous!"

He spat out the last two words and continued:

"From a societal perspective, what you and Bill are doing [to expose MBIA] is great."

At this point, I was feeling pretty good. My hero was complimenting me!

But then, he cautioned: "But if you go through life stepping on people's air hoses, they're going to hate you and attack you. So my advice to Whitney Tilson is, don't do it."

Then, he reflected on his own experiences short-selling decades earlier. "I shorted three stocks in my life and they eventually worked out," he said, "but not before running against me and causing me total misery. So I stopped."

He concluded with a phrase I'll never forget: "But every young guy seems to have to learn this for himself..."

He was saying this to himself as much as to me, because he knew I was so full of myself that I wasn't going to listen to him. That's how wise he is... and how dumb I was. My failure to listen to Munger eventually brought me to ruin...

Stock Shorts Collapse
 

Related Articles

Stock Shorts Collapse

Add a Comment

Comment Guidelines

We encourage you to use comments to engage with other users, share your perspective and ask questions of authors and each other. However, in order to maintain the high level of discourse we’ve all come to value and expect, please keep the following criteria in mind:  

  •            Enrich the conversation, don’t trash it.

  •           Stay focused and on track. Only post material that’s relevant to the topic being discussed. 

  •           Be respectful. Even negative opinions can be framed positively and diplomatically. Avoid profanity, slander or personal attacks directed at an author or another user. Racism, sexism and other forms of discrimination will not be tolerated.

  • Use standard writing style. Include punctuation and upper and lower cases. Comments that are written in all caps and contain excessive use of symbols will be removed.
  • NOTE: Spam and/or promotional messages and comments containing links will be removed. Phone numbers, email addresses, links to personal or business websites, Skype/Telegram/WhatsApp etc. addresses (including links to groups) will also be removed; self-promotional material or business-related solicitations or PR (ie, contact me for signals/advice etc.), and/or any other comment that contains personal contact specifcs or advertising will be removed as well. In addition, any of the above-mentioned violations may result in suspension of your account.
  • Doxxing. We do not allow any sharing of private or personal contact or other information about any individual or organization. This will result in immediate suspension of the commentor and his or her account.
  • Don’t monopolize the conversation. We appreciate passion and conviction, but we also strongly believe in giving everyone a chance to air their point of view. Therefore, in addition to civil interaction, we expect commenters to offer their opinions succinctly and thoughtfully, but not so repeatedly that others are annoyed or offended. If we receive complaints about individuals who take over a thread or forum, we reserve the right to ban them from the site, without recourse.
  • Only English comments will be allowed.

Perpetrators of spam or abuse will be deleted from the site and prohibited from future registration at Investing.com’s discretion.

Write your thoughts here
 
Are you sure you want to delete this chart?
 
Post
Post also to:
 
Replace the attached chart with a new chart ?
1000
Your ability to comment is currently suspended due to negative user reports. Your status will be reviewed by our moderators.
Please wait a minute before you try to comment again.
Thanks for your comment. Please note that all comments are pending until approved by our moderators. It may therefore take some time before it appears on our website.
 
Are you sure you want to delete this chart?
 
Post
 
Replace the attached chart with a new chart ?
1000
Your ability to comment is currently suspended due to negative user reports. Your status will be reviewed by our moderators.
Please wait a minute before you try to comment again.
Add Chart to Comment
Confirm Block

Are you sure you want to block %USER_NAME%?

By doing so, you and %USER_NAME% will not be able to see any of each other's Investing.com's posts.

%USER_NAME% was successfully added to your Block List

Since you’ve just unblocked this person, you must wait 48 hours before renewing the block.

Report this comment

I feel that this comment is:

Comment flagged

Thank You!

Your report has been sent to our moderators for review
Disclaimer: Fusion Media would like to remind you that the data contained in this website is not necessarily real-time nor accurate. All CFDs (stocks, indexes, futures) and Forex prices are not provided by exchanges but rather by market makers, and so prices may not be accurate and may differ from the actual market price, meaning prices are indicative and not appropriate for trading purposes. Therefore Fusion Media doesn`t bear any responsibility for any trading losses you might incur as a result of using this data.

Fusion Media or anyone involved with Fusion Media will not accept any liability for loss or damage as a result of reliance on the information including data, quotes, charts and buy/sell signals contained within this website. Please be fully informed regarding the risks and costs associated with trading the financial markets, it is one of the riskiest investment forms possible.
Continue with Google
or
Sign up with Email