Reflexivity, The Perils of Going Public, and the Stock Whose Name Shall Not Be Named
January 12, 2013 4 Comments
In short seller land, there tends to be two schools of thought when it comes to going public with one’s short position: those who (1) never go public and (2) those who go public.
LST will not delve into the merits of the two schools’ approaches. Suffice it to say, however, that the asymmetric risk/reward of maintaining a short position (i.e. shorts get larger on you, as the position works against you, and visa versa), regardless of the fundamental merits of the short, warrants extreme caution if/when going public. If you go public, you better make it count; & you better be right (or otherwise humble about your thesis).
Enter a certain sanctimonious “short seller”, who shall only be referred to as “the short seller”* . The short seller went public with his short thesis, via a 10,000 slide powerpoint presentation (with something like ~10 words per slide). Some would already say, “that’s mistake #1”. Then the short seller revealed the size of his position. Mistake #2. The short seller pulled the “going to zero” card, and that he wouldn’t cover. Mistake #3 (why back yourself into a corner?). Oh, and by the way, he decided to target a company that every short seller and their mother have been watching/critical of for many years. Mistake #4. And the list goes on. And on. And on.
Some have asked LST, “Why did the short seller go public with his position? Shouldn’t he have kept it to himself?” To which LST believes: the short seller (1) is somewhat economically rational (2) somewhat intelligent (3) largely believes in his short thesis, and…
(4) believes in his own ability to alter the outcome, which combined with (1), (2) and (3) means “must go public” **
The stock surely enough tanked ~40% largely because weak longs capitulated into year end.
Enter certain short sellers and activist investors (“the longs”) who…decided to go long the stock. They deemed the short thesis flawed, the price action unwarranted…not to mention some of them aren’t exactly fans of “the short seller”. The longs were right, and the stock has rallied since.
Here’s the thing… LST believes one of the longs made a critical mistake recently. He revealed and elaborated on the “wild card”*** tail event that the smart longs are in this. LST wonders, why bring up the wild card, rather than focus on the many holes in the short seller’s thesis ?
The market is vicious, the market is smart; the market is also a feedback mechanism. The way LST sees it, the more you talk about this possible tail event, the less likely it is to transpire.
So why bring it up? You’re already up on your position (great job), why shoot yourself on the foot? Public opinion within the investment community is largely on your side and against the short seller’s, as he has many enemies. Why risk that PR advantage?
See, if you don’t bring it up, the marginal buyer of the stock won’t know for sure whether the wild card event is priced in or not. That uncertainty increases the chance that the tail event happens. But by talking about it loud and clear, it seems to either suggest
(A) it might already be largely priced in, or
(B) it signals to the market that it is priced in…
(C) The short seller and/or his LPs are more likely to take precautionary measures that they otherwise might not have
(D) You anger the short seller, rather than cause him to fear. It seems that anger would cause the short seller to fight back, whereas fear just might lead him to give up.
The markets humble all.
* even though he’s not really a short seller
**believes in his ability to alter the outcome because he thinks he can (a) frighten weak longs to sell at year end (b) destroy confidence with a resulting lower stock price (b) limit flexibility of use of equity as currency, i.e. higher effective cost of capital; encourage uneconomic/non growth uses of cash such as buybacks (c) pressure regulatory bodies to act (d) draw attention to the most unsavory side of his target, leading the public and press to believe the target is defined by its worst members (e) cause customers and employees to worry, and leave.
***presented and mentioned without further comment