Kyle Bass, on the Art of Short Selling
December 17, 2013 3 Comments
Kyle Bass, Hayman Advisors, on short selling:
Question: What was the worst trade of your career?
The second company I ever sold short was a disaster. The first one was actually a great trade. It was an East German shipbuilder that was being heavily subsidized by the government when the Berlin Wall came down. The executives were not applying the subsidies to the shipyards. We shorted the stock around 100 Deutsche marks and it never saw an uptick – it went from 100 to 80 to 60 to 40 to 20 to zero, where they were literally chaining the gates after that.
The second short was a technology company. The COO had just quit under suspicious circumstances and in doing our homework on the capital structure we figured it could be a zero.
Right after we got short this stock, an active and influential newsletter at the time came out and said they thought it was the stock of the century. It doubled on me so fast that it carried me out. All the money I had saved up until that time was literally gone.
I did an enormous amount of work on the balance sheet, met with some of the players, thought I understood what was going wrong, had almost all of the data, and in the end, was even right. But I just couldn’t withstand the move.
It was such a beautiful learning experience because I came from no money. I was so broke in college. I came from a middle class family, and by that point I had made a few hundred thousand dollars and saved it, and it was gone. I was apoplectic.
When I think back now, thankfully it happened to me then – it only cost me a couple hundred thousand bucks, and it was the most important lesson in short selling that anyone could ever learn. It taught me the humility and the respect that you must have when you’re on the short side of anything. It wound up being one of the best things that ever happened to me.
What do you do differently today with short sales?
We do a lot differently. We do short individual equities from time to time, but we short with respect, experience, and proper sizing and stop-loss levels.
In my view, the humility and respect Kyle Bass is referring to is not only of the variety involving how you treat/view other people. It’s also your attitude and orientation towards knowledge, and the pursuit of knowledge. I.e., knowing what you know, knowing what you don’t know, knowing that which is know-able, (for you and others), knowing that which is not know-able (to you and others). Perhaps we can call it intellectual/epistemological humility. And so, being humble is not thinking any lesser of yourself, but being more open to what you don’t know, or are unable to do. Good intentions must be coupled with a healthy dose of wisdom.
Very few things in life (other than death, taxes, and student loans) are “obvious”.