On the Twitter, I used to follow a famed short-seller who shall remain nameless.
Basically, he would tweet about the following things:
- About how Home Capital Group was going to zero
- About how Green Mountain Coffee Roasters was going to zero
- About how Valeant Pharmaceuticals was going to zero
- About how Concordia Healthcare was going to zero
And so on.
It was entertaining, at least for a while. He’s clearly a little bit insane, a trait I can at least appreciate. He would find people who were long stocks he was short and troll the living crap out of them. I thought he and I would be imaginary friends forever.
The more I looked into stocks he was shorting the more confident I got about his abilities. There was a clear thesis for each and every stock he was betting against. Home Capital Group has admitted that 10% of their mortgages are fraudulent. Who knows how many more are built on lies. Green Mountain is famous for making the Keurig coffee machines, a revolutionary new concept. They followed it up with the Keurig Kold, a machine designed to make ice cold individual servings of soda, juice, and other refreshing beverages.
But wait. They’ve already invented that.
How anybody can think the Keurig Kold is a good idea is beyond me. And yet, GMCR is spending billions building and marketing it. They honestly think they can replicate the success of their coffee maker.
His short appeared to be working. Here’s a one-year chart for GMCR, with the end date a couple of weeks ago.
That is not a great chart, to say the least. Perhaps my short-selling friend was onto something. I have no idea how long he’s been short, but let’s give him the benefit of the doubt and say he was first bearish on the stock at the $100 level. That’s a 50% gain in a few short months.
And then, on Monday, this happened.
That is pretty much your worst nightmare as a short-seller.
Here’s what happened. A German private equity firm (JAB) headed by the Reimann family made an offer to take Green Mountain private, bidding $92 per share. You might think it’s a dummy offer, like that time Prem Watsa decided he was going to lead a takeover bid for BlackBerry.
But there are a number of indications this deal is going to go through. It’s an all-cash deal. And JAB already owns coffee behemoth Jacobs Douwe Egberts, a name I promise you I didn’t just make up. JDE owns a bunch of different coffee brands — mostly European — along with a name you’ll probably recognize, Tassimo. When the deal closes, JDE will be the world’s largest coffee company, passing Nestle in revenue.
The unpredictability of shorting
My Twitter friend mentioned many times about how he thought GMCR was worthless. He spent his time looking for and then tweeting any negative information he could find about the company. Positive news was either deemed as being wrong or misunderstood.
It was all a massive case of confirmation bias. This isn’t to say confirmation bias is something that only afflicts short-sellers, because it’s not. Many long-only investors are just as bad, if not worse.
There are dozens of other examples of shorts going horribly wrong. Oprah came to the rescue of Weight Watchers. I bet against Canada’s housing bubble via the banks, getting my ass handed to me in the process. Whitney Tilson, one of the smartest investors out there, shorted Netflix back in 2010. The stock is only up 700% since, although in Tilson’s defense he eventually threw in the towel on his Netflix short and went long shortly after.
I firmly believe that shorting is harder than going long. Think about all the things a short has to get right. A company can’t just be overvalued to be a good short, since companies like Amazon and Tesla have been overvalued for years. The short-seller needs something more than that. Accounting shenanigans is an obvious reason to short. So is a massive debt load that can’t possibly be serviced. And then the short-seller has to get the timing right.
Think of everything a short-seller has going against them. The market tends to go up. Something like 98% of all investors are long only, meaning a short basically has the entire market betting against them. A certain percentage of people absolutely hate short-sellers. And for every shorter out there, there’s probably five investors willing to give a beaten-up company the benefit of the doubt and bet on a recovery.
And to top it all off, the downside potential in shorting is limitless, since a stock can rise forever.
Put all that together, and I don’t understand how any retail investor says to themselves “hey, you know what’s a good idea? Shorting.” It’s the investing equivalent of going to the strippers because you like the conversation. It’s just a bad idea all around.
If you’re an investing expert, shorting might be for you. If you’re an average retail investor, just don’t bother. Even the experts regularly get it wrong. It’s a much tougher way to make a buck than going long. The easiest way to invest is index funds. Buying stocks gets a little harder; buying obscure small-caps ups the difficulty level still. Shorting is about as tough as it gets.
Remember that the next time you think you have the inside track on the next can’t miss short.