In early April I made my annual trip to Florida to play golf with three of my brothers.
Along with fighting a wicked hook off the tee, I ended up reacting to a professional short seller that had targeted one of the companies in the Crabtree portfolio on the day I arrived.
Before I go further, let me say a thing or two about professional short sellers, as exemplified by Carson Block of Muddy Waters or Bill Ackman of Pershing Square.
These investors typically combine published research with a substantial short position in the stock. Their motives are transparent and their goals are clear.
First, since most investors are inherently bullish, there’s a tendency to personalize it when professionals start shorting a stock that you are long.
It’s an almost primal reaction. Why, it’s practically un-American! It’s insulting. Well, not really, but it feels that way.
Having written that, I think short sellers are a necessary component of any capital market.
They are highly motivated, usually well-informed and serve as a welcome counterpoint to the inherently bullish attitudes (and biases) of most investors, myself included.
They’re the dung beetles of the global markets in my view: ugly and distasteful, but a necessary part of the ecology.
From the target company’s perspective, I think that dealing with a professional short seller offers few options. You can pretend it’s not happening. (Unwise, in my view.)
You can ignore them (better in my view, but still with the negative that you look clueless while somebody else controls the narrative).
You can fight them with lawsuits and PR (Dumb: why spend money against people who are protected by the First Amendment?).
Or you can counter the short seller’s story with one of your own. Issue a news release. Appear on TV.
Address the short-seller’s concerns and respond to them with easily provable facts – preferably from audited financial statements, delivered in a matter-of-fact tone.
Explain industry practices and how you conform. Don’t personalize it. Don’t be triumphal. Most of all, do not attempt to litigate the matter.
Since the target company is best suited to defend itself, my advice as a professional is to encourage them to do so, rather than somehow taking them on myself.
Which is what I did back in April. One of our holdings was the subject of a negative report issued by short seller Kerrisdale Capital.
I found the full report on-line and after reading, felt it didn’t describe anything new or particularly concerning about the company.
So I contacted the target company’s investor relations representative and in an e-mail exchange encouraged her and the company to counteract the short seller’s narrative, per my earlier advice.
The rules of this blog don’t allow me to identify the company. But we still own as many shares of it as we did before the short attack.
It’s long been true that “differences in opinion make a market.”
In this case, the target company and the short seller each put forth facts to support their respective opinions. And the company’s share price ended up pretty much where it started.
To my way of thinking, it hurts to have your investment opinions challenged, but it’s much worse to reject challenges out of hand, for reasons of ego or pride.
In my opinion, when a professional short seller makes its case, you need to be intellectually honest and be prepared to challenge your own assumptions and investment thesis. Only after that should you make the decision to fight or move on.
Oh and my golf game? Well, never mind about that. Let’s just say I had another great time with my brothers.
And I managed to avoid this fellow, who one of my brothers had spotted on the same golf course about three weeks earlier.
As I boarded my plane home, the only thing I was short was a dozen golf balls. Hope the gators liked ‘em.