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Commentary

Short Sellers Bask In A Well Deserved Glory

An interesting article about a short seller, David Einhorn, and Lehman Brothers:

That was 1996. The firm had just $900,000 in assets, more than half of which came from Einhorn’s parents back in Milwaukee. It was barely enough to rent an office—they made do with a single windowless room. Twelve years later, Greenlight has over $6 billion under management. Einhorn has hit many balls hard, and some of them have gone to the moon.

Though Allied tried to brand him in the public eye as a ruinous short seller, it is difficult to overstate Einhorn’s stature within the hedge-fund community. His peers respect him personally—“A super-high-quality human being,” says Bill Ackman of Pershing Square Capital, who has known him for about eight years—and more than that, they revere his acumen as an investor. He is, for the most part, an old-fashioned stock picker. Though he does engage in short selling, most of his positions are long, and they include companies like Microsoft and Target. Unlike other types of funds, Greenlight doesn’t use borrowed money, or leverage, to amplify small profit spreads, nor does the firm rack up huge trading volume. The nine analysts who work for Einhorn take weeks, if not months, to research companies, and when they find one that he likes—or doesn’t like—he tends to hold the position for a long time. Given this approach, Einhorn can’t afford to be wrong very often, and he hasn’t been. If you had given him $1,000 in 1996, he’d have turned it into $14,600 by now.

Incredible story of a man who has been called all sorts of names for first shorting Allied, and now for Lehman.

These are fundamental shorts – which, like fundamental buys, are based on facts, not price. All Einhorn did was decide that a company was in trouble and lying about it. He shorted Allied and Lehman on information that was publicly available – that you and I could have used to the same effect. People rebuke such short sellers, because they believe that no one should profit from a company’s failure. Or that innocent other shareholders should not be paying for a shorter’s profit. Or some such excuse. Even companies hate short sellers of their stock – the Enron CEO, Jeff Skilling, called one an “asshole” in a conference call prior to Enron’s bankruptcy.

Jim Chanos was an open short on Enron. He went short and made his analysis public, so other people could also see what was wrong.

Recently, Bill Ackman shorted MBIA and Ambac and released an “open source model” showing how bad the situation is, with facts.

Shorts are essential to the ecosystem, as much as bulls. But you shouldn’t be manipulative (i.e. short only to bring the market down) like some operators in India did.

Is there a case for a fundamental short in India? I’ll leave that for you to think about.

  • techntrek says:

    >Very insightful

    U have immense knowledge on investing
    and the Indian markets. U are an Investment Guru!

  • Mahendra Naik says:

    >Great find Deepak. Short sellers are much maligned, but they only exploit weaknesses already present. Rather than call these guys names, companies would be better off putting their houses in order. The same thing happened with George Soros when he shorted the Malaysian Ringitt.I don’t think anyone can short a company or a market or a currency that stands on solid fundamentals. Even so far as someone shorting a market to simply bring it down is concerned, I dont see anything wrong with that. If the market has a weakness to be exploited so be it. We know that the shorts take a huge risk when they do so, & if they are wrong in their assessment, they lose their shirts. So why grudge them when their call is right.

  • Anonymous says:

    >yes. right. They are fundamental shorters. But how does this long term shorting process work?
    Building Long position is easy. Buy and Forget. How does the reverse work? Through Futures? Or through Options? There must be very long tenure F&O instruments avaiable, which is not the case in India. Will much appreciate if you a can write a detailed post regarding that.