Activist short sellers are heavily criticized by the media and the corporate world, often accused of market manipulation and anti-American sentiment. In some examples, this is quite true, however, there is an argument to made that short sellers are the watchdogs of financial markets. Activist short seller Jim Chanos often says that short sellers are “are the market’s real-time financial regulators” and that regulatory agencies are the “archaeologists” of the markets.
From his start at a shady cold-calling commodities brokerage in the 90s, to shorting boiler room and internet bulletin board darlings, clearly Andrew Left didn’t get his start in the market through traditional means.
He currently runs Citron Research, his website where he posts his short ideas. Rather than the traditional funky accounting-based shorts that most short sellers are known for, Left’s style is different to say the least.
He identifies companies that make bold claims about their products and technology. For example, one of his most recent and controversial shorts was on Shopify. His short thesis was based on Shopify’s supposedly over-ambitious marketing claims used by their affiliates. He went on to compare the company to multi-level marketing company Herbalife, titling his Shopify report “THE HOTTEST STOCK ON THE NYSE IS … A COMPLETELY ILLEGAL GET-RICH-QUICK SCHEME (WITH A GOOD SOFTWARE PLATFORM).” The reaction from Wall Street and the financial media was quite negative, and many attacked Left as a market manipulator, taking advantage of the affect his reports have on stocks. However, Left doesn’t always get it wrong. He is widely credited for exposing Valeant Pharmaceuticals, calling them the “next Enron.”
Perhaps the cornerstone of Left’s success is his use of copywriting. He uses inflammatory, fiery headlines that raises one’s eyebrows, and makes his reports simple enough for the layman to understand.
Jim Chanos is the head of short selling hedge fund Kynikos Associates. He is known for calling out multiple fraudulent companies, mostly based on their shoddy accounting practices. Most of time, these companies, like Enron, are darlings on Wall Street when Chanos gets short.
He is most well known for his short call on energy merchant bank Enron, which was eventually the subject of a book and documentary The Smartest Guys in the Room. The catalysts for his short call was a long string of acquisitions, which is always a sign for Chanos to take a closer look, but most of all, when the energy merchant banking industry successfully lobbied the SEC to apply mark-to-market accounting to their company reporting. After noticing this and other red flags like insider selling and mass executive departures, Chanos & Co. initiated their short position in November 2000. Just 13 months later, in December 2001, Enron filed for bankruptcy.
In the current day, Chanos is best known for his views on China and Tesla. He called Tesla a “walking insolvency” and thinks the company is heading towards bankruptcy. He cites, among other things, Tesla’s acquisition of SolarCity, their burn-rate, and their inability to keep up with auto autonomy technology.
Chanos’ view on China is based on their supposed real estate bubble, to simplify this he described a conversation he had with his real estate analyst that went like this:
Analyst: “Currently, China has, under development, 5.6 billion square meters of high rises. Roughly half residential, and half office in mixed use.
Chanos: “Alex, you’re getting your nomenclature wrong because we think in square feet, and they think in square feet. That’s 60 billion square feet, which would make a 5×5 cubical for every man, woman, and child in China.”
Analyst, with a look of horror: “I’ve tripled checked. It’s 5.6 billion square meters.
Chanos additionally made correct short calls on companies like Tyco International, Boston Chicken, Baldwin-United, and many others.
Perhaps Barry Ritholtz best described Chano’s abilities:
“Jim has the combination of an accountant’s ability to dive into the numbers and a detective’s ability to sniff out nonsense, and he has done it throughout his whole career”
Bill Ackman is the CEO of Pershing Square Capital Management, a hedge fund he started in 2004 shortly after his previous fund, Gotham Partners, was blown up by a failed investment into a golf course operator.
Bill Ackman’s day job is value investing, but when he comes across a short idea he likes, he goes “to the end of the earth,” as he said in regard to his Herbalife short. Ackman has made two big short plays in his career, one was massively successful, MBIA, the other, Herbalife, was a massive failure for him.
Looking at the two businesses, they were different types of shorts. MBIA, which he began shorting in 2002, was due to their risk as a bond insurer, in his report “Is MBIA Triple-A?,” he theorized that they didn’t have enough capital to insure the bonds they were insuring should a financial crisis occur.
Conversely, Ackman’s Herbalife short wasn’t based on the company’s financials, but their business model. Ackman went public with his Herbalife short, claiming the company is a pyramid scheme. It started in December 2012 with a 300 slide presentation called “Who Wants to Be a Millionaire,” and went on until late 2017, when Ackman finally exited his short position.
The Herbalife short was all about public relations, he had to convince the public that Herbalife was a scam, and put enough pressure on regulators to investigate the company. After lobbying Washington, spending $50 million on a public relations campaign, working with a filmmaker, and working with civil rights groups, the stock was still going up consistently. The FTC eventually had a ruling on Herbalife’s business model, in which they did not describe it as a pyramid scheme. After closing the position, Ackman’s firm lost an estimated $455 million dollars.
Ackman claims he will never handle a short position the way he handled Herbalife again, saying “In the future I am going to bet against the stock and then deliver my material to John Oliver,” referencing Oliver’s investigative report on multi-level marketing schemes which heavily featured Herbalife.
Short sellers, specifically short sellers who publicize their positions with reports, are some of the most disliked people on Wall Street. Often times, the line between a whistle blower and a market manipulator is blurred. Without a doubt, short seller’s reports are meant to move the market, however the same could be said about any bullish investor on CNBC, touting their favorite stocks. Both propositions have the potential to lose the investing public money.
Excellent report, extremely interesting and narrated. Many Thanks!