The Ethics of Public Discussing a Short Position

[NBL0303]

I've been a long-time admirer and reader of the site but am very new to posting because I generally do not like to pipe into a discussion unless I truly have something significant and worthwhile to add.  I'm posting this question/thought here because it has kind of been burning a hole in my brain.  I'm sorry if this topic has been discussed before, I could not find it exactly.

 

The issue that has been on my mind relates to a short position (relatively small to me) that I have recently taken.  I'm a very focused value investor and have been for more than 15 years.  As such, I've essentially never taken short positions - though I understand the value investing perspective on certain shorts.  For the last six months, I've been thinking about a company that I'm very familiar and that I like elements of, but is wildly overpriced.  Overpriced as in, I wouldn't pay one-fifth of what the company is currently trading at.  For a variety of reasons, I began to think that this was a good short position to take and after months of thinking and reading my thought that this was would be a good short grew.  I began to think that this is one of my better investing ideas in a while because if the fuse is lit in the way that I think it will be at some point in time, the stock will likely go down dramatically (like down 90% or so).  For a long list of reasons, I think the asymmetry between the upside and the downside of a short warrants shorting this company (or buying puts on it).  So finally, I've recently purchased a small position on the short side of this company.  While the position is not actually material to my own financial life, it is more of an intellectual curiosity.

 

I was thinking of discussing this small company on this board, as I would love the smart people in this forum thoughts' on this.  But as I began to think about it, I started thinking that it was bad form and not a great ethic to publicly discuss companies in which you have a short position.  As I am new to being on the short side of the equation, and this may be my first and last time on the short side of a company (apart from an occasional hedge on the short side of something - which I do from time to time), I have not thought much about this before.  It seems very different to me to have a financial interest in a public company losing value and publicly discussing that, then to have a financial interest in the success of a company and to publicly discuss that company.  Sort of like the legal principle that competition is fine unless it involves physically destructing the competitor rather than offering a better product (i.e. two competing sandwich shops next door to each other - it is fine for one to undercut the other's prices but it is not fine for one to the throw a brick through the glass front of its competitor).

 

Does anyone have thoughts/feelings on this subject?

[Liberty]

Might be just me, but I think sharing short positions is the same as sharing longs. It might not be perceived the same way socially, but financially it's the same. And I think this forum is sophisticated enough to not take the layperson view that "shorts are bad guys who want to see America fail" or whatever. Michael Bury's a hero here in good part for his short bet.

 

Shorts provide a useful service by uncovering frauds and pointing out overvaluation and such. I wish we heard more from shorts, even if it's not something I feel comfortable doing myself.

 

Maybe others have a different point of view, though. But I'll point out that there are lots of short ideas posted on the VIC and it doesn't seem to be a faux pas.

[writser]

Might be just me, but I think sharing short positions is the same as sharing longs. It might not be perceived the same way socially, but financially it's the same.

 

Shorts provide a useful service by uncovering frauds and pointing out overvaluation and such. I wish we heard more from shorts, even if it's not something I feel comfortable doing myself.

 

Maybe others have a different point of view, though. But I'll point out that there are lots of short ideas posted on the VIC and it doesn't seem to be a faux pas.

 

Couldn't agree more. If you think a company is hugely overvalued I think it is actually beneficial for the stock market as a whole to point this out - in theory it should dampens bubbles / crashes. Granted, there are some shady short sellers out there but also on the long side shady promotors exist. I think the ethics depend on how you present your case - not on whether you are long or short. Or at least, that's how it should be.

[thepupil]

if it is a small company with finite borrow, I would caution you against sharing. You never know who you may impress and there's no reason in potentially crowding out yourself or increasing your costs to short. If it's big and borrowable, share away. it's a free market formed by the dollar weighted average opinions of participants. price discovery requires more than just bulls. also if it's an equity issuer, it's good to get out the bear thesis in a public forum. any declines in the stock price or just the negative attention will potentially fend off unwary equity offering participants. you don't want people buying into that expensive stock and hurting your position (or hurting themselves). don't underestimate the ability to be your own catalyst or at least get your thoughts seen by big important people. I've seen hedge funds and long onlies shaken by the humblest of seeking alpha articles / message board threads.

[rranjan]

Discussing your shorts are not different from discussing your longs.

 

If float and average volume is very less then I can see some merit of not wanting to discuss in both cases. But in normal case, there isn't any difference when it comes to ethics.

[AzCactus]

I agree with rranjan---some people might think that shorting is either unethical/un-patriotic.  The bottom line though is that as long as the thesis is backed by facts and reasoned intelligently I do not see an issue.  The only issue I see pertains to float/volume. 

 

Ackman and Einhorn have discussed their shorts very publicly on occasion and while I do not know them as people that specific action does not seem to me unethical.

 

David

[tlee19802]

There is nothing unethical about discussing a short as long as you do the homework and you are not yelling "fire." Think about all the people who got hurt because of Enron or got pulled into the tech bubbles and real estate bubbles. Hearing a short opinion is a good counter weight against all the bs and marketing we hear from wall street and the company's IR department. Whether you choose to share is your choice. But I definitely appreciate it when someone explains to me why they think xyz company might not be a great buy.

[AtlCDore]

NBL,

 

Having read some of your posts recently, you come across as an intelligent and thoughtful poster and I look forward to reading your posts going forward. 

 

Since your title contains "ethics", I don't believe there is any ethical issue with discussing a short idea.  However (and this may not be of interest to you) as a word of caution, know thyself before posting a short idea. 

 

I have found being short an overvalued stock is very different mentally than being long a cheap stock.  At least to me.  Over time I have learned that it is best for me to play a short idea via long puts or not being short at all.  Maybe being long a put I know my max loss and therefore can deal with it better.

 

My issues with shorting:

 

1) I can be long a stock for years and the volatility doesn't bother me.  Once I am short, I seem attracted to watching that stock like a moth to a flame.  And the fluctuations drive me crazy.

 

2) I believe that a short idea is more of a trade and the timing of initiating that short is vital whereas with a long idea, time is on your side.

 

3) Being short seems to take an inordinate amount of energy as opposed to a long idea.

 

4) Once you announce you are short stock X, you will find that there is someone who is long that stock.  And chances are good you will find yourself in a ongoing discussion with that person discussing why it is/isn't a good idea.  Takes up a lot of your time.

 

Hopefully, none of this is relevant to you but since you said you have not shorted an idea, I just thought I would list some of the pitfalls I found with being short. 

 

I would not worry about the ethics of being short or even discussing it in any sort of forum.  I would tell you to think long and hard before announcing it publicly.

 

Best,

 

AtlCDore

[Guest longinvestor]

NBL,

 

Having read some of your posts recently, you come across as an intelligent and thoughtful poster and I look forward to reading your posts going forward. 

 

Since your title contains "ethics", I don't believe there is any ethical issue with discussing a short idea.  However (and this may not be of interest to you) as a word of caution, know thyself before posting a short idea. 

 

I have found being short an overvalued stock is very different mentally than being long a cheap stock.  At least to me.  Over time I have learned that it is best for me to play a short idea via long puts or not being short at all.  Maybe being long a put I know my max loss and therefore can deal with it better.

 

My issues with shorting:

 

1) I can be long a stock for years and the volatility doesn't bother me.  Once I am short, I seem attracted to watching that stock like a moth to a flame.  And the fluctuations drive me crazy.

 

2) I believe that a short idea is more of a trade and the timing of initiating that short is vital whereas with a long idea, time is on your side.

 

3) Being short seems to take an inordinate amount of energy as opposed to a long idea.

 

4) Once you announce you are short stock X, you will find that there is someone who is long that stock.  And chances are good you will find yourself in a ongoing discussion with that person discussing why it is/isn't a good idea.  Takes up a lot of your time.

 

Hopefully, none of this is relevant to you but since you said you have not shorted an idea, I just thought I would list some of the pitfalls I found with being short. 

 

I would not worry about the ethics of being short or even discussing it in any sort of forum.  I would tell you to think long and hard before announcing it publicly.

 

Best,

 

AtlCDore

+1 Especially your second point above. You have turned the best possible friend, time, into your enemy. Someone asked Buffett this question about shorting and he said "what a miserable way to live".

 

Closer to home for many board members here, your point #4 played out really ugly with FFH between 2002-05. The short sellers got a little ahead of themselves with the thinly traded stock and got caught w their pants short. They tried everything they could, shill analysis to message board trolling to threatening phone calls...they lost more than an argument. There are millionaires on this board thanks to that mistake made by the shorts.

 

 

[yadayada]

+1 don't short. Waste of time, unless your in a position of a fund manager, or like greenblatt you can spread out your short bets, and have a team of analysts.

 

It is like opening a insurance company, and then only insuring a few people at the time. And risking a large % of your networth in the process. Really stupid, v difficult to get a good sample size quickly. It still blows my mind that so many seemingly smart people do it.

[Patmo]

Great discussion all.  Many thanks!

 

Have you been swayed to discussing your short position openly? I'm quite curious what idea made you dip your toes in the short pool.

[AtlCDore]

Closer to home for many board members here, your point #4 played out really ugly with FFH between 2002-05. The short sellers got a little ahead of themselves with the thinly traded stock and got caught w their pants short. They tried everything they could, shill analysis to message board trolling to threatening phone calls...they lost more than an argument. There are millionaires on this board thanks to that mistake made by the shorts.

 

 

If I'm not mistaken didn't Watsa sue that whole hedge fund cabal?  Did anything ever come of that lawsuit?  Really a travesty what Watsa had to go through from what I remember.

[Guest longinvestor]

Closer to home for many board members here, your point #4 played out really ugly with FFH between 2002-05. The short sellers got a little ahead of themselves with the thinly traded stock and got caught w their pants short. They tried everything they could, shill analysis to message board trolling to threatening phone calls...they lost more than an argument. There are millionaires on this board thanks to that mistake made by the shorts.

 

 

If I'm not mistaken didn't Watsa sue that whole hedge fund cabal?  Did anything ever come of that lawsuit?  Really a travesty what Watsa had to go through from what I remember.

I haven't kept up w the lawsuit much. But it was the biggest thorn for SAC in his legal troubles. The day FFH filed that lawsuit, the cabal died. All of those millions started flowing towards the longs from that day in 2005. It was night and day, literally.