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David Chulak
David Chulak
Articles (77) 

The Long and Short of It: A Short History

September 01, 2013
“The average man doesn’t wish to be told that it is a bear or bull market. What he desires is to be told specifically which particular stock to buy or sell. He wants to get something for nothing. He does not wish to work. He doesn’t even wish to have to think.” -- Jesse Livermore

“To enjoy the advantages of a free market, one must have both buyers and sellers, both bulls and bears. A market without bears would be like a nation without a free press. There would be no one to criticize and restrain the false optimism that always leads to disaster.” -- Bernard Baruch

Just as you may have value investors and growth investors attracted to the same stock for different reasons, you will also find short sellers of various stripes differing on their reasons for applying a short strategy. Some will find the reason to short a particular stock quite compelling, while others find the reasons less than compelling and may ultimately choose to take a long position.

In current times, most recognize the names of David Einhorn, James Chanos, Bill Ackman and others whose names cover the Wall Street blogs and financial newspapers when they’ve decided to take a short position. But there are others from much earlier days, as far back as 1609.

Isaac Le Maire was a major stockholder in the Dutch East India Company. Having invested 85,000 guilders and being a major shareholder, Le Maire became disenchanted with the results, deciding that the company was not providing dividends or providing adequate return. He was also dissatisfied with the lack of information regarding his investment. Launching his own type of short sale, the Dutch became enraged and eventually issued the first ban on short selling.

Jesse Livermore made a fortune during the early 1900’s. Known as a trader, he made fortunes and lost fortunes, but did make a considerable amount of money short selling stocks. During the Panic of 1907, the economy was is such a desperate state, that J.P. Morgan personally approached Livermore, pleading that he might refrain from short selling. In fact, Livermore went on to make over $3 million in one day of trading. He was wise enough to short the market prior to the 1929 crash, allowing himself to preserve $100 million of capital when the depression hit full force. Definitely a trader, he urged investors to have a buy and hold strategy during bull markets, but he was mostly a short term trader. A fascinating study, Livermore, unfortunately took his life.

“If you believe you or anyone else has a system that can predict the future of the stock market, the joke is on you.” -- Ralph Wanger (Acorn Fund)

Bernard Baruch, a famous financier and friend of President Woodrow Wilson and Franklin Roosevelt, was also a trader that had experienced much success in short selling stocks. Having been called to Washington D.C. to explain before Congress why he was shorting the fast moving Brooklyn Rapid Transport Company, Baruch explained, “Bears can only make money if the bulls push up stocks to where they are overpriced and unsound”. Baruch was able to skate around several panics aside from the Great Depression, getting out early and able to preserve most of his capital.

“Every man has a right to his opinion, but no man has a right to be wrong in his facts.” -- Bernard Baruch

Know your own failings, passions and prejudices so that you can separate them from what you see.” -- Bernard Baruch

David Einhorn has typically taken both long and short positions, creating a long/short portfolio. Not particularly designed as a hedge, because he intends to make money on all his investments, the shorts act as partial hedges for his portfolio. Einhorn emphasizes that he does not short due to just overvaluation, obviously because there are many stocks that can seemingly maintain that overvaluation for a very long time. He will short an overvalued stock with a deteriorating forecast.

Why I find these quotes and ideas so interesting and important is that we live in a time in which most seem less likely to entertain ideas counter to their own. Whether its politics, economics or stocks, people are consumed with their own biases and seemingly unable to look at opposing viewpoints objectively for what they are. Even if they will read it, will they consider it…..really consider it? Name calling is not required. If a company’s revenue has declined, along with declining margins and is shorted and the view of another respected investor views the same stock as distressed but with the firm knowledge that it will come back with strong revenue and better margins, who is right? They both could be ultimately. The short seller may be correct in the shorter term, though a stock can decline a very long ways and over a very long period. The point is that confirmatory bias is a horrible disease and we should all try to view opposing views objectively, taking them into account, using the items before you as an attempt to “kill the stock” or even damage it severely. Ultimately, don’t take it personal.

Coming up: Reasons For Shorting

About the author:

David Chulak
David Chulak is a private investor that uses a value approach to investing in the styles of Graham & Dodd and Warren Buffet. Looks for that margin of safety in an effort to preserve capital and attempts to guard against short term market fluctuations by having clear rules laid down in advance for selling an equity. Likes to visit the company's where his investments are in order to understand the business better.

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