Short Sellers - The Anti-heroes of Financial Market

[Music] the video game retailer skyrocketed more than 380 percent last week on the back of a reddit fueled effort to squeeze the hedge funds that had sold the stock short [Music] now they don't target just any stocks they go after the ones that are heavily shorted in order to come up with a short squeeze [Music] they'll come up with a thesis all in display and then run them and run them until the shorts have to cover their positions spurring still one more leg higher i think that what you're seeing is um essentially a push back against the establishment in a really important way but take a look at it now since the highs on thursday gamestop stock has lost 81 percent of its value [Music] that's an obvious question isn't it of course short sellers are the bad guys aren't they with a recent game stock craze it became obvious to me that there's misunderstanding about short sellers our economy is composed of many interconnected parts that even the smartest people can never truly understand it but one thing is certain without short sellers our financial system will be much less efficient in this episode we'll go back in time and learn how short selling was first invented we will study all the skillful ways that short sellers like sorrows and ironhorn used to generate returns eventually we may come to understand the important role they play in the financial market [Music] [Music] a fleet of eight ships under captain jacob van neck was the first dutch ships to reach the spice islands of indonesia their prime mission was to import cheaper spices from their colonies the fleet returned within a year and made a whopping 400 profit [Music] this is the beginning of the dutch east india company which was the first publicly traded company in history their largest shareholder was isaac lamar revisionary entrepreneur who made his fortune in the grocery business but after a failed power struggle he was thrown out of the company field by vengeance isaiah lamar set out to destroy the dutch east india company in 1609 he founded a secret company with a purpose to trade in dutch east india company shares lamar saw that the rights of french competitors would cost a shared price to drop he realized there was a way to profit from this he invented short selling just like how you borrow money from the banks you can also borrow stocks from a brokerage firm once you borrow the shares you can sell them to other market participants after a while you buy them back and hopefully at a lower price the difference is the profit you make this is the very first recorded short selling in history the key is to remember that just like cash stocks can be borrowed if someone wants to lend them to you since many mutual funds hold stocks for the long term they're very willing to let them out for a fee in 1929 president herbert hoover blamed the short sellers for the market crash small groups in the business world purpose to profit from depreciation of securities and commodities they are equally condemned by our public and business opinion they are by no means helpful to the nation well if everybody's losing money and there's somebody at that time making a lot of money it's going to be natural to feel a little bit of resentment towards them what many people don't understand is that short sellers can play the role of watch docs in many cases they could expose overvalued or even fraudulent companies you see way more stocks that are dramatically overvalued in your career than you will see stocks that are dramatically undervalued it's the nature of securities markets to occasionally promote various things to the sky so that securities will frequently sell for five or ten times what they're worth and they will very very sell themselves for 20 or 10 percent of what they're worth so therefore you see these much greater discrepancies between price and value when a short seller bet against a stock it always costs a lot of backlash because they make a profit when the stock goes down but they're never the root cause it's always the port fundamentals that eventually lead to the drop of a company's stock price even so a great number of people engage in short selling not to bet against the price but as a way to hedge in 1949 while working for the fortune magazine journalist alfred winslow jones was secretly preparing to launch his own investment company he had a groundbreaking idea he discovered by using short selling he could create what's called a market neutral portfolio he bought as many stocks as is so short so the market impact will be neutralized in the portfolio the value of the portfolio then would not be based on the direction of the market but whether the manager had picked the right stocks joe's chose to take 20 profits as his compensation he avoided regulations by minimizing the number of investors to be under 100 this became the first hedge fund in history in this case short selling was not used to bet against the stock but as a way to hatch or an insurance therefore if we ban short selling it will decrease the ability for many funds to hatch the risk which will no doubt cause a lot of volatility in the market hedge fund became a tool that many wealthy people use to take out risky investments like short selling they bet against the shared price of any companies they deem to be overvalued or fraudulent some even took it further by betting against an entire country when british government decided to raise interest rates in order to stop the pressure on sterling i said to my partner now this is the wrong policy for the british government in the in the long term they cannot sustain this therefore you can sell any amount of sterling because it cannot be maintained so i said go for the jugular go for the kill sorrows was a masterful short seller instead of simply betting against the currency he placed a simultaneous bets on interest rates and securities that will be affected by the currency realignment to pull it off soros short about seven billion dollars worth of sterling at the same time he bought about six billion dollars worth of deutsche mark and some french franc as well soros bought about 500 million dollars worth of british stocks as a parallel play because equities often rise after a currency devaluation he didn't stop there he also bought german and french bonds while shorting those countries equities because of strong credit sorry was able to put down only one billion dollars as a collateral so he was leveraged roughly one to ten which is very risky he must have really believed that he was right as predicted sorrows made one billion dollars for this trade he was called the man who broke the bank of england making him one of the most feared and most hated currency speculators in the world although soros didn't act alone it was not less concerning that a small group of short sellers could literally destroy a country's currency i was only one of many market participants that was selling sterling so i did not really break the bank of england because if there weren't so many other people doing it it wouldn't have happened i can only succeed in making money if i guess the direction of the market right the authorities like to blame the speculators but actually it was their mistake that the speculators recognized that is why as a speculator i was successful because i discovered the mistake of the authorities of course they don't like to admit it while currency is speculating to yield high profits not everyone can do it most investors simply can't get high enough leverage to make a reasonable return most dedicated short sellers just focus on the good old stock picking except they pick bet companies to short the research should be the same the work you do should be the same but you have to basically take your positions in the face of almost always overwhelming uh uh criticism of it from the other side you see look it's not always easy even if you've been doing it for a long time jim channels is one of the most well known short sellers of our time [Music] after earning a degree in economics from yale he became an equity analyst for gale force securities in 1982 and it was there that i sort of stumbled on my first short idea which was baldwin united and bald united shortly after we got involved filed for bankruptcy and was the largest financial bankruptcy in the u.s up until that time and that got me thinking about the whole idea of whether or not there was a business to be made in fundamentally analyzing short ideas after years of working as analysts channels founded kainikos in 1985 with 16 million dollars the hedge fund was designed to focus on short selling his reasoning is pretty solid because he saw that there are more companies that will eventually go bankrupt than becoming successful one of these companies was enron arguably the biggest corporate fraud in history channel was among the first short sellers to successfully predict the fall of aaron corp before it fell for bankruptcy when we started going through the documents just things just started completely jumping off the page of their 10ks and 10 qs not least of which was these odd uh offshore partnerships in which a senior executive of the company was the general partner and they existed to primarily do business with enron we put the position on at about 60 it skyrocketed to 80 in the course in a month or two and then rolled over and then never you know pretty much uh went straight down with a few short rallies in the succeeding 11 months and in the world of short selling you know it probably doesn't get a whole lot easier than that what is difficult about short selling is not necessarily just the analysis it has to do more with psychology and market timing and all i can say is it hasn't been for me it is a very very tough business because of the fact that you face unlimited losses and because of the fact that people that have overvalued stocks very overvalued stocks are frequently on some scale between promoter and crook it should be evident by now that the market is not as efficient but it's still very rare to see everyone to be wrong at the same time but it did happen in 2008 brothers have fallen 12 in the last week accelerated by the critical words of david einhorn at the age of 28 david ironhorn was ready to start his own hedge fund but we felt that the the way the industry is set up there's very low barriers to entry and we felt that even with a small amount of money we could if we could do a good job with it we could make you know a good enough uh income stream that we would have a you know have a satisfactory life but he had no money and no track record it was extremely difficult to raise capital until he realized he had wealthy parents he raised more than half a million dollars from his parents and eventually got to a total of nine hundred thousand dollars as a seat money in 1996 green light capital was born during his early years great light capital made remarkable returns by shorting weak financial firms generally speaking we don't short companies on what we think to be valuation we've always insisted on over-evaluation combined with some kind of deterioration in 2008 such a company was lehman brothers and so i called up and i confronted lehman's management with the various discrepancies and they haven't been able to provide um credible answers so let's go through a couple of those ironhorn was the one of the few subaru ones in a drunken party it turned out to be one of the best trades of all time these short sellers are generally called contrarians they take conventional wisdom and ask what if the opposite is true what if the sun is powered by coals what if tesla is a fraud it is like that mathematical reasoning called proof by contradiction you start by assuming the opposite is true and see if it can arrive at some reasonable conclusion in the case of gamestop there were so many short sellers what if they were wrong [Music] stock picking is perhaps the most common and oldest activity in finance [Music] in the world of stock pickers it is near impossible to distinguish between skills and luck [Music] but once in a while a hedge fund comes along scoring consistent height returns that defies luck steve cohen's sac was one of those hedge funds his secret was insider information allegedly at the end of day to have a real edge as a stock picker it all comes down to information the one that you have that others don't everything else can be pretty much explained by luck known for his audacious bets and crazy returns gate plotkin was a superstar trader at sac well uh with mr plotkin it seems like really really strong stock picking um he's had experience managing money for a long period of time he was at sac and then point 72 since 2006. after sac was dismantled by the regulators kit plot can start his own hedge fund melvin capital with a focus on short selling with one billion dollars asset under management immediately the fund started an astonishing winning streak went to start his own firm so this was this was actually the 47 percent number is particularly impressive because it was his first full year managing money so that you know right off the bat not only did he raise quite a bit of money but he came out with incredible performance i suspect that there's a high expected return for short sellers because the amount of risk they take after many years of exceptional performance it all came crashing down when melvin capital became the target of a short squeeze the stock market will be brought down by the wild actions in stocks late game stock that's that retailer place game you go in you buy video games in the you know you buy the hardware uh this gamestop is really something we must talk about because it's been bid up higher and higher by enthusiastic traders on january 22nd 2021 approximately 140 percent of gamestop's public shares have been so short this means that some of the shortest shares have been rented over and over again in this case the consensus is that gamestop is a bad company what if they were wrong this is a question that many retail investors ask on subreddit wall street bets they believed the company was being significantly undervalued now they've got a community of very rapid investors who will choose individual stocks and then run them up as a group with commentary about how much they love them with such a large amount of shares being shorted they could trigger a short squeeze by driving up the price to the poi where short sellers had to encapsulate and cover their positions as a large loss now i know what it's like to get caught on the wrong side of a short squeeze the only thing a short seller can really do when targeting is to throw in the towel no point in trying to fight it you just have to cover your short meaning buy back the stock to close out position before before you run out of money [Music] the video game retailer skyrocketed more than 380 percent last week on the back of a reddit fueled effort to squeeze the hedge funds that had sold the stock short but on january 28th robin hood put restrictions on gamestop and many similar stocks this action infuriated retail investors and the public i've seen it on twitter already as you point out carl people upset at the idea that they can no longer buy and it will have an impact by the end of january 2021 melvin capital had a loss of 53 of his total investments this is what happens when you're a short seller you face virtually unlimited downside but this type of targeted coordinated attack by the retail investors is unprecedented this incident escalated to a class warfare [Music] by and large the free market system has brought prosperity to the country who practiced it those that tried a different system have all failed in the free market system each participant is incentivized and given the freedom to take risks and make money for themselves this should include short sellers short sellers are the anti-heroes of the financial market like everyone else they're driven by their own self-interest but by and large their actions have made the market much more efficient a stock market just a place where people get together trying to guess the value for a company people should be allowed to bet on both directions in the end the real bad guys are not the short sellers or the retail investors it is ignorance and wishful thinking as they're all part of human nature as long as the free market exists there will always be boom and bust [Music] you

Channel: FINAiUS

Views: 240,479

Keywords: #shortselling

Id: G-L8MAC3RXc

Length: 22min 7sec (1327 seconds)

Published: Mon Mar 01 2021

Reddit Comments

[u/[deleted]]

In other words, criminals.