Step Back. Review. Before You Believe In What A 'Short Seller Is Selling You 11 comments

Mar 7, 2015 9:43 AM

I had the unfortunate circumstance to run into two situations lately that had a direct affect on stocks that I own in my portfolio. Of course this isn’t the first time it has happened, won’t be the last but these two had such an impact that I though it best to put my thoughts on paper. Primarily to use as a reminder to myself that when this situation develops in the future, I have these thoughts to go back to and ponder.

The first situation was with GILD. It surely is a prime example of what develops when there is controversy in a stock. GILD has been a solid market performer now for quite some time. On Dec. 22nd, 2014 a headline came out that many seized on a as major negative to the company. In two trading days the shares went from $108 to an intraday low of $86, a 20% drop. We will see later that once investors came to their senses. the fear subsided, and saner heads prevailed, how the headline was used against them.

A short seller, especially a trader. uses a headline. negativity. technical breakdown or all three to their advantage to spin ‘their story. More times than not they simply spin the story to convince themselves that its the proper trade. Remember, Without conviction one is lost. They look to pounce on the fear of investors.

Let’s be perfectly clear, the trader, short seller in this case, has no time for due diligence, no time for research, it’s a simple task for them to take the event, spin the negativity, use the fear factor and run with it. While there may be nothing wrong with that on the surface, as they, like everyone else are trying to make money in the markets, make no mistake, they will do whatever it takes to accomplish that.

But it’s what lies underneath that many unsuspecting individuals should be aware of. And in my view use that to strip them of their self ordained power that they are employing.

In the case of GILD many authors here on SA. research analysts in various Financial firms, Independent analysts and commentators wrote countless articles on GILD. In this example, I’ll put them on one side of the scale as we weigh the arguments. They put forth reams of info, data to support their case. I suspect weeks if not months of research over a considerable period of time, gathered from various sources. That does NOT mean it’s right but it does show the research that went into the conclusion. One has a choice before adding a stock to their portfolio — Buy into it or leave it.

On the other side of the scale we have the short seller (trader) who comes along and ordains themselves the expert because they need to spin the story in their favor.

Investing in equities is all about putting the odds. the risk/reward in your favor.

I suggest that in the process of forming an opinion on whether a stock is a good investment or not the scales tip heavily in favor of the party/parties that put the time & effort to compile data and put it into their thesis.

An investor will find that OVER TIME using the tried and true, due diligence, research approach puts the odds in the investors favor -and in turn slants the risk/reward to their side as well.

Simply put, You have the words of a researcher vs the words of a short seller that has no time to do any due diligence. That is not a knock or a put down — its reality. By their ‘trading nature, they have to act and act quickly. there is no time for extensive research. It’s their objective to take this headline and run .

That is proved time and time again as the self ordained experts spin their story the very same day as the headline or the technical breakdown. Many had no comment and weren’t around before the headline and they are gone now, a true testament to these words.

Going back to that period in time with GILD. my message to everyone was simply to weigh the evidence. The negative spin coming from the short sellers would be a temporary event and in the end they would not be around, for the every one of the reasons I have stated here.

Let’s review what eventually happened, the same folks that attacked the authors and their bullish thesis at the time of the headlines are now no longer on the scene as these same authors have published many more positive articles after that event, but they (shorts) have, as predicted, disappeared.

Therefore, there can never be any competition when weighing the evidence presented by a short seller vs an investor. GILD is but one example. Since the saner heads prevailed, the stock has made it’s way back to the $105 level, leaving anyone listening to the fear mongers questioning themselves as to why they may have sold at the lows.

And then there is Alibaba..

BABA has seen loads of negativity, headlines everywhere and now the key for the short seller, a technical breakdown that brings another headline. And on the day of the breakdown every short seller has come out of the woods and are now experts on BABA.

Not only do they note the technical breakdown, which of course is real, and the only data point that is material to the conversation for them, they ordain themselves again as the fundamental experts on every Chinese based company. China itself, and all that goes on there..

Wild suggestions that investors in BABA have done no research, have invested in a company with no thought process as if they put money in the stock, while having no idea what they have bought.

How bold and ironic, as it also implies their one day headline grabbing approach to research, automatically trumps the weeks, perhaps months of research an investor has put into this situation.

Now that doesn’t always mean and therefore imply that all research is correct. Anyone holding BABA now doesn’t know how their position will eventually turn out. However, In my view the scales are tipped in their favor as opposed to the short seller trader approach to due diligence. Which is non existent.

Short sellers (traders) want to make money, that’s ok, What is wrong is suggesting the longs have no clue, and then pontificating on how their expert thesis has to be the correct one. And selling that limited research thesis to everyone. using fear’ to their advantage..

Everyone can make their own decision. I simply suggest to put the odds in your favor and weigh what is being presented.

More often than not the same experts that came forth on that technical break or headline event won’t be around as they look for the next headline.

There is and can be no comparison or competition when it comes to short selling trading approach vs Investing.

What I presented here should not be extrapolated to include the research firms, hedge funds,and individual money managers who do invest time and energy in their presentations of individual stocks or sectors in there desire to take a ‘short position.

They are far different and frankly there can be no comparison to the Short Selling trader that I depicted in this missive.

The examples that I used here happen more often than not, so I will repeat

Step Back. Review. Before You Believe In What

A ‘short Seller Is Selling You