don’t cry for us short sellers, but please save your hatred for someone who deserves it

Last week, I wrote a bearish article on Tesla for Seeking Alpha–not the company, the stock. As I said in the piece (and an earlier blog post), I admire Elon Musk and I think Teslas are neat cars. I’ve even considered buying one. But the company’s stock is another story. The logic of paying more than $200 a share for a barely cash positive business with all sorts of very large challenges ahead of it seems, well, stretched to me. And yet, people keep on buying. The article came out Monday morning, West Coast time. By the end of the day, Tesla was up another eight bucks. A few days later, Tesla beat on its Q2 earnings and the stock started pushing against its all time highs again. Correction? What correction?

Even though I clearly stated in my piece that I have no positions in the company, long or short, and no plans to initiate any positions in the future, several commenters accused me of secretly shorting Tesla and trying to drag its share price down. Unfortunately, this sort of vitriol is common. Short sellers are about as popular as personal injury lawyers and IRS agents these days. In the eyes of most investors, we’re little more than greedy vultures looking to smear good companies so we can profit on their fall. This simplistic, black hat-versus-white hat understanding of the financial world might be comforting, but it’s a dangerous fantasy.

In reality, the people waving the white hats and whipping this bull market higher are the ones investors should really be fearing–or at least questioning.

I’m not going to lie, it’s been a tough time for the shorts in my portfolio. I’ve decided to stop writing about them in the future, but over the last year, I published articles on two companies I believed (and still believe) will eventually lose value: Intuitive Surgical and Dex Media. Contrary to popular belief, I did not write these articles to tank the stocks. In reality, publicizing my short ideas is bad for my returns. The more people wind up shorting a stock, the more my prime broker charges me for borrowing the shares I need to execute the investments. It’s called a negative rebate, and it is not cheap. Since 2010, my fund has paid out $10 million in these fees.

Worse still for my fund, despite ominous evidence of trouble ahead for both Dex Media and Intuitive Surgical (and in Dex’s case, a very real chance at bankruptcy), the stocks of both companies have gone up considerably since my articles on them came out. So much for big bad short sellers dragging down share prices. In Dex Media’s case in particular, the opposite has taken place. The stock has seen a number of rallies after pseudonymous authors posted positive pieces on the company.

Unlike me, these writers do not use their real names, and the only articles they have published on Seeking Alpha have involved, you guessed it, Dex Media. And yet, obviously, many readers have been willing to risk real money on their bullish predictions. For all I know, the writers in question sincerely believe that Dex Media’s stock is destined to double and triple (or more) in value, as they have claimed. (And for all I know, they might be proven correct, though I doubt it.) But it never ceases to amaze me–even after three decades of watching this dynamic play out over and over again–how many people are willing to buy stock in troubled or overvalued companies just because some self-styled expert says they should.

Everybody wants to find those rarest of rare commodities in the stock market: the comeback story or the next big thing. But the next Microsoft or Starbucks comes around every couple of decades and corporate phoenixes are about as rare as real phoenixes. Far more troubled or highly speculative businesses wind up going to zero than doubling or tripling. Short-sellers aren’t to blame for this reality. It’s just good old market capitalism at work. And yet, if you look at how stock buyers behave, you’d think that $2 dollar stocks routinely go to $50 or that exorbitantly priced stocks like Tesla frequently catch up to and surpass their inflated valuations. That simply isn’t the case, and the reason so many everyday investors get burned has nothing to do with short sellers. The real culprits are all those smiling optimists promising happy endings that almost never come true.


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