Research and Gathering Information
Background of the executives matter right who’s running the company and what’s their history.
You either have found a new way to make a wheel or you haven’t and if you haven’t then how are you supposedly doing so much better than your peers in the market.
Accounting is something you look at very strongly now because this is really crept into the market over last 20 years but you know this word adjusted, earning per share, margins all adjusted means is a kind of set of parameters that management has put around what their earnings per share or their margin or the revenue and its all bullshit your earnings per share are your earnings per share and they kind of match their bonus to whatever’s their adjusted matrix and it’s starting to kind of hit the zeitgeist is everybody’s taking these huge pay-outs from stock buybacks and then they have these stock options and they cash out hundreds of millions of dollars and most of their bonuses are based on adjusted metrics and that kind of incentivizes management to if not cross the line really straddle the line of fraud or creative accounting or accounting shenanigans whatever you want to call it and really lever their companies to a position where any kind of change in the market could send it over the edge.
When management starts to base their bonuses on acquisitions and the bigger the acquisition the bigger the bonus.
Long shareholders do not have to do if you’re long a company and you have a positive view that is wrong then you are just overly optimistic, if you have a negative view that’s wrong on the short side then people think you’re committing fraud or you’re some kind of short selling cabal it’s ridiculous. We spend months and sometimes years looking at a company quarter after quarter seeing the trend seeing how their accounting treatments change do, they start to revalue their intangible assets and things of that nature so it’s very difficult.
We have a better understanding of a company before we actually kind of publish a short thesis than the auditors do and they have access to the management.
Being a customer helps so if you want to understand what a company does you have to be serviced by that company or if you can’t be a customer talk to a customer and understand what their relationship is with that company so we do get into supply chain we do get their customers sometimes we find like you know especially china related that customer doesn’t exist or that’s a related party a brother or sister and its around tripping revenue but that definitely helps.
Investors don’t really realize that when they’re valuing a company they’ll talk to management, CFO and CEOs and will feel however they feel about that conversation when they’re done but they would probably have a better understanding if they talk to top two or three customers and hey should be able to do that or supplier why would they be able to talk to their suppliers as well find their one, two or three suppliers and see how that suppliers feels about their customer about that relationship.
Short Selling Risks
As far as an investment thesis goes, you’re only right when the rest of the markets agrees with you and very short so in this situation you have hedges and you have a squeal point and you have to manage that risk.
