Lately, I’ve been organizing all my current and potential short positions into a table (see below). The short positions I am most excited about go into Tier 1.
I’ve found it incredibly useful to start ranking my short ideas against each other and into tiers. The short positions in the top tier generally have one or both of the following characteristics:
- There is a huge amount of fraud involved.
- The business will likely bleed a lot of cash in the future.
Ranking my ideas should help me short my best ideas instead of wasting margin on my second-rate and third-rate ideas. However, I honestly don’t have the discipline to do this for my entire short portfolio. I should probably cover my Imax and Pretium shorts because I think there are better shorts out there.
The usefulness of looking at portfolios
By looking at the table above, you should be able to get a sense of my abilities (or lack thereof!) as a short seller. Perhaps you really understand a particular sector listed in the table above. If so, you could form an opinion as to whether or not my rankings are sensible within that sector. You should be able to get a sense of some popular trades that I am not doing:
- I don’t think that non-Chinese Web 2.0 is that bad. I think that Facebook, Amazon, and Netflix are high quality companies with good/excellent management teams. The level of fraud and scumbaggery is rather low compared to mining, oil and gas, pharma, and Chinese reverse mergers.
- Generally no macro top-down bets, except against solar.
- No bets against the Chinese economy (e.g. Caterpillar, steel, iron ore, etc.).
- No bets against investment banks.
- No pairs trading or attempts to hedge my longs.
I also believe that portfolios are an expression of a person’s personality and investing style. You should see some paranoia about shorting common stock given the diversification. My starting position sizes are usually around 0.2-1%.
My most important short positions
Rightly or wrongly, I have a massive position in this. If YONG goes to 0 my portfolio will go up several times. My position is currently down due to mark-to-market losses. I don’t think that mark-to-market is relevant right now. If the YONG merger closes, my puts will go to 0. Otherwise, my puts will probably go up in value at least several times (that’s what happened when the merger failed the first time around).
I had no idea that I would be able to buy $7 2016 puts for 5 cents. The theoretical maximum upside is 140X before commissions. My average entry price is higher than 5 cents.
RH and GME puts
I have more money in GME puts than RH puts. Ideally, it should be the other way around since RH is clearly more flawed than GME.
Brief commentary on some positions
NQ puts: I covered my puts after the stock dropped on May 15. The puts were really expensive (high implied volatility) when I bought them and still expensive when I sold them. In general, I dislike expensive puts because it can be easy to lose money on the position if things don’t work out right away. The puts went up around 4 times, though this was a very small position for me.
Homebuilders: I covered CHCI because (A) the borrow became expensive and (B) I wanted to raise liquidity. The other homebuilding shorts (KBH and HOV) were closed to free up margin for better short ideas. Overall, I lost money shorting homebuilders.
CROX*: Covered this position at a loss to short other stocks.
MY*, CGA*: I’m waiting for these to rally before shorting them again.
SFXE*: I have a feeling that many people don’t understand the true purpose of the CEO’s nominee agreements. The writeup on VIC has a short thesis with an overview of the business’ economics. I have no position at the moment.
TPLM: The older 10-Ks have some details on this company paying for stock promotion. Pinkinvesting.com summarizes some of their promoters.
Promotional stocks: I’m pretty comfortable with this category. Some of the stocks in this category have awful cash flow and are paying for stock promotion.
Pharma: Pharma is NOT within my circle of competence. For example, I did a writeup on HART. I only found out later that both the parent (HBIO) and the spinoff (HART) both turned into highly promotional stocks.
So why am I shorting pharma? It’s because the level of paid stock promotion, excessive G&A and the valuations are rather high.
JOE, CRM, POT, GA puts: Knowing what I know now, I probably would not have put on these illiquid positions.