The Art of Short Selling - Short Sellers

Robert Wilson (profiled by John Train in The Money Masters) is the acknowledged grandfather of the short selling hedge fund managers.

Julian Robertson used a fundamental approach based on prodigious research and a long term horizon. Valuation bets on price alone make bad short sales. There must be either a fundamental change in the outlook or a major misconception by the stock buying public.

Alex Porter (Porter, Felleman) - the trick is to be short the stocks you can stay short without pain or expense. He likes shorts where mgmt doesn't own much stock, management is not realistic or forthright, and where the company has a fatal balance sheet flaw.

Joe DiMenna (Zweig Funds) - Short frauds, earnings disappointments, hyped stocks, industry themes where macro forces are negative and deteriorating balance sheets. Try to determine a catalyst. Don't short stocks with strong relative strength and earnings momentum.

Short sellers tend to be odd people. Most are ambitious, driven, antisocial and singleminded. They are contrarian by nature and like to win against the odds. They often have a chip on their shoulder.

The Feshbachs looked for terminal shorts: (1) stock price overvalued at least by 2x's reasonable valuation, (2) A fundamental problem at the company, (3) A weak financial condition, (4) Weak or crooked management. They perceived themselves as hype detectors. To sell short you have to be certain that you see an important factor that other people do not see. You look for something that is obviously misperceived, obviously important, and obviously detrimental. The most important charater trait of a short seller is the ability to remain analytical when other people panic.

For McBear management is rarely the target, unless there is fraud. It is generally Wall St that has engineered the ascent of the stock.

Chanos' specialty is solving complex financial puzzles. He likes to short stocks with secular problems where he can make a "reasonably strong argument, based on the valuaton of the business, that the equity value of the enterprise is $0." Chanos does not visit companies. Likes to focus on return on invested capital as a key financial indicator. When the accounting gets murky people tend to shy away from rigorous analysis and rely on management and just take earnings per share at face value. Therein lies the opportunity.