Tempting as it is from time to time, it is very difficult to make money consistently by selling short. William Ackman, famous hedge fund manager and head of Pershing Square, his firm, is the latest example of how difficult it is. Ackman recently covered his short position that he has had for 5 years in Herbalife. A recent Wall Street Journal article revealed that Ackman originally shorted Herbalife in 2012 at about $47/share. Herbalife traded at $92 when the article was published. When you sell something at $47 and then buy it back at $92, that’s not good. The Article didn’t conjecture as to how much money Ackman lost, but “$1 Billion Bet” is mentioned, so the loss was huge.
Ackman is not the only short seller to have fallen on hard times. David Einhorn of Greenlight Capital, who wrote a book on a great short deal he did, has also had a tough go, as his fund has fallen by several Billion dollars in recent years. Same with John Paulson, who famously made the bulk of his fortune by shorting the mortgage market during the mid-2000’s.
It takes a certain personality type to be a good short-seller. Pessimistic, negative, curmudgeonly, and cranky are adjectives that come to mind. Maybe skeptical is another. Short-sellers don’t like any new innovation that looks to be over-hyped or overvalued. Do you know anyone like that? Maybe you are like that? Are you or they like that all of the time? That’s how you need to be in order to be a good short-seller. You know, the type that 20 years ago said that the Internet would never amount to anything. Or the type that has said Amazon stock is always overvalued because it doesn’t generate positive earnings, as it has risen to $1,500/share. Currently, you have another famous shortie, Jim Chanos, saying that Bitcoin is worth $0.
Have you ever encountered a company or a business and thought, “This company is terrible. It’s a short!” The next time you do that, if you don’t actually short the stock, write it down and note the stock price at that time. Then, one year later, check to see if you were right. Most likely, though maybe the company didn’t knock it out of the park, it probably didn’t go down. For instance, for the past several years I have thought Restoration Hardware (RH) has been missing the mark. We get their giant catalogs, beautifully photographed, in the mail a couple times per year. Who sends out catalogs in the mail, especially has huge as theirs are, in this Internet age? RH has other problematic issues as well, in my opinion. Well, I have been wrong. RH peaked at over $100/share in January 2018 before falling back a bit. Perhaps it hasn’t matched the performance of Amazon, but RH has at least gone up. Glad I never actually shorted the stock.
It is also difficult to make money shorting market indexes, such as the S&P 500 Index. Put simply, there is a lot more investor money out there betting that the market will go up than there is betting that the market will go down. For instance, everyone’s IRA’s or 401K’s are invested in Long funds, meaning they buy stocks thinking they will go up. You may be skeptical about the market’s future potential because you read that the market’s overall P/E ratio is higher now than at any time since the early or mid-2000’s, but there is still a lot of upward pressure on the market.
If you don’t like a company, or even an entire market situation, rather than to sell it short, it is better to avoid it and to invest your money in other asset classes. For instance, instead of shorting the market, keep your money in cash, or put it into bonds or even in the bank. At least you won’t lose money that way if you are wrong. If you short something and you are wrong, you can lose a lot. Keep your assets in a safe place and you won’t get burned.