There is a saying in the corporate treasury world that when everyone is the same way round, it is time to change your position. It means that when a view of the market is virtually unanimous, it is probably wrong. A view is an assumption, and assumptions can be dangerous, particularly when they are not recognised as such. You may not believe the sole person who offers an alternative opinion, but it is useful to at least consider that opinion.
Short-sellers are often demonised as the bad guys of capitalism, probably because they make a killing when others are losing money big-time, but they are also useful in challenging the conventional wisdom. Short-sellers borrow shares and then sell them, hoping to buy them back later for less, returning them to the lender, and pocketing the profit. And they can only really make money this way when the rest of the market has a view that is different to theirs.
Short-seller Jim Chanos made a fortune predicting the downfall of Enron twenty years ago and has been referred to as the “Darth Vader of Wall Street”. He recently made around $100m by shorting the German Fintech company Wirecard that filed for bankruptcy after admitting it “probably” did not have the €1.9bn in cash that its accounts said it had. His simple method is to really understand a company’s business model and then figure out if its financial statements reflect that model – if not, then something is wrong. In what is now a “post-truth” world with attitudes like “fake it until you make it”, it is easier for companies to befuddle investors and regulators and to report in a way that is overly optimistic.
Tesla, the electric car maker founded by Elon Musk, recently became the world’s most valuable car company, overtaking Toyota. Chanos has been shorting Tesla for five years during which its shares have increased by a factor of six, contrary to his predictions. Nevertheless, he has not altered his view of the company. He points out that Tesla is unprofitable, is burdened by debt, faces increasing competition, and uses aggressive accounting.
Time will tell if it is Chanos or Musk (and the market in general) that is right. But whether it is an investment in a high-flying company or just a project for change within a company, it is worth considering the views of everyone, giving weight to both the promoters and the detractors, or you may get it badly wrong…
Data Source:Financial Times “Lunch with the FT”, 25 July 2020