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July 28, 2020
A Warning To The Compounder Bros…
August 10, 2020

Stop Shorting “Project Zimbabwe”

I have spent a lot of time on this site speaking about “Project Zimbabwe” as this period is so poorly understood and if you get it wrong, you’ll get annihilated. I have also written about how it’s getting strange out there as stocks no longer seem to have floors or ceilings on valuations. The moves are increasingly sudden and random as the active manager community undergoes an extinction event and no one is left to take the other side. When you combine the two, it should become obvious that shorting is suicidal. Sure, there will be a lot of volatility. There may be moments to take on counter-trend shorts, but why bother? The rules have clearly changed. Besides “Project Zimbabwe” states that the market is going higher, much higher. The risk is that you’re not along for the ride, or worse, get caught in a short vortex and removed from the game.

Let me tell you a terrifying story. A buddy of mine was short Kodak Pharma (KODK – USA), except this was before it became a government subsidized, low ROIC producer of pharmaceutical inputs trading at stratospheric multiples on potential future revenue. Instead, this was back when KODK was an underfunded pension fund attached to a melting photography business. Why was my friend short? That doesn’t matter. KODK was part of a basket of over-leveraged shorts in various melting businesses. Here’s the important part; what happens when a 100bps position increases from $2 to $60 in a supernova orgy of retail market orders? You effectively lose a third of your fund. The result gets worse if you decided to sell a few more on the way up, as you refuse to believe the current price is possible. In 48-hours, you’re in a world of pain on a 100bps position that you never really cared for in the first place.

How many times in your career have you seen a dying business have a 30-bagger return overnight? Pretty much never. Suddenly, “Project Zimbabwe” has spawned an army of brain-dead retail traders who’ll chase anything in motion using market orders. The playing field has been dramatically altered, yet people are still playing like the old days. My friend will survive and prosper because he has hopefully learned to stop shorting. I learned this lesson for good with Tesla (TSLAQ – USA) and gave up the first second it became obvious that facts wouldn’t matter. Look at where Tesla is now. I have friends who stayed short and have been completely run over. When something goes up seven-fold, even a small position can take you out of the game. I don’t care how high your conviction is, it’s simply gotten too hard to short.

I know that many of you like to be contrarian and walk on the wild side. Please be careful with shorts. This market is different. Even 100bps can cost you your whole year or worse. The moves are sudden, fierce and illogical.

I like to fill this site with interesting thoughts on the market, but to have big winners, you have to survive the landmines of “Project Zimbabwe.” I hope my friend’s story has scared you sober. The big money will be made on the long side. Why even bother with the short side?

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Disclosure: Funds that I control wrote puts on KODK.