Reflections of a Short Seller

In the Age of "Roaring Kitties"

Disclaimer: All the content in this post represents the author’s sole opinion, and should not be construed as investment advise in one way or another. It is more like a monologue in which the author reflects on his experiences of being a short-seller, and the author may well be wrong.

If you wonder why GameStop went up 200% in the last two trading sessions, well, “Roaring Kitty” is back!

GameStop and AMC are not strangers to the short-seller’s community, and they’re probably even more popular among the Wall Street Bets and other momentum-chasing retail speculators, made famous by the movie “Dumb Money”.

There are usually two camps of investors when facing an irrational surge of security prices — those who rush to embrace them, and those who detest such asininities and decide to teach the “dumb money” a lesson. Back in 2021, I belong to the second camp. But before I start with my stories of short-selling, allow me to introduce the GOAT (greatest of all time) short-seller — Prof. C.

Prof. C

Prof. C teaches one course per semester at two prominent institutions in the US, and is widely acclaimed as the GOAT short-seller. He has betted against some of the highest profile flops in the equity market, ranging from Enron to Lehman Brothers, from Valeant Pharmaceuticals to Beyond Meat.

When Covid started in 2020, I had a student going to Yale University as an MBA, and when he asked me which course he should take, I did not hesitate a second — “Take Prof. C’s course, that will change your life!” In return for my advice, my student secretly passed along the Zoom meeting link, such that I was able to sneak into Prof. C’s online class and listen to his words of wisdom. Before the semester even started, I already finished reading every single item on his curriculum — perhaps safe to say that I was the most dedicated and diligent “student” in that cohort. The following three books are my favorite, and I read them twice each.

Prof. C has encyclopedic knowledge, and perhaps no one in the whole wild world understands the subject of “Financial Fraud” better than him. He also aptly dubbed our era “the Golden Age of Fraud”. In the three books above, my favorite would be “The Demon-Haunted World” — it showcased to the readers how human minds can stubbornly resist the reality, and chose to believe in falsehoods and mirages that stand in stark contrast to clearly presented numbers and/or facts suggesting otherwise — it helped us understand, in a succinct manner, how could companies like AMC trade up to a $35 billion market cap.

I was so enamored by Prof. C’s remarkable intellectual capacity and profound insight, that I took on a crusade on my own to begin systematic, fundamentals-driven short-selling. It was like I relived my undergraduate career back at Cornell, where I studied a course named Modern Philosophy — my classmates and I stood in awe at Friedrich Nietzsche’s marvelous observations, that when our professor asked us who was our favorite philosopher by the end of the semester, everyone shouted, “Nietzsche”!!

GSX Tech Edu

One of my early targets was a company called GSX Tech Edu. As the owner of a small education consultancy business in China myself, I have a close connection in Beijing, a famed entrepreneur in the same space, who personally participated in “payment farming” (刷单) for GSX. Muddy Water’s report thoroughly exposed how tens of “students” would use the same IP address and log into a class within a 1-second window, and I personally invited myself into multiple WeChat groups organized by GSX Tech Edu. I tried to add the members in the groups and found few of them are real. The tutors who I also added have their WeChat Moments filled with posts looking for “unwanted WeChat accounts”, with a clear intention of using these fake accounts to create a facade of a large customer-base.

What I did not know, was that this stock was completely manipulated.

I started shorting the business at $75/share, and it just kept going up. Muddy Water was so frightened by the relentless upward momentum that they hired a professional trader to identify “short squeezes” to hack out and protect themselves. As a matter of fact, every time there are new evidences coming out that indicate this company is a fraud, it will go up more — the trader(s) who engineered the squeeze gave a big middle finger to whoever doubted this company’s financial results.

Watching the spectacle unfold in front of me, I got so pissed that I started openly attack this stock.

A post that I wrote, which I juxtaposed Xiangdong Chen (陈向东), the Chairman of GSX Tech Edu with poop, quickly became viral and garnered more than a million views. The company’s IR team, which closely monitors all major equity platforms, promptly reported and deleted my article. Furious, I wrote another follow-up piece with essentially the same content but without the juxtaposition, and this follow-up piece gathered another 600,000 views — apparently GSX Tech Edu was a real battleground stock!

GSX went all the way up to an intra-day high of $141.78 — in Chinese, it means, “if you want me die, then let’s die together”. Countless short-sellers lost their shirts, and I had to convert part of my sold calls into put options.

What can’t go on forever will ultimately stop. Now we all know who was behind the absolutely insane price appreciation.

On its way down, I made some money — but compared to the psychological pain and the tremendous amount of time consumed, it was probably not worth it at all. However, I was too young to give up.

AMC Entertainment

That’s right, apes together strong.

In May 2021, Wanda (万达), a Chinese real estate giant who previously invested in AMC and was severely under the water, miraculously had the opportunity of selling out their entire stake at a minor profit as AMC appreciated from $2/share to $12/share in one of the most inexplicable short-squeezes in the capitalist history. After Wanda sold out, the float substantially increased, and the “apes” swooped in.

I started shorting the stock at ~$114/share after the reverse split, but I picked the time wrong — I sold a bunch of calls with insane IV (implied volatilities) on a birthday trip for my wife. Suffice to say that I did not enjoy the trip, and my wife was a bit mad at me.

Of course, ultimately the stock completely cratered, but keep this in mind — this meme stock destroyed a birthday trip for my household.

Tesla

One thing I used to tell my peers and colleagues with pride was — I was wrong on Tesla and it went against me 10x, and I managed to increase my net worth by 2% through shorting this name, trading in and out, leveraging various options strategies.

This is another vexing stock that some of the best short-sellers were not only brutally wounded (including Prof. C, both monetarily and reputation-wise) but also hilariously humiliated — remember shorters’ shorts?

By the end of 2021, Tesla was a trillion dollar stock. Again, a squeeze destroyed my vacation — my wife and I were having our Christmas break on a beach in Florida, and I had to operate my accounts, trading Tesla as it squeezed monumentally against the bears. I pinpointed the price point on Dec 23rd, 2021 for you to see — what a Christmas gift for the bears, right?

No wonder someone made this cartoon — I wouldn’t be surprised if there were indeed “bears” who were sent into the ICU due to betting against one of the most egregiously cultish stock in modern financial history.

Despite the partial destruction of my Christmas holiday, I was still vainly holding on to the “pyrrhic victory” of having made money betting against one of the craziest stocks in human history — until just two weeks ago.

Carvana

As a matter of fact, I started managing 3rd party money when I was a second-year graduate student at MIT, but most of the accounts I managed were in Mainland China, and I was only able to short through my own US brokerage account, until early 2022, when I started to formally manage US accounts as a registered investment advisory representative.

I started off with a long/short strategy. It worked phenomenally in 2022, especially the short-book. Anything I shorted would go down 50% in a couple of months. The tide started to turn in 2023. My “magic touch” was gone, and anything I shorted would double, triple or even quadruple against me.

Prof. C did not fare much better. After what seems like a “come-back” in 2022, he raised a round of money to bet against some of his highest conviction names, only to find out that the market would appreciate a whooping 26.5% in 2023.

After 40 years of operating as a “bear” in one of the most bullish markets in the entire world, Prof. C’s AUM (asset under management) dwindled from $9 billion in 2009 to $2 billion in 2018, then from $400 mm in 2021 to less than $200 mm by November 2023, and he threw in the towel, citing “the market has changed”. Prof. C’s shorts, such as Tesla, General Electric, Wingstop, Carvana, Coinbase, were literally some of the best performers for the bulls.

Nietzsche’s philosophy is hard to verify, but market opinions aren’t — you either make money for your clients, or you lose your shirts. Unfortunately, Prof. C seems to belong to the latter party. Maybe he’s the most erudite in the subject of Financial Fraud, but if he keeps picking the stocks that go up substantially, his most appropriate role might be advisory services, not money management — and capital indeed made their own choices.

Unfortunately, I was short one of those names — I was short Carvana, for myself, and for my clients.

On May 1st, after the bell, Carvana reported a “profit” mostly due to their warrants in another company called Root, and the stock surged 36%. That night, I lost sleep. The stock stopped at $116/share by 8PM EST, but started another round of surge to $121/share the next morning. I had a morning flight to catch to Omaha, Nebraska, for my favorite “vacation” of the year, the Berkshire Hathaway Annual Meeting, so I scrambled onto Traders’ WorkStation and covered the shares that broke our risk parameter at 5:30AM.

I can’t believe after ruining two trips with my wife, I am committing the same error, shorting a piece of garbage founded by a crook (actually, a convicted felon) with a sky-high short-interest only to find myself in the same situation — another trip ruined, and my clients actually lost money on this semi-fraud. That moment, I felt psychologically fatigued, and this might be the last straw.

The Long Book

When I told my story to Paul, a friend who I believe is one of the finest discretionary asset manager with a 9-year record of 20%+ net return and a Sharpe north of 1.4x, he told me, his favorite line from Buffett’s annual meeting was, “Don’t be too hard on your self. ” Why was this his favorite quote? Because Buffett’s trying to teach us how to run a marathon. Investing is a long ball-game. If we are able to stay in the arena for an additional 10 years due to conservative management of our book, imagine the amount of money we will make through compounding — to achieve that, we necessarily have to build in slack in our system.

I have never seen a short book, that over economic cycles, has been able to generate positive return. As I discussed, even the GOAT short-seller cannot seem to eek out a profit. Prof. C likes to say that “I have seen a lot more zeros than stocks going to infinity”, but the few and far in-between “infinity” stocks will kill us — such as Time Warner in 1999, and Tesla in 2021, for Prof. C.

Shorting is inherently a fruitless endeavor. Actually, I’d say any endeavor that stacks the odds against you will likely turn out to be both painful and profitless. You can accumulate small advantages over time, and then one rogue wave will annihilate all the profits you have painstakingly piled up.

More importantly, given the number of securities in the long book I have to cover for my clients, the short book which typically takes even more time (because unfavorable odds and necessity of stop-losses) is simply a distraction, and my time is probably better devoted to analyzing names that can double or triple, rather than focusing on how to eek out a 20% gain off of a shabby operation managed by a crook who has every intention to screw up the bears through any machination she can fathom.

Yes, there will be financial crises in the future and there will be episodes when our long book rapidly loses value, and in those periods, another “Prof. C” or Dr. Burry will show up on CNBC, chalking up their gains and talking gloom-and-doom. But, now, I will probably side with William Nygren — if you’re at a roulette table and you know that “Red” statistically shows up considerably more than “Black”, why would you want to try time-guessing when the “Black” will show up? If you think the “Big Short” has a special talent of figuring out when the market will collapse, then your view is probably just not supported by facts and numbers. Facts and numbers, they are what matter the most to investing. Ironically, perhaps the short-sellers are the ones who really live in the “Demon-Haunted World”, believing the next collapse is imminent, and always trying to cast things into the negative lens, failing to appreciate advancements and sea changes, forfeiting the best odds in their career.

Last but not least, I guess I am just too “old” to allow crooks corner my position and destroy any future holidays with the ones I love and treasure. We don’t need to, and practically cannot make every penny in the market, and there are things more important than “disciplining the apes”, who we will probably never meet anyways.