(1) Math.
Limited upside max +100%. Unlimited downside (can be >-100%). We do not like any math that increases the long-term risk of an eventual 100% loss. We like asymmetric payoffs that are in our favour despite how favourable we think the probabilities are.
(2) Natural upward trend of Stock Market.
The stock market rises by +7–9% p.a. over the long-term, for a short seller to achieve +10% p.a. returns, they have to find stocks that will decline by -17 to -19% at least. Not that there aren’t any, it is just much harder and to time it perfectly.
(3) You can’t size big.
Because the risk of big losses is theoretically 100% probability with -100% loss, the position sizes tend to be much smaller. It is just much more difficult to make a lot of money on the short side.
(4) Winners run dry.
The more successful a short position, the quicker it declines as a percentage of your portfolio, the smaller it becomes. Eventually it needs to be replaced with a new short. Constantly finding new trades, further reduce the probability of getting it right continuously as a short-seller of stocks.
(5) Getting timing right.
Shorting is borrowing, you are paying to be in the game. Timing is crucial. You need money and time to be on your side, if time is not, you can be 100% right but lose all your money and be bankrupt at the same time.
(6) Optimism rather than Pessimism.
Shorting screws up the mind, you end up being very focused on negativity and pessimism. It might work great for others, just that it does not work for us. We rather choose positivity and optimism, over negativity & pessimism any time. That’s just us and who we are, and what we do.
(7) Never Short Overvalued Growing Companies.
Short-selling high-valued growing companies that have rising revenues, profits & cash flows on valuation is a formula for going broke. They can go up 3X, 5X, 7X, before you might be correct, and you might end up broke earlier and faster before that.
Candidates for Short.
That said, if you still want to short, rapidly shrinking market share, declining innovation/R&D, customer satisfaction, revenues, profits, cashflows with already high and still rising debt levels are good (or rather bad) qualities to look at. Suspected fraud is possible, it is just much harder to time. Also don’t choose small market capitalisation stocks, you can be prone to short squeezes (think GameStop).
Plain Difficult.
All in all, it is just much more difficult to short-sell stocks. It is not that it is not doable. There are some great investors who are primary short-sellers, it is just that there are very few and far great short-sellers between versus much more great investors who are primary long, buy & hold types.
That said, we are glad that there are still short-sellers out there, because they help to police and protect investors. Profit from success short-sells are their rewards for doing so, just that it is not for us, because it is not who we are and not what we want or like to do.
01 Jan 2020 | Eugene Ng | Founder & CIO| Vision Capital
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