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Author: TMFGuardian Three stars, 500 posts Supernova Odyssey 1
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Subject: Forced Buy-In of RSH Date: 3/19/2013 5:50 PM
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Charlie and I both have talked about it, we probably had a hundred ideas of things that would be good short sales. Probably 95 percent of them at least turned out to be, and I don’t think we would have made a dime out of it if we had been engaged in the activity. It’s too difficult. The whole thing about ‘longs’ is, if you know you’re right, you can just keep buying, and the lower it goes, the better you like it, and you can’t do that with shorts. -- Warren Buffett

I now understand what Mr. Buffett meant.

Tier 1 was subjected to a forced buy-in of our RSH short position when our brokerage, Interactive Brokers, was unable to locate and borrow the shares necessary to support our position.

This is an extremely frustrating development, because at current prices, I believe RadioShack is an even more attractive short than when Tier 1 first entered the trade.

In that regard, here's a recent Goldman sell call that explains a lot of the reasons why I think RSH's stock price is poised for a fall:

http://blogs.barrons.com/techtraderdaily/2013/03/12/radio-sh...

I've been debating whether to re-establish Tier 1's short position, but it likely will be difficult to do so since the shares seem to be in short supply for short-selling, and even if we're able to initiate the short, we may experience another forced buy-in, likely at a very inopportune time.

The best course of action appears to be to accept that our RadioShack short trade was an unsuccessful endeavor, and that shorting individual companies may prove to be a difficult proposition in Tier 1. I don't want to abandon the idea of shorting altogether because there are some strong benefits that can be obtained from doing so, but I recognize that Tier 1's future shorts will likely be on highly liquid ETFs rather than on individual companies.

I intentionally allocated only a small percentage -- around 1% -- of Tier 1's capital to the RSH short trade because I knew that the stock could move sharply against us. By doing so, I limited the losses on this position to about 54 basis points, or 0.54%, of Tier 1's overall return. However, I take no solace in that now. I thought the reward outweighed the risk, and that the probabilities were in our favor.

I was wrong.

RSH will go down as Tier 1's first losing position. And I absolutely hate to lose. Even worse, I failed you.

I apologize for the mistake, and I promise to apply the lessons learned to improve my process in the future.

Humbly,

Joe Tenebruso
Portfolio Manager
Tier 1 Investments
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