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I would love to be the proverbial "Fly-on-the Wall" at the corner office all partners meeting this morning at Greenlight Capital and Kynikos Associates. I wonder if the remotest possibility of Musk taking Tesla private was included in the check-list , (if there was one) , prior to accumulating the large short positions that are currently causing significant pain in each of these hedge funds.

In Berkshires case, I believe these Black Swan events are considered by Warren, Charlie, & especially Ajit and the appropriate reserves are protected in the BRK armory. It's still early, however the mental models & checklist principles discussed by Charlie may have saved Greenlight & Kynikos a lot of pain.



ciao
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Kynikos a lot of pain

Kynikos is methodical about their short positions. Just like your long position can run into unexpected issues, so is your Short. But assuming they have not considered, a short-squeeze doesn't hold merit.
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I would love to be the proverbial "Fly-on-the Wall" at the corner office all partners meeting this morning at Greenlight Capital and Kynikos Associates. I wonder if the remotest possibility of Musk taking Tesla private was included in the check-list , (if there was one) , prior to accumulating the large short positions that are currently causing significant pain in each of these hedge funds.

In Berkshires case, I believe these Black Swan events are considered by Warren, Charlie, & especially Ajit and the appropriate reserves are protected in the BRK armory. It's still early, however the mental models & checklist principles discussed by Charlie may have saved Greenlight & Kynikos a lot of pain.

ciao


Buffett and Munger are definitely not fans of short-selling.

"You'll see way more stocks that are dramatically overvalued than dramatically undervalued. It's common for promoters to cause a stock to become valued at 5-10 times its true value, but rare to find a stock trading at 10-20% of its true value. So you might think short selling is easy, but it's not. Often stocks are overvalued because there is a promoter or a crook behind it. They can often bootstrap into value by using the shares of their overvalued stock. For example, it it's worth $10 and is trading at $100, they might be able to build value to $50. Then, Wall Street says, "Hey! Look at all that value creation!" and the game goes on. [As a short seller,] you could run out of money before the promoter runs out of ideas."

"Everything we've ever thought about shorting worked out eventually, but it's very painful. It's a whole lot easier to make money on the long side. You can't make big money shorting because the risk of big losses means you can't make big bets."
- Warren Buffett


"Being short and seeing a promoter take the stock up is very irritating. It’s not worth it to have that much irritation in your life."
- Charlie Munger
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“Kynikos is methodical about their short positions. Just like your long position can run into unexpected issues, so is your Short. But assuming they have not considered, a short-squeeze doesn't hold merit.”


True, both Greenlight & Kynikos have withstood the test of time & a short squeeze has to be cosidered in each position however, a $72B buyout would be “The Mother of all Short Squeezes” and I still wonder if that made the checklist.

ciao
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MadCapitalist,
Beautiful synopsis of why shorting is dangerous! Thank you! I follow Einhorn and used to follow Tilson pretty carefully and always wondered why they shorted so many stocks.
Rock
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I'm not sure if anyone else here listens to the Intelligent Investing podcast with Eric Schlein, but Tilson was a recent guest. He has a good story about shorting, and Charlie Munger's personal and specific advice to him, near the beginning of his career.
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<< I'm not sure if anyone else here listens to the Intelligent Investing podcast with Eric Schlein, but Tilson was a recent guest. He has a good story about shorting, and Charlie Munger's personal and specific advice to him, near the beginning of his career. >>

Link: https://intelligentinvesting.podbean.com/e/interview-with-wh...

-Rubic
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Incidentally, the discussion about short selling and Munger's comments to Tilson starts at about the 27:00 minute mark, and the specific comments are about at the 36:50 mark.

Doc
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"(<< I'm not sure if anyone else here listens to the Intelligent Investing podcast with Eric Schlein, but Tilson was a recent guest. He has a good story about shorting, and Charlie Munger's personal and specific advice to him, near the beginning of his career. >>

Link: https://intelligentinvesting.podbean.com/e/interview-with-wh......

-Rubic )"


Many thanks Rubic

I listened to the Podcast with great interest as I was an investor with Whitney for 15 yrs.
My perf in his fund was exceptional in the first 10 with an outperf of the S&P of +7.8%/yr followed by a very poor underperf of -14.5%/yr for the last 5 yrs. The net of this was an overall outperf of +0.5%/yr. I feel the last 5 yrs of underperformance were definitely related to poor short selection in a rising market and partly responsible for shutting down the fund. In the end, I found Whitney to be an excellent general partner communicating clearly and what I felt truthfully, and would likely continue to be an investor in his partnership today(had it survived) if he had followed Charlie's clear advice regarding Short Selling!

I was unable to find a transcript of the above interview as the portion of the interview relating to Charlie's view on Shorting is absolutely outstanding & I would have quoted here.

As an aside , I did not know this about Whitney,


"Mr. Tilson is an avid mountaineer and has climbed Mt. Kilimanjaro, Mt. Blanc, the Matterhorn and the Eiger. He also competes in obstacle course races regularly and is the all-time record holder in the 50+ age group at the 24-hour World’s Toughest Mudder, having completed 75 miles and nearly 300 obstacles in 2016."

There were 1,235 competitors of all ages , Whitney came in 58th finishing 75 miles in 25:12:46 and #1 in his age group!


https://www.youtube.com/watch?v=aycSctbsmA8
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"Mr. Tilson is an avid mountaineer and has climbed Mt. Kilimanjaro, Mt. Blanc, the Matterhorn and the Eiger. He also competes in obstacle course races regularly and is the all-time record holder in the 50+ age group at the 24-hour World’s Toughest Mudder, having completed 75 miles and nearly 300 obstacles in 2016."

There were 1,235 competitors of all ages , Whitney came in 58th finishing 75 miles in 25:12:46 and #1 in his age group!


That's impressive. I did a Tough Mudder back in 2012 at the age of 43. It was brutal, and it wasn't even the 24-hour variety. It took my team about 7 hours to complete the course, which was about 10 to 12 miles.
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At the 39 minute mark: reflecting on what not listening to Charlie's advice not to short-sell cost him, Whitney teared up.
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“Beautiful synopsis of why shorting is dangerous!”


The billionaire boys are heading for the woodshed...

https://www.bloomberg.com/news/articles/2018-10-05/einhorn-a...
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" always wondered why they shorted so many stocks"

How many long-only PMs got paid 2&20?

I daresay, unless you have been deeply involved (you can read that to mean Professionally in most cases) with short-selling for yrs & with more than a few highly experienced & highly successful short-sellers, you don't understand the hows & whys of professional short-selling.
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2 Excellent points:
"the risk of big losses means you can't make big bets" in sort of 1-off, unique story ideas... but if you're doing well-structured pairs-trades you can

"Being short and seeing a promoter take the stock up is very irritating."
And it isn't always a blatant "promoter". I had at least 4 tech shorts that had already fallen about 50% recover half that loss when some big tech company acquired them for a "50% premium" to the beaten-down price. In all cases, the products were going obsolete & so would the stock. The only value above $0 would have been some questionable (read: yesterday's news) IP. But, the big tech company decided they could breathe life into it solely due to their size. In all cases, the big tech company took a nearly complete or complete write-off of it w/in 18 months.


When CPQ did it once, I looked at the #s & I realized that the big tech companies could pay that much for a small firm & it'd cost the mothership maybe $0.01 EPS in yrly losses & only a bit more than that when they wrote it off. So, the "promoter" was actually some product-line exec who wanted to build his/her product-line empire & convinced the CEO to blow the bucks.
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"Buffett and Munger are definitely not fans of short-selling"

They don't GET PAID to short. Do you not understand the difference?
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