Dream year for shorters
The recent carnage in the stock markets has caused a lot of grief to investors. All of our so-called “multi-baggers” have degenerated into “multi-beggars” and relegated us to a state of extreme poverty.
However, Samir Arora, the distinguished fund manager with Helios Capital, is grinning from ear to ear.
“This year was a dream … You have seen the amount of money that has been made in shorts … it is quite amazing,” Samir Arora gushed, struggling to keep his happiness under control even as poverty-stricken investors gaped at him with disbelief.
“These shorts can go on to make another 20%. Many of these shorts individually and not collectively have made 40-50%,” he continued unabated, rubbing salt into our injuries.
Lot of stocks going to Zero
“There are many stocks where it is easier to make 15-20% on shorts than to make 20% on longs in the next six-nine months,” Samir said.
“There are number of them going toward zero,” he added.
“There is a problem of plenty,” he chuckled.
(Tanvir Gill looking resplendent in company of distinguished Samir Arora)
Easy to make serious money from shorts
Samir Arora explained that there is a climate of fear relating to auditors’ resignations and corporate governance that is plaguing Dalal Street at present.
“One line of problem about auditors’ reluctance to sign the accounts is sufficient to spook the market,” he said in his typical dramatic manner.
“Market participants do not have energy to aggressively buy anything which has a problem,” he added.
Samir Arora explained that the fear is so pervasive that even if a stock slumps 5-10% over news/ rumors, there is still a chance to pocket a further 15-20% from the downside.
“You give me any example other than a high quality name,” he said, throwing an open challenge.
He further explained that there are hundreds of listed stock futures which are candidates for shorting.
Even if 30-40 of them have a problem, that is enough to make serious money, he said.
3rd listed co in a row where Auditors have resigned-Vakrangee, Manpasand & now Atlanta Ltd.
Underlines very little tolerance for even the slightest whiff of doubt. Take no risk-no chances approach! @BTVI @Geetu_Moza @stockgurupiyush @ShailDamania @SEBI_India @theicai @PwC_IN pic.twitter.com/00pnIBlf6W
— Siddharth Zarabi (@szarabi) May 30, 2018
Has this ever happened? Rarely
It is uncommon for auditors in India to resign halfway through an audit.
On Apr. 27, Price Waterhouse & Co resigned as auditor of Vakrangee Ltd.
On May 26, Deloitte Haskins & Sells resigned as auditor of Manpasand Beverages Ltd.
— #RenukaJain, FCA ?? (@RenukaJain6) June 30, 2018
What sort of stocks to short?
(Avanne Dubash & Samir Arora sparkle and strike a stylish pose)
Samir Arora gave a quick 101 on shorting.
He explained that two things have to be checked to decide whether a stock is a good shorting candidate.
First, it should have large institutional ownership.
Secondly, it should be in futures and somewhat liquid.
The advantage of large institutional ownership is that as per their SOP, they cannot remain invested in stocks which are accused of wrong-doings.
So, there is a desperate rush to dump the stock at any cost, leading to enormous gains for shorters.
“Currently none of these guys will be able to handle a bad event or a bad issue,” Samir said.
“Nobody has the energy to buy at corrections,” he added.
Stocks which can never be shorted
Samir Arora cautioned that there are some stocks which can never be shorted.
These are blue-chips like TCS, Infosys, HUL, Bajaj Finance, Britannia etc.
He explained that these stocks are excellent compounders and even if they are expensive and quoting at nose-bleed valuations, they are not shorting candidates.
“The reason why we will not go short is because we have realised that if the market corrects, it will correct a little bit and would not fall 10%. These stocks may underperform over a year-two year period but from a shorting point of view it is unlikely that they will suddenly fall 10% in the absence of a crisis. If there is a crisis and they fall 10%. then the rest of the group will fall 20% from here. So, there is no point in shorting them. You may be underweight on them and use the proceeds on something else but shorting them has never worked,” he advised.
(Avanne Dubash listens with rapt attention to Samir Arora revealing top secrets about shorting techniques)
In Wall Street, shorters are Billionaires
The concept of shorting stocks is as yet an unfamiliar concept in Dalal Street, at least amongst novices like me.
However, it is highly popular in Wall Street and several shorters are celebrities who have made Billions for themselves.
Jim Chanos is a well known and charismatic shorter.
He made loads of money by shorting Enron and Valeant.
His latest short is Elon Musk’s Tesla.
“We think Tesla is worth zero,” he said and gave cogent reasons in support of his proposition.
— CNBC International (@CNBCi) December 24, 2017
However, Elon Musk has stayed defiant.
“Shorts have about three weeks before their short position explodes,” he said in a grim and defiant tone.
They have about three weeks before their short position explodes
— Elon Musk (@elonmusk) June 17, 2018
Yet another example of a famous short is that of Bill Ackman’s bet against Herbalife.
While Ackman lost tons of money, Carl Icahn, who bet against the short, pocketed a Billion dollars.
— MarketWatch (@MarketWatch) March 2, 2018
— CNBC (@CNBC) March 1, 2018
So, prima facie, there is merit in Samir Arora’s assertion that there are tons of money which can be made from shorts, provided we are in the right place and at the right time. Otherwise, we will end losing our shirts and shorts!