Besieged by short sellers? Here’s what to do

Bill Haas © Getty image
Do you play it safe or try to make the tricky shot?

When we make an investment, we expect to profit. I mean, why else bother? But even the best laid plans can go awry. And as an investor, it’s when things go wrong that you really have to show your mettle.

I’m always reminded of the advice of the golf pro: “It’s not the shot that goes wrong that costs the round. It’s the shot that comes after it that really counts.”

That’s as true in investing as it is in golf – or anything else, for that matter! What do you do when things start going wrong?

Dealing with awkward questions

Last week, I wrote an article about vigilantism in the markets; about how vigilantes can help keep markets in check by telling bad news – the news companies have no incentive to tell themselves.

We looked at the case of Quindell, a business that was subjected to a negative research note by a mysterious outfit called Gotham City Research. Was Gotham a vigilante fighting for the truth, or perhaps a nasty con artist, deliberately peddling falsehoods in order to profit from a short position?

I suggested that, in fairness, Gotham was asking some valid questions – questions that any self-respecting investor should rightly ask themselves. “Only time will tell” was how I left it.

But I have to say, I was surprised that so many readers read what I wrote as an attack on Quindell. Responses talked of bringing “MoneyWeek into disrepute” – about “withdrawing subscriptions” and “uninformed rubbish”… you know the sort of thing.

I suppose some shareholders were particularly peeved, but still – is this a useful response, when they’ve just been offered the other side of an argument?

When a tricky situation unfolds, shareholders need to make the right call. Putting our hands over our ears and shouting “la, la, la… ” in the face of an adversarial argument cannot be the best reaction. I’m sure we all do it to one degree or another, but it’s not helpful at all.

The truth is, it’s difficult to face awkward questions, especially when it comes to our investments. But pretending these questions don’t exist will just cause more headaches down the line.


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The Quindell argument is far from over

Now, let’s get one thing straight. I did not endorse Gotham’s research note.

And indeed, since writing the article, Quindell’s management has come up with a full rebuttal of Gotham’s research note. That was as expected.

But despite what some Quindell shareholders may think, this doesn’t put matters to bed. Of course the company comes out with a defence in such a situation! But that doesn’t mean that the argument is over.

Indeed, as the shares opened for trading on Monday following the response, they fell back a full 20% again. Shares recovered slightly yesterday, but investors are clearly not at ease.

As I said at the time, only time will tell. But in the meantime, shareholders have a very tricky decision to make. Has a wicked short-seller offered an opportunity to pick up more shares on the cheap? Or does the vigilante have a point?

Do you chip out of the rough and safely onto the fairway – or play the risky shot and try to hit the green?

Take your time and make the right call

Well, every shot is different. And every case of a short-seller’s attack is too.

The key is to be absolutely sure of the facts. To know the argument, and the counter-argument. I have gone toe-to-toe with short-sellers and come out on top. I have also played the “la, la, la” game, and lost!

Long-time Right Side readers may remember a vicious short-selling attack on SuperGroup that drove the share price below three quid. In response to the attack, I said “Buy” – and watched in delight as the shares gradually recovered to over £15.

Other times, I’ve come unstuck as I’ve believed management rebuttals and lies (I won’t mention names for obvious reasons!).

The key is to listen to both sides of the argument. Do your homework – and work out whether or not you can put 100% faith in the company’s management.

Beware the kings of spin

And last of all, always be aware that company directors and management are the absolute kings of spin. Read every statement very carefully and compare it carefully with the counter-argument. Even if there aren’t downright lies (which, in fairness, there seldom are), carefully crafted statements can mislead.

If you feel confident that you are right, and you can hit the tricky shot, then buy more stock. However, if uncertainty remains, then it’s probably best to sit tight (or even lighten up on holdings). Given the share price action, it’s clear that many holders have lightened up. It’s not always the worst thing to do.

There are lessons here for us all, whether it’s learning from Gotham’s inquisitive approach or learning how to deal with opposition and a short-selling adversary. Maybe we can even learn a bit of humility.

Now, before we leave the subject, let me just put one thing on record: I sincerely hope Gotham’s research note is flawed. I hope Quindell returns to form. And I hope shareholders make a packet.

The only thing is, hope isn’t always the best way to invest. It’s certainly not the best way to play golf. At least, that’s what the pro says!

I’ll be watching this one with interest.

This article is taken from our FREE daily investment email The Right Side.
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6 Responses

  1. 30/04/2014, Share52 wrote

    Only deal in facts! Gotham Report was full of deliberately misleading questions particularly about the integrity of the board. But….

    Fact: Gotham is shorting this stock through its own admission.

    Fact: No II’s sold out on the report and subsequently II’s have significantly increased their holding.

    Fact: KPMG have cleared the company accounts.

    Fact: QPP share price had made significant gains such that many PI’s would be in profit and would sell at the slightest hint of any significant SP movement probably via stop loss.

    Lesson.

    I think if PI’s are to be encouraged to invest in AIM then allowing the shorting of AIM stock needs to be stopped.

    Share52

  2. 30/04/2014, RedBaron wrote

    Share52, I think I agree with you but please do not use ridiculous abbreviations.I’m an experienced trader and have no idea what II and PI refer to? I assume IIs are directors and yes they have increased their holdings which has to be a good sign. I have held Quindell for some time and was dismayed by the fall ( but still in profit) Managed to buy more at near the bottom so am pleased with my strategy.
    Bengt, think you were too slow off the mark to watch with interest – might not be too late if you get in quickly

  3. 01/05/2014, Andrew M wrote

    When I search for Quindell on Google or Bing, I find hundreds of stories about its share price, but precious little on what it actually does. That should raise a red flag for any prospective investor.

    Why is this company better than its competitors? How does it plan to maintain that leading edge? What is its “moat” against the competition? Why are its growth prospects better than for its competitors? Is the sector itself growing?

    I like to invest in companies I can understand, and this isn’t one of them.

  4. 01/05/2014, Clive wrote

    @ RedBaron

    My guess would be that II/PI stands for Institutional/Private Investor respectively, though I’ve never seen the acronym used before (hence the guess). If no institutional investor sold Quindell shares, leaving only the little people (us !), one wonders why the share price crashed. I suspect there were many who believed the research.

  5. 01/05/2014, Pinkers Post wrote

    A fascinating case is that of UK online video company Blinkx which lost almost half of its value following the publication of a blog by high profile Harvard academic Prof Ben Edelman. The case raises a number of relevant issues, notably the cosy and sometimes dubious relationship between high-end academia and the shady world of hedge fund country.

  6. 02/05/2014, DrD wrote

    Talking about getting out of bad investments. How are you coping with your buy Google, short Apple trade, Bengt? Not the best call you’ve ever made…

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