Sunday, September 20, 2015

Teitelbaum, The Most Dangerous Trade

Of all the ways to make money in the financial markets, being a short seller is one of the toughest. The short seller is fighting the upward bias of the equity markets as well as the wrath of deep-pocketed, litigious individuals with vested interests in the stocks he is targeting. He has to be both a sleuth and a promoter; after all, what good is all his detective work if other investors don’t know what he uncovered and don’t join him in putting downward pressure on the stock?

In The Most Dangerous Trade: How Short Sellers Uncover Fraud, Keep Markets Honest, and Make and Lose Billions (Wiley, 2015), Richard Teitelbaum, a financial journalist, has written illuminating profiles of ten top short sellers, complete with their investing strategies. Combining interviews with well-researched back stories, he explores the highs and lows (and there are a lot of lows) of short selling.

Bill Ackman, Manuel Asensio, Jim Chanos, David Einhorn, Carson Block, Bill Fleckenstein, Doug Kass, David Tice, Paolo Pellegrini, and Marc Cohodes are the featured investors. We learn about their early years, how they ended up being short sellers, even the significance of their fund names. Why Muddy Waters, for instance? Block, trying to find a good name for his nascent firm, recalled a Chinese proverb: “Muddy waters make it easy to catch fish.”

We read about positions that worked and those that didn’t—and what these investors learned from the latter. We learn how they construct their portfolios (including long positions) and how they try to mitigate risk (sometimes with options).

Each short seller has his own style, but the investors profiled in this book share some common traits. They are passionate, they work exceedingly hard, and they are resilient—even those who ultimately didn’t make it. They scour the equity markets looking for stocks whose price significantly overstates their value. Some have macro theses, some are more akin to microbe hunters. But they are all looking for stocks that should, if they are correct and if other investors embrace their research, fall. Even in a rising market, though that is sometimes too much to hope for.

The Most Dangerous Trade is a book that’s hard to put down. Teitelbaum knows how to keep his reader involved. Whether you just like a good story or are thinking about starting a hedge fund, whether you are an individual investor who wants to learn how to pick stocks or an institutional investor debating portfolio construction, Teitelbaum’s book will speak to you. If you don’t come away with at least one or two good ideas, you didn’t read it carefully enough.