Speaker 1: Welcome to add thoughts. I'm Tracy Alloway, Executive editor of
Speaker 1: Bloomberg Markets, and I'm Luke cow reporter at Bloomberg Markets. So, Tracy,
Speaker 1: you remember that Taylor Swift album I borrowed off you.
Speaker 1: For the purposes of this conversation, I am going to say, yes,
Speaker 1: I remember that you borrowed my Taylor Swift album. I've
Speaker 1: got some bad news. I kind of sold it to
Speaker 1: a friend for for twenty bucks. But don't worry. Don't worry.
Speaker 1: I found somebody on Amazon who said that they'll let
Speaker 1: me buy it off them for thirteen bucks. Wait a second,
Speaker 1: So you're gonna make money off of my Taylor Swift
Speaker 1: album indeed, But I was also taking a pretty big
Speaker 1: risk here. When you think about it. You know it
Speaker 1: is a Taylor Swift album. Should assume that's going to
Speaker 1: go up in value. And you know what, if nobody
Speaker 1: was willing to sell that for less than twenty bucks,
Speaker 1: I'd be in the red. I guess that's true. Why
Speaker 1: are we actually talking about this, Well, because short selling
Speaker 1: is all the rage, and it's not just because of
Speaker 1: the Oscar winning movie, The big short in the markets.
Speaker 1: It's been the little guys Andrew left John Hempton, who
Speaker 1: have really brought short selling back into the prime time. Right. So,
Speaker 1: John Hempton is a name I definitely recognized. He's been
Speaker 1: in the headlines recently because of some of his work
Speaker 1: on Valiant, Right, Yes, Valiant, Both both John and Andrew left.
Speaker 1: They kind of discovered a lot of accounting or regularities
Speaker 1: or some things that were eyebrow raising at Valiant, and
Speaker 1: that kind of served as the launching pad for the
Speaker 1: discovery of all the things that have brought what was
Speaker 1: once Canada's most valuable publicly traded company to around its
Speaker 1: thirty most valuable. That's been an amazing story. So this
Speaker 1: giant pharmaceutical company darling of the public markets and it's
Speaker 1: just been embattled lately against short sellers and the wider
Speaker 1: investment community. Yeah, and with that in mind, I've taken
Speaker 1: more of an interest in short selling. And I don't
Speaker 1: think there's anyone better to talk to learn more about
Speaker 1: it than Marco Hotas, who was once called the world's
Speaker 1: greatest short seller. Tell me who who Mark is? Well
Speaker 1: Mark is now with Chicken Farmer. We seem to we
Speaker 1: seem to really have a beat on that. On lab lots,
Speaker 1: this is the farm farmers. We've had mule traders, a
Speaker 1: cow farmer, and now we have a chicken farmer. Yes,
Speaker 1: but in a in his previous life, Mark was the
Speaker 1: partner at Copper River and they had many public, high
Speaker 1: profile battles. Probably the most famous was with overstock dot Com.
Speaker 1: And it's it's amazing because Mark's experience is one which
Speaker 1: we'll get him to detail, is one where even in
Speaker 1: a down market where things are getting killed, it's still
Speaker 1: incredibly tough to make a profit as a short seller.
Speaker 1: So his job as a short seller was basically to
Speaker 1: find companies where he saw potential weaknesses and he thought
Speaker 1: the stock was going to go down and bet on
Speaker 1: those companies. But you're telling me that even if he
Speaker 1: got his call right, it didn't always work perfectly. Yeah,
Speaker 1: that's pretty much everyone in finances worst nightmare when your
Speaker 1: thesis is right and then you still lose money. All right,
Speaker 1: So today we're basically going to learn about the fraud
Speaker 1: life of the American short seller. Yes, exactly, let's do it.
Speaker 1: Well you guys, You guys know what you're doing. That's
Speaker 1: why to make the big bucks. I'm a Bloomberg subscriber anyway,
Speaker 1: seest Oh, excellent. I support the product. Thank you, feed
Speaker 1: the hungry journalists, thank you exactly right. All right, so Mark,
Speaker 1: thank you so much for joining us. Luke has given
Speaker 1: a little bit of background, but I guess I'm kind
Speaker 1: of curious to go back to the beginning. How did
Speaker 1: you actually get into short selling? Well, I've always been
Speaker 1: interested and excited about the investment business. When I was
Speaker 1: in high school, I used to play gold when gold
Speaker 1: was hot, made some money doing it. Then I completely
Speaker 1: blew myself up being a long a fraud called data
Speaker 1: access systems, and I lost myself plenty of money. I'm
Speaker 1: in my early twenties and back then and then back then,
Speaker 1: I lost my friends some money, and I said to myself,
Speaker 1: if I'm going to be serious in this business, I
Speaker 1: better hone up my skills. So I worked hard to
Speaker 1: learn things, figure things out, and sort of a byproduct
Speaker 1: of that, I started looking at things through the what
Speaker 1: did I miss in the data access systems? Which sort
Speaker 1: of sharpened my short prison and that's where I got started.
Speaker 1: My first short I ever did was Vally Manufacturing, which
Speaker 1: made pinball machines, and a friend and I back when
Speaker 1: I lived in Chicago, you to go around arcades and
Speaker 1: figure out the coin drop of these machines and as
Speaker 1: video games and things like that, we're coming out to
Speaker 1: basically put the pinball guys sort of out of business.
Speaker 1: So that was my first successful short. I enjoyed it,
Speaker 1: loved it. I thought it was fun and you got
Speaker 1: to go to video arcades all day, well at night.
Speaker 1: I worked by day and then messed around at night.
Speaker 1: And you know, there's twenty four hours in the day.
Speaker 1: So that's that's that's when my first got started in it.
Speaker 1: And then you know, in the eighties there were such
Speaker 1: great things as cabbage patch doll transformers, the call Eco Adam.
Speaker 1: I mean, there's a number of companies. There's a number
Speaker 1: of high profile cases that you've been involved with over
Speaker 1: the years, and probably the most intriguing and the most
Speaker 1: one that's received the most press over the year still
Speaker 1: does today is your battle against overstock dot Com, which is,
Speaker 1: you know, e commerce discount brand. Uh say, And so
Speaker 1: what jumped out at you at the beginning? What were
Speaker 1: the red flags that said, Okay, well this is one
Speaker 1: that I need to be betting against. Yeah, well, it's
Speaker 1: it's interesting me someone who I think it was really
Speaker 1: really good at shorting stocks no longer in the business.
Speaker 1: A guy named Dave Shallon was actually my neighbor when
Speaker 1: I lived in Marin and he forwarded me once Patrick
Speaker 1: Burn's letter two shareholders about their quarter about the year
Speaker 1: that they missed. Patrick Burne being the yeah CEO of Overstock,
Speaker 1: and I read this and I said, this is just
Speaker 1: completely insane and off the wall. What was in it?
Speaker 1: It was kind of like we had a really good
Speaker 1: first quarter of the basketball game. We were leading by
Speaker 1: a big score. We had a really good second quarter,
Speaker 1: third quarter we started giving it away, and the fourth
Speaker 1: quarter was an absolute disaster. You know. It was this cheeky,
Speaker 1: weird writer work like that. And I think the year
Speaker 1: was just an absolute disaster. I said to my partner
Speaker 1: at the time, David Rocket, we need to look at
Speaker 1: this thing a little more. And we looked at it
Speaker 1: and the numbers made no sense, and the prospects made
Speaker 1: no sense, and accounting made you know, everything was off
Speaker 1: the wall. And we initiated a short position for the
Speaker 1: benefit of our listeners. Tell us exactly how a short
Speaker 1: position works. A short position is essentially selling something you
Speaker 1: don't own, looking to profit as it goes down. Imagine
Speaker 1: if you're in the cow business and you think the
Speaker 1: price of cows are going to go down, you not
Speaker 1: only sell your cows that you own. I go to
Speaker 1: Luke's cattle farm and say, look, can I borrow your cows?
Speaker 1: And he said, sure, you can borrow my cows as
Speaker 1: long as you promised to pay them back and give
Speaker 1: me a small amount of interest. We say fine, Because
Speaker 1: the cow is a cow, it doesn't really matter, right.
Speaker 1: Luke don't care. He just wants his cows back. So
Speaker 1: I'd go and sell Luke's cows in the market under
Speaker 1: the theory that I think I'll be able to buy
Speaker 1: back these cows later at a lower price price of
Speaker 1: cows declines, I buy them back, deliver Luke back his cows,
Speaker 1: and I make the difference. If I sold this cows
Speaker 1: at two hundred and bottom back at a hundred, I
Speaker 1: made a hundred dollars per cow. If I'm wrong and
Speaker 1: the price of cows goes from two hundred to three hundred,
Speaker 1: I buy Luke's cows back if I want to and
Speaker 1: lose a hundred dollars per head and still return Luke
Speaker 1: back his cows. So there's two ways that a short
Speaker 1: trade can really go wrong for you, the obvious one
Speaker 1: being that if the value of cows or the stock
Speaker 1: goes up, and the other one being if you can't
Speaker 1: get those cows back to return to their original owner. Right,
Speaker 1: that's true, but there's always places to find cows, and
Speaker 1: sometimes you can go to Mexico to find the cows,
Speaker 1: or Southern California or Canada god forbid, or even you
Speaker 1: need to ship cows in from Australia, which will cost
Speaker 1: you more, which means your borrow rate goes up. I mean,
Speaker 1: it's a dangerous, dangerous, dangerous part of the business. But
Speaker 1: for the people who have a genetic defect, it's it's fascinating.
Speaker 1: So you decided to take the short position against overstock,
Speaker 1: tell us all the technics decided to take the short
Speaker 1: position against overstock. Uh. I thought the stock was going
Speaker 1: to go down and go down a lot, but the
Speaker 1: stock decided to go up, and it went up and
Speaker 1: up and up. And Patrick Byrne is a colorful figure
Speaker 1: to say the least, and David Rocker is somewhat feisty.
Speaker 1: In those who didn't exactly see eye to eye, these
Speaker 1: are these are very big understatements for for anyone who
Speaker 1: to be politically correct, it'll get steamy here a little later.
Speaker 1: And then David decided, against my advice, to go to
Speaker 1: a lunch with Burn and sort of jump Burn. And
Speaker 1: then it became sort of a free for all. Can
Speaker 1: we just explain what went wrong with the overstock short? Nothing?
Speaker 1: Nothing per se went wrong with the overstock short. I
Speaker 1: think at the end of the day we ended up
Speaker 1: making money. I think the stock collapsed. I think at
Speaker 1: the time it went from thirty to eighty on a
Speaker 1: squeeze and then maybe twelve or ten. But during the
Speaker 1: big UH sifth Lord short squeeze lawsuit UH routine, it
Speaker 1: became you know what I would call a brain drain
Speaker 1: or a huge UH and bad use of our institutional
Speaker 1: time and a short squeeze. A short squeeze is that
Speaker 1: cow situation we discussed where you have a bunch of
Speaker 1: people who have shorted the stocks and they need to
Speaker 1: get stocks back in order to cover that short position.
Speaker 1: Part of it was that, and part of it was
Speaker 1: Patrick Byrne's friends and institutions thought it was going to
Speaker 1: be friendly and fun too squeeze things and and buy
Speaker 1: the stock up I know Glenn Krevelin and his fun
Speaker 1: squeezed us. I know a bunch of you know, tiger
Speaker 1: cubs squeezed US. I know this from the lawsuit and
Speaker 1: the depositions. It's just, you know, people like to play
Speaker 1: games and push stocks higher, and I know I find
Speaker 1: that kind of behavior on savory You've mentioned, I've read
Speaker 1: you say that you know this public battle turned out
Speaker 1: to work to your detriment. And yet given the weight
Speaker 1: of the things against you as a short seller, all
Speaker 1: the money and organization is kind of stacked on the
Speaker 1: other side. On some cases you need regulators to really
Speaker 1: step in for your desire then to happen. So how
Speaker 1: and where do you draw the line in terms of
Speaker 1: how forcefully you speak out against a company, you or
Speaker 1: a person. And I know you you don't pull many punches,
Speaker 1: So how do you do that yourself? Well, that's that's
Speaker 1: that's an excellent question in terms of the overstock you know, controversy,
Speaker 1: you know then morphed into a naked short thing, short
Speaker 1: and distort thing, a lawsuit, sits lord battle, a whole
Speaker 1: as I would say, just a complete and utter cluster
Speaker 1: of a disaster, you know, over a company that was
Speaker 1: extraordinarily overvalue. Um business model was in bad shape, and
Speaker 1: it just turned into something completely other than what the
Speaker 1: fundamentals were about the business. It became the focus of everybody, everything, everyone,
Speaker 1: and it, you know, it's sadly just turned into a sideshow.
Speaker 1: I mean the company. Subsequently, their business collapse, the stock collapsed,
Speaker 1: everything fell apart, but it became more about the messenger
Speaker 1: or messengers and not the message. Subsequently, you know, burn
Speaker 1: sued the prime brokers on this naked shorting thing, which
Speaker 1: was which is the proper target? And I applauded him
Speaker 1: for that. And you know, Burne and I are now
Speaker 1: peaceful these days. So Mark, did your sperience with overstock
Speaker 1: deter you from short selling? What happened after that? Well,
Speaker 1: let's see. After Overstock, you know, um, they suit us.
Speaker 1: We sued them. We settled for a very small sum,
Speaker 1: given what it would have cost to go to the trial.
Speaker 1: Initially they suit us for a billion dollars um, and
Speaker 1: then they wanted to sell it for a couple hundred
Speaker 1: million and a hundred million and fifty min blah blah blah.
Speaker 1: We settled it for five would have cost us about
Speaker 1: eight to finish this thing to trial, and at the
Speaker 1: end of the day, David Rocker is a witness and
Speaker 1: Patrick Byrne is a witness. I couldn't handicap that and
Speaker 1: just wanted out of the hole mess. So it's something,
Speaker 1: It's a good thing to put behind you. It didn't
Speaker 1: it doesn't determine you know, you learned things as you
Speaker 1: get older and as you grow up. So you you
Speaker 1: mentioned some of the some of the kind of crazy
Speaker 1: things that have happened on the other side. How about
Speaker 1: on your side, because the breadth of skills required to
Speaker 1: be a short seller seems kind of vast, and you
Speaker 1: see that in the Big short where you have Bury
Speaker 1: pouring over spreadsheets and then you have you know, Mark
Speaker 1: Baum and his people going through backyards in Miami. So
Speaker 1: what are some of the craziest things you've done as
Speaker 1: background research for for a company you're considering shorting? Crazy
Speaker 1: things I've done? I mean, I've been in a fair
Speaker 1: share of dumpsters in my day, literal dumpsters, real dumpsters,
Speaker 1: you know where people throw away hard drive components. Dave
Speaker 1: Shelley and I were once in Las Vegas, UH scouting
Speaker 1: out Nautilus, which used to make you know, exercise machine.
Speaker 1: I think you still think they make exercise machine. And
Speaker 1: they also made inflatable beds, and the company was making
Speaker 1: claims about how many beds they were shipping in him
Speaker 1: and I thought they were full of crap. So we
Speaker 1: hung out it in a Vegas distribution center and when
Speaker 1: everyone went home, we went through the dumpster account, you know,
Speaker 1: returns and returned boxes, and were found brand new stuff
Speaker 1: in there. And we hung out there long enough to
Speaker 1: wait for a truck to come by, I think the
Speaker 1: next day, and we followed the truck and we asked
Speaker 1: him how much business or how many loads he pulls
Speaker 1: or delivers out of there, and we were doing the math.
Speaker 1: He said he did two loads, three times a week,
Speaker 1: something like that. We were doing the math and we
Speaker 1: came to the conclusion that the company was overstating what
Speaker 1: they were doing by a factor of three. And you know,
Speaker 1: we were short at the stock, and we shorted a
Speaker 1: whole lot more. And the thing like blue to smithereens.
Speaker 1: But you know, it's it's anything when you short stocks
Speaker 1: or you are interested in it. It's again, it's not
Speaker 1: for the faint of heart. And I always say, do
Speaker 1: not try this at home. But you sort of look
Speaker 1: at things through a different prism. You say, this just
Speaker 1: doesn't make sense. You know, I was in Calgary last
Speaker 1: summer when everyone said, including some chuckle head developers, you
Speaker 1: know that everything is great. But I was as I
Speaker 1: was driving by at dusk at night and first thing
Speaker 1: in the morning. You know, I don't. I don't lead
Speaker 1: normal hours or again, saint normally. I went by all
Speaker 1: these condos and maybe a quarter to a third of
Speaker 1: the lights were on. And in popular times when people
Speaker 1: are waking up to go to work or at home
Speaker 1: after work, you know, you expect to see buildings lit
Speaker 1: when you go by New York or Toronto in the
Speaker 1: morning and night, people are in these places. But these
Speaker 1: newer high rises in Calgary were just dead as empty
Speaker 1: or a quarter to a third full. So you actually
Speaker 1: did the leg work and went out and tried to
Speaker 1: substantiate some of the claims that developers and companies are
Speaker 1: making Exactly I you know, if I'm going to cock it,
Speaker 1: I'm going to throw it. I mean, I'm not someone
Speaker 1: who hangs out in the ivory tower and looks at chart.
Speaker 1: I am a hands on in the trenches. Throw the
Speaker 1: grenade guy. I know short sellers, as you were alluding
Speaker 1: to earlier, tend to get a bad rap for various reasons.
Speaker 1: Do you think that sometimes they provide a social service
Speaker 1: to the market, or at least an antidote to the
Speaker 1: cell side research that we tend to see which can
Speaker 1: verge on cheerleading sometimes. Yeah, big time. I mean I
Speaker 1: think I think shorts should be respected. I think they
Speaker 1: should be admired. Again, for the average person, I sure
Speaker 1: wouldn't try this at home, but but you should always know,
Speaker 1: Joe six pack or a professional investor should always know
Speaker 1: respect and be comfortable with the other side of a story. Right,
Speaker 1: if I have a story on Valiant or Concordia or
Speaker 1: home Cap or temper Pedic, what have you. Right, I'm
Speaker 1: not just making stuff up because I have real money,
Speaker 1: my money on the line. And if I'm saying this
Speaker 1: is the point of view, here's my point of view.
Speaker 1: Here's the pitch, Come hit it. You know. The anti
Speaker 1: to that should not be you're a bad guy. We
Speaker 1: want to destroy you, we hope you die, we want
Speaker 1: you to go to jail. We're going to report you
Speaker 1: to the government. No, you know what, everyone's entitled to
Speaker 1: free speech and I always say free each is free speech.
Speaker 1: It's just not free speech if you're bullish. You know,
Speaker 1: there should be a public discourse and discussion of what
Speaker 1: goes on, both good and bad. So somehow this this
Speaker 1: whole market rigged always has to go up. Entitlement game
Speaker 1: has been you have to shut up, destroy, mock, jail,
Speaker 1: indict skeptics, and I think it's just terribly wrong. So
Speaker 1: at the beginning of the state that statement, you mentioned
Speaker 1: a few companies I believe Home Capital you still have
Speaker 1: a short position against, but a few others Valiant, Sino
Speaker 1: for Us, Nortell. These are all Canadian names. And to
Speaker 1: bring it back home to me, it seems like we're
Speaker 1: punching above our weight in this area that we might
Speaker 1: not necessarily want to be. Do you have any theory
Speaker 1: or any explanation for why Canada seems to be, you know,
Speaker 1: have some shortcomings in that area. Luke's are token Canadian
Speaker 1: and he always manages to bring it back to his
Speaker 1: home country. Well, well, here's here's the weird thing about it.
Speaker 1: I go back to shorting Canadian stocks and the Canadians
Speaker 1: they're very nice people. But when you're short a Canadian company,
Speaker 1: it's like calling someone's wife's fat or their kids ugly.
Speaker 1: They take it beyond personal. And and if the Canadians
Speaker 1: didn't know the word short squeeze, they wouldn't belong anything.
Speaker 1: I mean, everything is short squeeze, a my gaming short squeeze,
Speaker 1: home cap short squeeze. Everything is a short squeeze. But
Speaker 1: at the end of the day, you've got to look
Speaker 1: at the facts. And I think you're right, Luke. It's
Speaker 1: it's the second things get criticized up there. It's a
Speaker 1: concept that people think that their nationality is getting challenged
Speaker 1: when it's not. It's just the way it is. And
Speaker 1: and some of these great Canadian companies, I mean, don't
Speaker 1: just stop at Sino Forest or North Tel. You can
Speaker 1: go to Newbridge Network, you can go to Briacts, you
Speaker 1: can go to Dome Petroleum. You you can go on
Speaker 1: and on and on and on, and there's again, there's
Speaker 1: plenty of rot in the good old US of a Mark.
Speaker 1: You clearly had a colorful short selling career. Luke was
Speaker 1: telling me that your home life is equally colorful, and
Speaker 1: that you live on a farm. Is that right, Yeah,
Speaker 1: I mean I own a farm. It's not like I'm
Speaker 1: it's not like it's green acres here. We have a
Speaker 1: horse boarding facility. I have probably five hundred chickens that
Speaker 1: I sell eggs in San Francisco too, and I bartered
Speaker 1: with I probably have two hundred fruit trees. I mean
Speaker 1: sort of that business. I have a disabled son I
Speaker 1: raised and take care of him. He's all of twenty nine.
Speaker 1: I screw around with these various market activity. I have
Speaker 1: some rock and roll friends. I hang out with them. Though. Yeah,
Speaker 1: I lead. I lead more than a colorful existence, that's
Speaker 1: for sure. All right, Mark, Well, thank you so much
Speaker 1: for joining us today. We really appreciate it. Oh, Luke,
Speaker 1: do you want to talk about this ht G a bit?
Speaker 1: Oh God, I think I barely can't anymore, said the
Speaker 1: studio people are nearly dragging us out here. But Mark,
Speaker 1: thank you so so much. This is a heck of
Speaker 1: a lot of fun. Perfect fine, All right, Luke. Well,
Speaker 1: I think we might have just earned our first ever
Speaker 1: explicit warning for an Odd Thoughts podcast. But I did
Speaker 1: think it was a really valuable conversation to have because,
Speaker 1: as we were discussing, too often short sellers are painted
Speaker 1: as the sort of evil villains of the financial system,
Speaker 1: especially after the crisis of two thousand eight, and sometimes
Speaker 1: people forget that they actually provide a good amount of
Speaker 1: analysis and research that's valuable. It's valuable to have the
Speaker 1: other side of a bull market story. Moreoverly, as Mark
Speaker 1: alluded to and mentioned, he said, it takes a genetic
Speaker 1: defect to do this, and it you're swimming against the stream.
Speaker 1: It is tough, and it is a at times, I'm sure,
Speaker 1: a lonely existence. Not a lot of people are out
Speaker 1: there rooting for short sellers who succeed. It means that
Speaker 1: you know your four oh one case going down probably
Speaker 1: if they're always right, and it's it's not something people
Speaker 1: are inclined to ever root for, right. They don't want
Speaker 1: to hear it exactly. So. I do also like the
Speaker 1: idea of this short seller with a Bloomberg terminal on
Speaker 1: his chicken farm in California. I like that image. We yeah,
Speaker 1: we've really cornered the market on on farms here. All right.
Speaker 1: On that note, we're going to leave it there. Thank
Speaker 1: you so much for joining us this week. I'm Tracy Alloway,
Speaker 1: executive editor of Bloomberg Markets. You can follow me at
Speaker 1: Tracy Alloway on Twitter and I'm Luke Kawa, reporter at
Speaker 1: Bloomberg Markets. You can follow me on Twitter at l
Speaker 1: j Kawa and also our guest, Marco Hoda's is availab
Speaker 1: Well on Twitter at Older Laying Eggs. Thanks so much