Shorting Is Hard...And It's Supposed To Be

I've been short Prospect Capital for 3,100 days. Over that time, I've paid away 101 dividend payments totaling $6 per share, plus 2.5% average borrow costs with violent spikes when availability went thin. When the stock rips due to euphoria in credit, insider share purchases, or brokers running it up into a financing, I have added. I've made some token covers on extreme down moves, but I've basically been short since February 2017, watching it fall from $9.50 to $2.80—yet somehow survive.

I was short Valeant from $240, covered everything at $11 when Pershing exited. Even Bill Ackman, who was long and bleeding, eventually had to ask CEO Mike Pearson directly if there was fraud at the company. I was short Wirecard through several 25% counter-rallies that made me sweat before it finally collapsed in 2020. I was short GT Advanced Technologies (GTAT), which made sapphire glass for Apple—I had put options timed for their conference call, but when they delayed it, I had to roll them at huge cost to avoid expiring worthless, right before they filed bankruptcy and the stock collapsed. I was short GSX Tech EDU, which along with Bill Hwang's Archegos took me for a ride before heading to zero. I've been short multiple stocks that went to zero, more that dropped 90%, even more down 50%.

This brings me to why I'm writing this post. Recently, while scrolling X, I came across several tweets effectively saying that with all the speculative names going parabolic, shorting these 50 or so tickers (market caps ranging from $250bn to $5bn) for 90%+ down moves or playing for zeros was "easy money."

Shorting is not easy. Identifying investigative red flag shorts is not the hard part. Making money from shorting bad actors is the difficult part. Rather than list all the reasons why shorting is harder now, read Jesse Eisinger's The Chickenshit Club. It explains why companies caught cooking the books don't collapse as quickly as Twitter assumes—weak enforcement lets bad actors drag things out for years. So before you read on social media about market participants "underestimating how quickly a company caught cooking the books can collapse," think about this post. Think about how many stocks that start at large market caps, run by bad actors, committing fraud, playing accounting and narrative games, have their stocks go to zero. Hint: it's a lot less than you think. Then re-read the above about Prospect Capital, trading at $2.80, down from my $9.50 entry, that has managed to survive a death spiral for nearly a decade while keeping the dividend game going.

To be clear, I'm not saying don't short stocks. I think shorting helps make you a better "long" investor in so many ways, but that's not what this post is about. I would encourage you to think about your position sizing when shorting investigative red flag and fad situations rather than focus on conviction. In addition, monitor the technical dynamics very closely and maintain relationships with stock loan counterparties within a clear framework. For more on developing that kind of process: https://mojo3324106.substack.com/p/everyone-has-a-process and https://mojo3324106.substack.com/p/the-factory-that-makes-investment.

I’ll be writing more on governance, activism and investment process. I’ve lived and breathed these for years. I’ve also written about tokenization, Formula One, the NBA, and sometimes just tell a story worth remembering. Stay tuned.

You can also find me on Twitter at @MrMojoRisinX and @BeWaterltd.