No Country for Short Sellers
The capitulation of short sellers makes the market a riskier place to invest
We used to buy businesses. Not stocks, not beta, not “The S&P”. We used to buy businesses that we believed in. Companies that made a profit and used those profits to pay dividends to shareholders. Businesses that made products or sold services that you could touch and feel.
They didn’t whine about interest rates. They didn’t shake a tin cup at the government under code words like “quantitative easing” and “stimulus”. They worried about margins and customers. And returning dividends to shareholders. They were real businesses.
They weren’t hoping for a Greater Fool to save them on the next round. They didn’t play games with their Treasury. It wasn’t about liquidity for their options and how those options could gamma squeeze equity prices in capital market games. The game was on the business level.
It was business. Buy for a nickel, sell for a dime. The idea was to invest in businesses that do business well.
You’ve probably seen this meme by now, it’s been going around for years. Benjamin Graham and the whole idea of value investing summed up in a single meme.
This is the zeitgeist. This is where we are in the cycle. And we all have to decide whether to fight it or accept it.
Jim Chanos accepted it. Nate Anderson accepted it. Ben Hunt accepted it*.
*I’m including Ben Hunt here because he was the first one to explain it to me in a way that made sense. How markets were being transformed into political utilities. That conversation is now seven years old and more prescient than ever. It still haunts me: “being smart does not matter”.
Here’s the thing about short sellers: they do more due diligence than anyone else. More than investors, more than the rating agencies, and more than the regulators.
The regulators didn’t uncover Enron, Worldcom, Luckin, Nikola or Valeant. Short sellers did.
Don’t believe me? See for yourself. Short sellers sitting on rooftops with binoculars, risking their lives to tell you what a stock is worth.
Index investors aren’t risking anything. They can’t even be bothered to know what they own.
Without short sellers the market has become riskier. Lawless.
The market is now driven by flows and vibes. Nvidia has hilariously DOUBLED since I wrote about it being over-valued.
Nvidia's market cap is higher than the entire US energy sector - with another $200 billion left over - despite Nvidia generating only 13% of the energy sector’s net income. Nvidia is worth more than the Canadian GDP. Nvidia is worth more than the entire Chinese stock market. Like I said, value’s got nothing to do with it. -Me, just before things got worse.
We used to debate the efficient market hypothesis. Now we debate whether to take out a home equity loan to YOLO into Tesla. And people are serious. There are actual posts—real ones—from investors lamenting that owning a home kept them from going all-in on Elon.
The average investor now spends six minutes researching a stock. The market is a dopamine delivery systems of a society that stopped asking “what’s it worth?” and started screaming “NUMBER GO UP!”
And why not? In the riskless world of post-GFC investing, speculation works. Prudence is synonymous with under-performance.
So now there are no skeptics left. No crusty old voices shouting that this doesn’t make sense. No short sellers. They have capitulated.
We broke the last functioning circuit in the feedback loop.
What is left of this market and price discovery isn’t determined by portfolio managers but by momentum, gamma and flows.
And like Sheriff Ed Tom Bell in No Country for Old Men, old short sellers are watching the madness around them, lost in a daze, unable to reconcile the world they knew with the world they now find themselves living in.
What good were the valuation models if the valuation models brought you here?
There is no market left for short sellers. No market left for value investors. No market for the cautious or the skeptical or the diligent or the prudent. And no country for old men.