► When I set out to start a short activist firm earlier this year, my motto was: 'Exposing fraud, greed, misrepresentation, and stupidity'...
Fraud and greed go hand in hand. Misrepresentation, especially if intentional, isn't far behind.
Then there's stupidity, my favorite and maybe the most important of all. That's because smart people do very stupid things, or as I often say... they're so smart, they're stupid.
For much of my career, I've marveled the most at the stupidity part of the equation. It's human nature... thinking they can beat the system.
Some do, most don't.
If all goes well, my regular Empire Financial Daily essays will expose some of that stupidity, along with the greed, fraud, and misrepresentation.
Beyond that, there is no set course, topic, or tone.
In these essays, I may cover longs, interview money managers, CEOs, short sellers, or write about whatever else I find interesting...
And that will be triggered by a mix of outrage, excitement, and discovery... Expect tidbits on stocks, the markets, the economy, and even something unrelated to any of that in future essays.
If you haven't already figured it out... I'm skeptical by nature, a contrarian by design, and when it comes to stocks, I tend to be drawn to the "what can go wrong" in a world where most people tend to focus almost exclusively on what can go right.
There's a reason for that...
While I'm no longer officially a journalist, I'll always be wired as one...
News, by nature, is the unexpected... Even better if it's unearthing something people didn't know.
With public companies, that can get dicey when you start exposing things that management had hoped investors wouldn't see. Investors, for their part, often don't want to hear it.
Truth is, while seasoned investors often crave hearing what the other side has to say, as a reason to double up on their research and conviction, many other investors are often blinded by the natural bias of owning a stock they want to go higher. We've all been there. Nobody wants to think they were hoodwinked.
While figuring out which red flags investors should care about has never been easy, it's harder than it has ever been.
The reasons for this may surprise you...
Top of the list: Things that might have killed a stock 10, 20, or 30 years ago – things investors might have cared about – don't matter today.
Accounting issues? Oh, puhleeze.
Regulatory investigations? Tell me you're kidding.
Products that carry health or safety risks? OK, the brouhaha over the wood used by Lumber Liquidators (LL), exposed in part by our own Whitney Tilson, was an exception.
Obviously, this raging (though some might argue increasingly wobbly) bull market has led to investor complacency about some of this.
But so has social media and the rapid dissemination of a firehose of information: On one hand, everybody knows everything at the same time. On the other, there is so much information that nobody can absorb it all.
And then... there are the news cycles. Rather than lasting a day or two, they might have a lifespan of a mere hour or two. By the next day, unless whatever is being reported is proven to be an outright fraud, all is often forgotten.
I think something else is at work...
Market structure has changed. A big part of that is the so-called quants, who depersonalize all trading by creating algorithms that buy and sell stocks automatically... a process triggered by headlines, words, and a seemingly infinite number of variables.
Even more of a game-changer, I would argue, are passive exchange-traded funds ("ETFs") – the bulk of all ETFs that trade today. Most merely mimic stock indexes and are designed to buy and hold. With so much money pouring into ETFs, this passive money has become the dominant holder in many companies – and that also has helped shield them from all but the worst allegations.
How will that dynamic play out in a bear market?
I have no idea... and neither does anybody else.
Speaking of the markets: I think a bigger issue as it relates to the broader market is when buying on the dip is akin to catching the falling knife many of us have worried about all the way up.
The difference now is the market's perception of rising rates in reaction to inflation. It doesn't matter that interest rates are still historically low. (See quants, above.) Everybody thinks they'll be smart enough to hit the exit before everybody else. It doesn't always work out that way and in my opinion is harder than ever to game.
That's why, in the end, for long-term investors – especially those with a cautious bent – quality can't be overstated.
I'll end today's essay with a few other thoughts about my views on investing...
The first is that a long or short that is tied to courts, Congress, or the decision of a regulatory body (i.e., Securities and Exchange Commission, Federal Trade Commission, Food and Drug Administration) is foolhardy. They should be the icing, not the cake.
The second is the sheer reality that when it comes to investing, nobody – and I do mean nobody – gets it right all of the time.
Egos on Wall Street are fragile, and there is a tendency to blame everybody. But the only person who counts is the person who made the investment decision.
I thought about this the other day when my colleague Enrique Abeyta responded to someone on Twitter (TWTR) who suggested a company might have misled Enrique. As the user tweeted:
Real pros don't blame the companies.
This is why I'm working with Enrique.
Enrique chimed in, writing back to me:
Been at this game a long time and the No. 1 lesson to become a better investor is to TAKE RESPONSIBILITY for your own actions and process. ACCOUNTABILITY is everything in this business...
As I wrote back to Enrique:
Reality is, we're all just people. The smartest of the smart get it wrong... or the timing is off. All you can do is try to get it right much more than you get it wrong. If I could go back and have a redo there is a bunch I wouldn't have done, but I learned from each of them.
And hopefully the best of that will rub off on you.
I thoroughly enjoy interacting with readers, so feel free to reach out via e-email at [email protected]. And if you're on Twitter, feel free to follow me there at @herbgreenberg. My DMs are open. I look forward to hearing from you.
October 8, 2021