The stock market’s recent nosedive has many wondering if the near-record bull market is finally running out of steam. Some analysts say the reversal is a healthy correction bringing valuations in line with historical norms. But, plenty of media pundits are playing the doom-and-gloom card and counting the days until the yield curve officially inverts. Sure, trade wars, rising rates and natural disasters are playing a role, but what about short interest? Other than a few rants from Tesla’s tweeter in chief, Elon Musk, not much attention is being paid to short-sellers, those contrarians who could finally be getting the opportunity to pounce.
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Our clients, Anthony Glomski (AG Asset Advisory) and Matt Topley (Fortis Wealth), have been handling lots of media inquiries lately to help folks understand the role that short sellers play in today’s capital markets. Below are some excerpts:
Glomski, founder of Los Angeles-based AG Asset Advisory told me the other day that short sellers are often “perceived as the enemy, naysayers who bet against companies and entrepreneurs.” In truth, he said short sellers are an important part of an efficient market. “They risk their capital and help to keep markets honest when Wall Street doesn’t.”
Matt Topley, chief investment officer of Fortis Wealth in Valley Forge, PA had a similar take. “Short selling in the past was primarily a small cadre of esoteric fundamental research wonks who used forensic accounting to reveal holes in public company balance sheets.” Topley also said those folks would make big bets that required a huge amount of “patient capital.” Today with 12,000 hedge funds operating (up from 500 a few years ago), “shorting is expressed through ETFs,” added Topley, a Philadelphia Inquirer Influencer in Finance award winner.
Glomski noted that short selling has evolved and benefitted over the past 20 years from the internet’s “democratization of information,” adding that “complication and wrongdoing” have also emerged from message boards and Twitter. “History shows us though that short sellers don’t determine outcomes. Market competition does.”
Glomski works with tech entrepreneurs throughout the business life cycle, from startup to exit. “As is the case with Tesla today, their battle is with highly capable and motivated competitors, not necessarily short sellers. In my book Liquidity &You, I discuss a quote from Warren Buffet, ‘In the short run, the market is a voting machine, but in the long run, it is a weighing machine.’ Entrepreneurs should focus on the weight and not the vote.”
According to Topley, “most hedge fund equity long books have a 90-percent correlation to the S&P then they fill the short book with ETF shorts to protect downside. Huge short bets on companies are harder to achieve because a massive amount of intellectual capital is chasing the same ideas and this capital is not patient. Why? Because managers are being measured on a quarterly basis.”
What’s more Topley said companies with accounting fraud “keep a small float of stock which makes their shares very hard to short because firms can’t find enough borrowers…..and if they do, the rebate rate is too high,” added Topley author of the daily blog Topley’s Top 10.
At the end of the day, investing is about seizing opportunities, preferably where the rest of the crowd doesn’t see them yet. Don’t focus on whether the smart money is short or long. Focus on being right. Turn off your TV and unplug your computer. Focus on the long-term with the right advisor guiding your way.
TAGS: Short selling, market correction, Matt Topley, Fortis Wealth, Anthony Glomski, AG Asset Advisory, Liquidity and You