almost 3 years ago • 9 mins
For this episode, we welcomed back activist short seller Carson Block, founder of Muddy Waters, for a deeper discussion of the trends he’s seeing in today’s markets.
In part one, Carson argued that short sellers aren’t the enemy of regular investors, but rather the “pebble in the shoe” of the “dirtbags” and “charlatans” who run fraudulent companies.
In part two, Carson expresses his frustration that stimulus measures from central banks and governments are propping up fragile companies – whose shares should really go to zero. He explained why he believes most special purpose acquisition companies (SPACs) are “garbage”. Why the supply of speculative deals hitting the market is in danger of exceeding the demand from investors willing to take that level of risk. And why most people working on Wall Street are “mediocre”.
Carson started by giving Finimize analyst Andrew Rummer his take on today’s financial markets.
Carson Block: So, right now, where we are, I feel like a lot of the speculative excess is seeping out of the market. Retail, I believe, has gotten burned on a lot of these more speculative names and retail participation in the market seems to be down. Based on call option buying, those levels are off their peaks – they're ticked up a little bit recently, but they're still off the peak. On my platform, Zer0es TV, in December, I interviewed Andrew Left. And, ironically, Andrew was saying that he thought 2021 was going to be a good year for short sellers. And he cited basically these supply-demand imbalances or – for lack of a better way of putting it – shitcos caused by the proliferation of SPAC IPOs, and SPAC transactions. So you only have so much money out there in search of speculative – I hate to call them investments – but, for lack of a better word, speculative stocks. And the supply was just multiplying. And that's probably what really happened in 2000, when the internet bubble burst. It wasn't really due to rates, it was just all the IPOs that had come to market to take advantage of this flood of money. Much of it was retail, unsophisticated, highly speculative money. And so I think the same dynamic has played out here.
I don't have a crystal ball with respect to the future. But I do know that, especially in these times, there are a number of people in the markets who will continue to do things that are highly aggressive and even outright illegal from time to time. So from the perspective of supply of things that should go down, our business looks good. But you know, the question is always, “do things that should go down actually go down in this epoch of extreme monetary stimulus?”
Andrew Rummer: What about SPACs do you see as a scam?
Carson: Well, I mean, a lot of them are complete garbage. And the reason why you see so many shitcos going public via SPACs is they couldn't do it through IPOs. Because you're very limited as a company going through the IPO process as to what you can say about the future. But the legal regime, the regulatory regime around SPACs is entirely different. It treats the acquisition by a blank check company of an operating business the same as Microsoft acquiring Nuance. So you're a shareholder of Microsoft and you want Microsoft to explain, “here's why we acquired Nuance, and here's what our expectation is for Nuance’s contributions to our financials,” and blah, blah, blah. So the law treats the acquisition by a SPAC of an operating business the same way – so they can get out there and say, “so here's what we think about the future.” But there's been no sense that you can be liable for being massively overly optimistic, because pretty much every conference call you ever listen to, by any company, begins with the safe harbor statement that forward looking projections are just projections and we can't be held to them. So, with that safe harbor, basically nobody ever gets in trouble for talking about the future in overly optimistic terms. And that's what this SPAC market is built on: it's built on companies telling you that the revenue is literally going to grow 200x in five years. I mean, bullshit – like, maybe, a couple of them have that but definitely not the amounts that we've seen. Not every SPAC is going to be a total dog, but the vast majority of them will be complete dogs. And it's to me a very venal play to capitalize on the flood of retail money that's gone into the markets. And some appreciable portion of that retail is really just desperately trying to fix their finances and is gambling – and it's just sad, because it's just gonna do the opposite for them.
Andrew: To change tack a little bit, one of the corollaries of this massive explosion in retail participation in markets over the past year or so has been much easier access to options trading and other ways of shorting the market. As a noted short seller, is this something smaller retail investors should get involved with?
Carson: Well, retail should not be short selling. Unless you're exceptionally wealthy, and you're doing this with a small amount of capital, and you're regularly updating yourself on price movements, and you understand risk management. When we put zeros up there, I want to get a lot of individual investors to go to it – but it's not because I want them to say, “oh great, let me short.” I want them to understand how short sellers do their work, why we do the work, and also for them to learn enough not to short but to protect themselves on the long side. What are some of the tip-offs for us that management is gilding the lily or lying? That's what I hope for them to take out of it. So retail should not short. In terms of options, obviously buying options is a lot less risky than selling options. So I guess I feel stronger that retail should not be in the business of selling options than I do that they shouldn't buy options.
But I do think that it is funny. When I was in maybe like eighth grade, I was asking my father, when I'm old enough to work and invest full time, what's going to be the hot area? You know, what should I do? And my father's like – this is probably like ‘88 or ‘89 or something – and, “well, you know, there's options, yeah? Do you know what those are? And can you try to explain it to me?” He didn't really know. And he said that it's really esoteric. You know, there aren't many people who do it, but I know a guy who does trade options. Why don't you talk to him? So I had a phone call with this guy who traded options and it was just esoteric back then, you know, you really needed to be sophisticated and have deep pockets to do options. And it was funny – when I moved back to the United States from China in 2010 and I just started Muddy Waters – and now I'm looking at the financial world in a really different way from how I used to look at it in my younger, naive days. I get back to the States and I’m watching CNBC, Bloomberg – there are all these commercials for retail trading platforms, but focusing on options. It's like Ameritrade and E*Trade – but they were challenging your manhood in their advertising. You know, it's like, “be a man among boys: get thinkorswim from Ameritrade. Trade options.” It was all about showing that you've got a big dick by trading options. That's not healthy. And I think that advertising is still kind of out there, that messaging is still out there, you know. And anytime you see something being sold on the back of that, man, I mean, you cannot interpret that as being healthy, or helpful for you, if that's how they're selling it, by trying to challenge your manhood. So I don't know, man. That's all I needed to know about that.
Andrew: Do you have any parting words of advice for the Finimize audience?
Carson: I think that the encouraging thing with retail and, especially, Millennials, Gen Z is that they get the point that most people in finance and investing are mediocre and really aren't adding that much value – and that's completely correct. It doesn't take rocket science to be a decent investor. Over the long term, to make money and not have your ass handed to you does not take a rocket scientist by any means – you don't need to study years of finance. But what you do need to do is you need to read, and that's the big edge. And that's the thing, you know, you have all of these analysts and portfolio managers who are making, you know, $700,000 to $2 million a year, who don't read – they are lazy as fuck. And if you're just determined to read and learn, and read closely, you're gonna do well. But, unfortunately, it's not like a shortcut, right? I mean, that's, that's the whole point: doing the hard work that these guys are too entitled and too lazy to do themselves. So if you're willing to put in the hours reading, you're going to do well. But don't chase the hype stories – you can make money for a while, but ultimately, at least in the universe that I was born into, reality catches up.
The other thing that I think pays off a lot, if people want to understand the character of the management, is go and get, say, the last three or four years of transcripts of every call and presentation they've done, and read through those transcripts sequentially, from earliest to most recent. And if you see them being really promotional, if you see them not answering or not answering clearly certain questions there are probably soft spots there that you should be aware of. I think that one of the greatest arbitrages in terms of understanding a company that exists is with conference calls. Being dialled into a conference call in real time is pointless, it moves too quickly. You can't tell whether something has been answered, or a question has been evaded, or there's some nugget there. It's only when you read the transcripts that you get that – so those are the things that you should read. Read the filings, read deep into filings, read the middles of the filings – you know, where the bad stuff is. Like risk disclosures, so much of it is boilerplate, but that's the point, right? they bury the material stuff inside the boilerplate, hoping that you won't catch it. So there's no pill you can take to suddenly be like, healthy and slim, there's no easy way to do this. But just understand that the vast majority of people you expect are doing this based on their job descriptions and what they get paid are not, in fact, doing this – so you have an edge if you just read.
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