In his latest Q4 2020 Investor Letter, Dan Loeb discussed why investors should avoid taking positions against companies with large short interests. Here’s an excerpt from the letter:
The recent short squeeze in certain securities is nothing new. Indeed, as Jesse Livermore said in Reminiscences of a Stock Operator, (quoting Ecclesiastes), in investing, “there is nothing new under the sun.”
As targeted securities have started to come back to earth, wiping out fortunes on the way down as they did on the way up, we can see that this was a bubble no different than other manias over time, going back to the Dutch Tulip Bulb Mania in the 17th century.
What is different today, however, is the rapidity of the rise and collapse of bubbles, fueled by retail trading platforms and social media. Large short interests were also an accelerant in this conflagration.
We managed to sidestep substantial losses for two reasons. The first is that we have always felt more comfortable with higher net and lower gross exposure. It is tempting to think that lower nets imply lower risk, but recent events are a stark reminder that leverage, in all its forms, is a double-edged sword.
In addition, after a few previous painful experiences of our own taking positions against companies with large short interests, we had a preview of what can happen and cut our losses. Since then, we have mostly avoided taking short stakes in companies with modest liquidity and large short interests.
You can read the entire letter here;
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