Short selling is considered the ultimate contrarian investor tool. Shorting a stock means the investor is betting on the under-performance of a company relative to it’s market valuation – betting on failure. With infinite downside, it takes real confidence to enter a short position, especially on a big or famous stock. While many shorts fail, some succeed fabulously. These are our favorite examples of when short sellers got it right.
Fahmi Quadir, of activist hedge fund Safkhet Capital, famously shorted Valeant Pharmaceuticals. The company stock fell dramatically in 2015 from it’s all-time high of $260 to a low of $8. The catalyst was a malpractice suit in which the company was accused of altering doctors’ prescriptions so it could sell more costly drugs.
Institutional investors are always wary of pharmaceutical companies. The sector is subject to high research expenses with no guarantee of successful product launch. Patent protection is tricky and unforeseen sideffects result in costly lawsuits. Regardless, Wall Street was bullish on Valeant and praised the stock (up until the scandal) as the company always delivered fantastic quarterly results.
Today, Valeant has become a profitable and compliant company under new management, renaming itself to Bausch Health Health Companies Inc in 2018.
In the wake of the 2007-08 financial crash, David Einhorn, of Greenlight Capital, shorted Lehman Brothers stock while it was trading at $25. In 2008, Lehman Brothers declared bankruptcy, with its stock nearly reaching $0.
Lehman Brothers was one of the major players during the 2007-2008 financial crisis. The bank not only underwrote mortgage bonds, but created a vast amount of other mortgage-backed securities which would eventually fail. Lehman Brothers had failed to sell their securities in the wake of the crisis lost more than 6 Bn USD – forcing them to file for bankruptcy.
Today the Lehman Brothers offices can still be found in financial hubs like New York and London. Due to the nature of their bankruptcy (Chapter 11) the stock continues to trade OTC at pennies.
But the most famous case of short selling has to come from the appropriately named film: The Big Short.
Before the subprime mortgage crisis, a few clever traders and hedge fund managers realized that the housing market was ready to implode. Michael Burry, of Scion Capital, created a financial instrument (Credit Default Swap) that allowed him to short the housing market. Shorting the entire housing market was considered not only crazy, but un-American. If Michael Burry was right, he would make his fund millions amidst a failing economy. If he was wrong, he would leave his investors with nothing.
As we know, Michael Burry was right, and shorting mortgage-backed securities skyrocketed his fund’s returns to over 400%.
In the chart above we can see the Housing Price Indices for four major areas, and the effect that the 2008 crash had on the housing market. While in traditional finance you would need to be an accredited or institutional investor to be able to trade such specific and complex derivatives, on Morpher you can outright short the housing price index without the complexity.
With Morpher you can go long or short on any asset on any market, but it’s important to familiarize yourself first with the basics of shorting before you make your next big trade.
Disclaimer: All investments involve risk, and the past performance of a security, industry, sector, market, financial product, trading strategy, or individual’s trading does not guarantee future results or returns. Investors are fully responsible for any investment decisions they make. Such decisions should be based solely on an evaluation of their financial circumstances, investment objectives, risk tolerance, and liquidity needs. This post does not constitute investment advice.