Sceptical shorts can save your shirts
Jake van der Kamp
Seven brokerage bodies yesterday lobbied the government to follow the example of some European and Asian markets and ban short selling, citing the benchmark Hang Seng Index's more than 25 per cent loss over the past two months.
South China Morning Post, October 5
I have a better idea. Let's ban the index instead. After all, you can never be sure that short-selling alone forced the market down 25 per cent. Next time we may find something else pushing it down whereas, if we ban the index itself, it will never fall 25 per cent again. Makes sense, doesn't it?
Okay, back to the real world. I can think of a good reason that we should continue to allow short-selling and, in fact, encourage the practice. It is that the professional shorts provide some of the most thorough investment research I have ever read and help protect ordinary investors from thievery in ways that regulators never can.
The most obvious case of it recently was the trashing of Sino-Forest by a small research house, Muddy Waters, whose backers took short positions in the stock before publishing their findings and cleaned up when the price crashed. I'm still waiting for a Sino-Forest libel suit against Muddy Waters. Perhaps I shall have to wait a long time.
But a friend sent me a copy of an even more venomous report on a mainland company the other day.
It was headlined '11 years of deceit and corporate fraud' and it had a very baldly stated price target - delisting.
No, I shall not identify this company here and the reason is that this report did not identify its authors. I'll stick out my neck for others occasionally, but not if those others won't.
The report was put out by an outfit called 'Anonymous Analytics' and its logo is a suited man whose head is replaced by a question mark. The only clue is a website - www.anonanalytics.com.
Below the logo, a statement reads: 'Acquiring information through unconventional means.'
Let me put this in perspective. At the first brokerage house for which I worked as an investment analyst, we had three permissible recommendations.
They were 'Buy', 'Buy on Weakness' and 'Long-Term Buy'.
I tried publishing a 'Sell' recommendation once.
The result was that several clients told competing brokers, who then told the management of the company involved, who then called up my boss to complain.
Within hours I was holding on to my job by my fingernails. The stock went back to 'Long-term Buy' the same day.
Of course, the other option would have been to publish the research anonymously. But this was a non-starter. We expected clients to deal through us on our ideas. How much good would we have done ourselves if they did not know whom to call?
It makes no difference to the research published by short interests, however.
They are their own clients and make their money by shorting their target stock before they publish.
If they are right, the share price crashes as their findings become widely known. They then cover their shorts and walk away with the loot.
And they have incentives to get it right. If they are wrong, they might be sued for the entire value of the stock's fall on the market or, if it does not fall, they may have to cover their shorts on a rising price in thin trading. Ouch!
But I can't think of a better way of getting solid 'Sell' recommendations out to the investing public at large.
These 'short' side reports contain much better, real research work than is to be found in all the fluff topped by 'Buy' recommendations. What's more, the whole object is to publish them as widely as possible, unlike the restricted circulation of most brokers' research.
And they make such delicious reading. You really can curl up with this latest report as you do with a good book. You will soon be laughing at how the target company's brazen ways of misleading investors were uncovered and how its public statements are contradicted by its subsequent actions.
I'm sorry I can't name it here.
I believe that Anonymous Analytics stays anonymous more for reasons of personal safety than from a craven evasion of responsibility, but I stick to my standards.
If they won't name themselves I won't name their target.
I can tell you, however, that the share price chart does indeed seem to point to an early delisting.