SRI Short Sales - Doh! Homer & Friends II
This post continues the SRIÂ panel discussion between Homer Simpson, Gordon Gekko and Henry David Thoreau, inspired by Jed Emerson's article Beyond Good Versus Evil: Hedge Fund Investing, Capital Markets and the Sustainability Challenge.
Homer: What makes a tall sale good?
Gekko:Â Convincing detail.
Homer: Doh, what's that got to do with a tall sale, suit?
Gekko:Â Sorry, Homer, I thought you meant tall tale.Â There really is no tall sale, only a short sale, and it's not good or bad.Â
Gekko:Â Suppose I realize Enron is making a lot of offsetting trades that add up to nothing and reporting big profits I can't understand.Â I borrow some Enron stock and sell it.Â Eventually people begin to take a closer look, Enron's books turn out to be as crooked as a three dollar bill, the stock price collapses.Â Now I buy stock cheap, return the stock I borrowed and pocket a profit.Â I did good , SRI right?
Thoreau:Â People lost their life savings.Â
Gekko:Â They could sell Enron whenever they wanted, my short didn't effect their decision to buy or sell, it didn't cause their loss in any way.
Thoreau:Â Didn't your short call attention to Enron's problems?
Gekko: Possibly, but the problems were real, I was just the canary in the coal mine.Â People would have noticed the problems sooner or later, and later might have meant even bigger problems.
Homer:Â I thought Jed's views of both fundamental and sustainable investment involved avoiding investments that moved markets by their own weight.Â Isn't the canary moving the miners to the exit, PDQ.
Gekko and Thoreau (in unison):Â What was in that donut Homer?
Gekko:Â That might seem inconsistent, but is it really a sustainability issue or a fundamental analysis issue to alert the world to a serious problem?Â It sounds almost like- I can't believe I'm saying this â Socially Responsible Investing, that's what that SRI thing stands for, right.
Thoreau: I'm actually sold on the short-term ethics of the short, so long as it's responding to a problem rather than creating it, but don't some shorts actually create a problem that mightÂ not otherwise exist. I heard some banks were ruined by short pressure last year, pressureÂ that led to collateral calls, illiquidity and failure - even when they might have been in OK shape long term.Â Â Sometimes the shorts even started rumors to increase the pressure.
Gecco:Â Well Henry, Â some of my shorts might have been a little different than Jed's, but I wouldn't know anything about those rumors - Henry please, give me a break, I just finished a twenty year stretch.Â Â Consider another situation, Henry, a short sale as a type of hedge.Â Suppose you own stock in a great windmill company.Â Thanks to energy and infrastructure subsidies the entire windmill industry goes through the roof.Â Â Now your great stock is overpriced.Â Do you sell?Â Why not keep your best in class windmill stock and short the industry dog.Â Even if the windmill industry falls back to earth, you'll make a buck, so long as your stock outperforms the dog.
Thoreau: Not really my style, and probably not headed for the SRI hall of fame, but perhaps not evil.
Homer: When did we start talking about Google, and what's long term for a short.
Gekko: (cough, cough, cough) no more questions, I mean donuts, for you Homer. Some shorts, like theÂ Â Enron example,Â are predicated on spotting a problem and waiting for the rest of the market to see it.Â It's a short term play, the shorter the better.Â Some shorts, like the hedge in the paired windmill companies, need to be maintained for a while, until that windmill sector cools.Â Some paired trades are planned from the start.Â Buy and sell the best in sector and worst in sector on day 1, sell and buy the best and worst simultaneously as soon as your analysis of the situation changes.Â
Thoreau:Â SoÂ I'm not leaving any short positions to my grandchildren?
Gekko:Â No, Henry.Â Whether you use short sales (which have some high carrying costs, especially for the small fish, I mean investor) or buy put options (safer but even more expensive) you probably won't last too long with a short.
Thoreau: OK, first you convince me that some shorts are ethical, now you're telling me they are not really long term, how can they be a good long term fundamental investment or a sustainable investment?
Gekko: I can't stop thinking about tomorrow, but Jed might suggest that a hedge fund with that very deep, very long term analysis could take a short position here and there and still be around for your grandchildren.Â Maybe a sustainable investment can include supporting activitivites, like short positions as hedges, that don't change it's fundamental long term character. Not sure if this could apply to the Enron type short.Â
Homer:Â Enough, where can I read Jed's actual paper instead of listening to more of you guys, my head hurts.
Gekko: Click here.Â to read Beyond Good v Evil, Hedge Fund Investing, Capital Markets and the Sustainability Challenge
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