Investment Advisory Service

Wednesday, 18 December 2013

Life is too short to be short.

Bill Ackman of Pershing Square has lost a big amount of money in his short position on Herbalife. As per this article, shares of Herbalife have gone up by $6 per share to touch a 52 week high price of $77. Is Herbalife actually a pyramid scheme as claimed by Ackman? I don't have any clue about Herbalife. Only things I know are: I don't like the milkshake powder that Herbalife sells and secondly I don't like to short.

Shorting has its own set of vicarious examples to learn from. German billionaire Adolf Merckle committed suicide by jumping in front of a train when he got short squeezed in his bet on Volkswagen. In India, lot of investors [speculators] got trapped in the short squeeze of Akruti Nirman. There might be many more examples which one can read and try to learn from. However, it's easier said that done.The dope, excitement and mirage of getting rich quickly through shorts traps a lot of gullible and not-so-gullible investors.

There is another example which comes to my mind. Somebody shared an article a few months back about the third person in the team at Berkshire along with Mr Buffett and Mr Munger. I am unable to recollect the name of that person right now. That person had taken some margin positions in his personal book around 1973 or 1974 and the market went against his position. In order to fund the margin requirements, he had to sell his shares of Berkshire to Mr Buffett for $40 a share.The price of Berkshire stock is $170,000 now.Things on margin can cut you really deep.
I myself got trapped in a short position in the stock of Matrix Laboratories in 2006. The beauty of shorts is that for a while, the position will work in your favour. That will release a shot of dopamine and the eyes will move away from the underlying risk to the expected profits. Since Matrix position worked in my favour for a while, it led me to believe that my theory [of why Matrix stock should go down] is correct. I increased my position and that was the only time I liked Matrix. 

From then on, the shares of Matrix kept moving up and I kept on funding the margin requirements by selling my long equity positions. By the time, I squared up my position in Matrix, I had lost around 25% of my overall portfolio. That was a very costly lesson I learnt. And one thing which doesn't reflect in the calculations is the amount of stress I had to undergo due to that position. I decided thereon that I am not wired for such roller-coaster rides in F&O. I am happy that it happened early in my career. If that one position would have worked for me, it might have led me on to a lifelong trip of misery.

I want to get rich comfortably. And the emphasis is more on being comfortable.


Bhaskar Jain said...

Ankur Jain said...

Thank you Bhaskar for the interesting link.

Vinay said...

Hi Ankur,

Are you referring the third person to Rick Guerin who got was levered with margin loan in the downturn of 1973,'74


Ankur Jain said...

Hi Vinay,

Thanks for refreshing my memory. Yes, I was talking about Rick Guerin.