Today's Chuckle
Place all liquids in a safe spot, this is really, really funny...
(emphasis mine)
Short Sellers as Canaries in the Biotechnology Coal Mine
David Miller, President of NymbleInvestor Biotech Monthly, publisher of the monthly NIBM Newsletter on the biotech market sector, provides the following article. His web site address is .... He welcomes your comments and questions at ...
First, let me say I am not a fan of short sellers. It's not that I think it is un-American or anything silly like that. I just don't happen to like short sellers, their tactics, or the free pass the SEC and financial press gives them when they cross the line. Before you send me a nasty note suggesting I like short sellers, please take a moment to re-read this paragraph.
With that out of the way, I want to take the next few hundred words to pass along a tip I learned the hard way: Short sellers may be the bane of long-side shareholders' existence, but they can provide intelligent investors a competitive advantage. In biotechnology stocks, they can be the canary in the dank, damp, and murky world that is sometimes biotechnology investing.
In case you aren't familiar with the story of the canary in the coal mine, here's a review: In olden days, coal miners would take canaries into the coal mines. Provided a light was nearby, these canaries never shut up. They weren't there for their melodious warbling, however. In coal mines, gases can build up and/or be released by drilling and blasting. Those gases are toxic. Luckily for the coal miners, canaries fall silent or drop dead when these toxic gases begin to reach levels that are just beginning to be toxic for humans. When the canary stopped singing, the miners knew they were about to be in trouble and could escape with their lives. These canaries were an early warning system for the miners.
Just like canaries, short sellers can be an early warning system for biotechnology investors
Anyone who has been an investor for very long knows when short sellers have arrived. Even before the monthly short interest figures appear on the NASDAQ site or in the Wall Street Journal, experienced investors can tell. (Incidentally, published NYSE or NASDAQ short interest figures are essentially six weeks old, an inexcusable delay in this computerized age.) Companies that couldn't bribe anyone for good or bad coverage suddenly get modestly uncomplimentary articles from the folks at Bloomberg or one of the other outlets who particularly cater to short sellers. This is usually accompanied by a surge of activity on the message boards relating to the stock. Near the time negative articles come out, share volumes will pick up, the share price will come under pressure, and the message boards devolve into something sounding for all the world like a 2nd grade recess shouting match.
The dumb investor sees all this and becomes defensive, vowing never to let the short sellers "win" by personally buying as much stock as they can afford -- usually hopelessly destroying any semblance of portfolio diversification. They become obsessed with the stock and eventually fall in love with it. That the short-sellers might have a kernel of truth in what they say never enters the picture.
The smart investor sees this activity as a canary-like signal to buckle down and do additional research. Frankly, we (The NIBM Research Team) might be the only biotechnology research team who openly admits to reading the message boards. Why? Well, it's certainly not for entertainment. In EVERY instance we've studied, there is an identifiable thread in the bleating that passes for reasoned discussions on message boards affected by short selling mania. An experienced researcher can read through a couple hundred messages and see exactly where the short sellers feel the company is vulnerable to failure. Sometimes we can even gauge how committed (buried) the short-sellers are to the position.
Use short-sellers' accusations as a jumping off point for additional research into the company
Most often, we've already identified the vulnerabilities. When we see a particular vulnerability being picked on by short sellers, we dive back into research mode to make sure nothing has changed and our original opinion of the vulnerability and the company still holds water.
The key here is to recognize short sellers aren't dumb. When you dislike them very much, that is a hard step to make. Intelligent investors can make that step. Dumb investors cannot. We would encourage readers to not be dumb. Use short-sellers' accusations as a jumping off point for additional research into the company.
On occasion, we even find out the short-sellers are right. More often, we find they are wrong but there is enough of a kernel of truth that Wall Street will listen and the stock will fall anyway. Remember, the stock market has NOTHING to do with being right or wrong -- it's all about profit and loss.
Don't go to war with the shorts... Look at them as a canary
Unfortunately, a concerted short selling "attack" can and does take down promising companies whose only fault was under- capitalization and an inability to handle the PR/IR aspects of a short attack. Is that fair? No, but it's a fact of life until regulators decide they ought to get involved. When this happens, short-sellers -- never a modest bunch -- will crow about how right they are. Frankly, I think short selling success in small-cap companies is about 25% predictive (shorts predicted problems in advance) and 75% causative (shorts caused or exacerbated the problems by their tactics), but that's a debate for another time.
In the best scenario, we'll see a stock with heavy short interest where either the short sellers don't have a leg to stand on or the shaky leg they are standing on is running up against some event (financing, partnership, clinical trial results) where their expectations are dead wrong. How do we know which is which? Research, research, research -- hours and hours of it. In this scenario -- which, alas, happens too rarely -- we get an opportunity to buy low and sell high into a short squeeze. That's fun, especially for someone who doesn't much like short sellers.
The bottom line is this: When one of the biotechnology stocks in your portfolio comes under pressure from short sellers, don't go to war with the shorts. Look at them as a canary and take the opportunity to redouble your research effort. If your research shows they have a point or the tipping point is close enough that Wall Street thinks they have a point, cut back your holdings accordingly. If your research shows there is much ado about nothing, stand pat and enjoy the show secure in your newly acquired research.
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