At one point in my career I was pretty much a dedicated short seller (spent more than 70% of my time on shorts). This was before fintwit, Reddit meme stocks, and before people stopped caring about valuation & fundamentals. One of my fav short stories is also the most telling 1/x
The target co provided valuable data on their website that updated in real time. The competitors did the same. The data was hard to track so nobody did, including the sell-side who was actually oblivious to it even existing. This was before the explosion in “alternative data” 2/x
So I spent over a month building a detailed ground up industry demand & supply model using a python based web-scraper on all of the relevant target/competitor websites. I did the same thing for their customers using a completely different data point and married them together 3/x
The data collection was automated to run in defined intervals (weekly) but the data analysis was manual. It took a while to clean, organize, and actually analyze. Once I had a template set up I backtested the findings against reported KPIs in prior quarters. R-squared: 0.75 4/x
Won’t lie, it felt great. Euphoric even. I knew I was sitting on a very valuable & unique analysis since most of their competitors were private so investors didn’t track their data, and their customers were highly fragmented so people didn’t even bother to even check that. 5/x
I didn’t have to wait long for the data to show a deviation vs consensus (about a month into tracking) - it had decelerated noticeably in the final month of the quarter. This was a 10%+ grower that always beat numbers and got a premium multiple so I wanted to be early. 6/x
The numbers showed they were going to modestly beat top line estimates for the quarter (which was a change of pace for them), but the start of the next quarter was much weaker than annual guidance implied or consensus expected. 7/x
So we put it on as an avg sized short and waited. When the co reported they guided aggressively, and the stock went up 5%. I assumed they believed revenue would accelerate throughout the q and didn’t want to give in to the growth story ending. Sure enough, that was it. 8/x
Over the next month the data got worse and we sized up the short aggressively. When they reported the next q they missed top line by 5% (think 7% growth vs 12% expected). But the stock was flat because they again guided above street and blamed the miss on internal issues. 9/x
But I had an industry model and saw the revenue slowdown was not unique to them, it was pervasive across their competitors and some large customers. Plus they were losing share. The data was weak throughout the entire next quarter too so we sized up again. 10/x
When they reported the next q they again missed top line by 5% (similar 7% vs 12%) but guided the next FY 5% ABOVE consensus (which was a growth acceleration). The stock was down 2% on the report because some people didn’t believe them but it should have been much worse 11/x
At this point it was getting annoying and the brain damage to constantly update this beast was taking up so much time for a position whose stock price was barely changed vs 6 months ago. I started doubting that dumb investors would even care if they missed estimates 12/x
And also started worrying that mgmt could pull some strings to re-accelerate the business. It was also the largest short in the book so got a lot of attention/questions from others which added more time. But I continued on and believed it would eventually work out. 13/x
Over the next q the data got much worse but the stock melted up 15% vs a flat market. Sell-side contacts said it was rallying on positive checks of improving fundamentals. They were right, the industry data improved but now the target was losing significant market share. 14/x
We again added to the position. By now it was uncomfortably large for some, but I loved it. Go big or go home. Plus we had a clear differentiated thesis w/data to back it up. Basically the holy grail of shorting. By q end the data showed growth of 1% vs street at >10% 15/x
When they reported, growth was in fact, 1%. Mgmt also capitulated and guided the year from >10% to flat. Earnings guided down -15% vs expected growth of 20%. The stock fell 30% on the report and >40% over the next week and we covered. Our net gain was ~30%. 16/x
So why did I say this example is this telling? Well, since then the stock is up >6x and massively outperformed. So for nearly a year of brain damage, countless hours spent collecting & analyzing data, days spent arguing other investing team members, we made a whopping 30%. 17x
Even worse is we were ultimately wrong on the LT outlook of the bus. -30% vs +600% is a scary r/r. I stopped tracking the data after the q bc of the time sink & never would have owned the co anyway bc I thought it was low quality. This situation is what ended my shorting career.
Note: I did not proof read any of this

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