Supported by Greenhaven Road Capital, finding value off the beaten path.
What’s great about short sellers like Cohodes (and Jim Chanos ) is their willingness to offer a different opinion. “I always say that free speech is free so long as it’s bullish,” said Cohodes in 2017. Internal, but cordial, dissent, argument, and conflict are good for organizations as steel sharpens steel.
“It all started in high school, I was never a good student. I was taking a tenth-grade economics class where we invested in stocks and I sort of got the bug then.” I wasn’t a great student, is a common refrain but we shouldn’s assume school is good or bad.
School is school. That said, lots of entrepreneurs like Peter Rahal don’t fit in school. Katrina Lake rearranged her schedule so school fit around her business. Tiffany Zhong said, “I don’t think everyone should drop out. There’s a lot more to that. What will you be doing instead and who will you be doing it with?”
For highly motivated, focused, and intelligent people the opportunity cost of school is too high. For most everyone else it’s not.
Cohode’s first investment was in coin drop arcade machines. For research, he visited arcades, talked the owners, and found that business was slowing. “I realized at the time that this isn’t for everyone and I’m genetically mutated to have the short selling gene.”
Getting as close to the customer as possible is where the best data is. “My rule of thumb is this, Chanos made so much sense when he was unwinding this Baldwin United business that it was a fraud. It made so much sense and I overlaid it against the long story which was so convoluted and made so little sense.”
But that Baldwin United trade went against the people and associates Cohodes worked for. “I didn’t mind taking shit (for selling Baldwin United) from the powers that be at the bank.” Organization work better with top-down support. Organization work better pushing down support, not directives. Organizations work better that way, but Marc’s independence made it indifferent.
Cohodes warns that “thesis creep is fatal” and as the facts, people, or situations change the investors must consider changing too.
Marc tries to find situations where the creep is less likely to creep. He’s uninterested in Tesla which is “one of these tastes great, less filling names. Elon says it tastes great, shorts says it’s less filling.” Tesla has too much sizzle around the steak that the company could run on fumes until it’s a great business.
Shorting is like lifeguard training, said Cohodes; reach, throw, row, go. You want to carefully try to save another person and only take risks when there’s no other option. “There are some guys who are interested in wresting a jaguar out of a tree. I’m interested in when a guy shoots the Jaguar out of a tree I’ll go in and cut him up. I don’t tackle anything that has momentum, something that’s un-analyzable, something that’s too hot. Like the FAANG stocks. I could care less.”
And, “I kind of view myself as a huge fish that’s sitting in the water near a waterfall. I’m just sort of meandering, not letting the current push me one way or the other. I’m watching all the food sources come down the waterfall. I’m thinking, ‘Do I want shrimp today? Do I want plankton today? Do I want a minnow today?'”
And, “I try to get into situations where I have a jump. Where I can out analyze, out think, or out hustle.”
Around the 49:00 mark there’s a nice conversation about Cohodes’s experiences in 2008 with Goldman Sachs and his investments. It’s a good reminder that we all operate in a system and all systems have rules that seem permanent but that can change in a moment.
To find the right shrimp, to find a jaguar that’s been wrestled to the ground, to find situations he can out hustle others, Cohodes has to know his shit. He does. “What people don’t realize is that I’m an investor. In life, you can be an investor or a trader. I’m an investor whose specialty is on the short side. When I short a company I know it better than the guy running it.”
When investigating Badger Daylight, “I started calling various North American operators and asked what their market was growing by and they said 2-3%. I asked how some can think it’s going to grow at 30-40% and the operators say those people are full of shit and they’re lying.”
Then he puts stuff on Twitter and “I get all sorts of feedback” from former customers, suppliers, competitors, regulators. Andrew McAfee and Erik Brynjolfsson noted this change in their book Machine, Platform, Crowd where the masses can come to better solutions than the masters.
Cohodes gets maligned because he’s direct with bad news when we want to hear good. We could all be more like Rick Federico, who called Cohodes and said if you’re going to short P.F. Chang’s at least call me first and I’ll address your issues. It’s like Michael Ovitz wrote, “When you tell someone the truth, all they can do is get upset – they can’t call you an idiot.”
Thanks for reading.