Supported by Greenhaven Road Capital, finding value off the beaten path.
John Hempton was on The Jolly Swagman podcast to talk about his career, investments, and work in Australia. Hempton’s a short seller, and not the first we’ve looked at. Marc Cohodes has been featured, twice. Jim Chanos has been featured twice too.
Bethany McLean explained why short-sellers are helpful. She said, “I had no cynism or skepticism is those (early) days.” McLean had to pick stocks for the magazine and representatives from different companies came in, pitched their company, and it was roses all the way down.
After one of her first stories, she got a call from a short seller. That person told her all the ways she was wrong, and as McLean told Patrick O’Shaughnessy, “I just don’t like being wrong.”
Hempton is a short seller, so let’s see what he has to tell us.
Hempton has a talent stack. “At some point, I realized I wanted to pick shorts like Marc (Cohodes) and manage a portfolio like Kim. I don’t think I was good at either of those things as those people…but the combined result is quite nice and I’m really happy with it.”
The odds that anyone is the best in the world at any one thing is quite low. (See Also: Something is always happening). However, the chance that someone is world-class in one combination of things is quite high. Scott Adams writes that he was not great at business, drawing, or humor but he’s great at combining the three.
Adam Savage writes, “Eclecticism is kind of my brand…my talent lies not in my mastery of individual skills, at which I’m almost universally mediocre, but rather the combination of those skills into a toolbox of problems solving that serves me in every area of my life.”
This combination of stock selection and portfolio management contributes to good decisions. He’s very complimentary of Cohodes throughout the episode but Marc invests with such rigor it borders on anger.
“In my ideal world I have a computerized Marc Cohodes that takes his unbelievable stock selection and it industrializes it and by industrializing it I can diversify it and de-risk it.”
This kind of style takes a certain approach. For example, Hempton tries to argue well. “A really good guy in financial markets likes to be told he’s wrong and hear rational arguments why he’s wrong.”
Steve Jobs was like this, writes Ken Segall. “Steve preferred straight talk and raw content to slick presentations.” Jobs would act like a newspaper editor, assigning tasks, giving feedback, and scheduling follow-ups. “Steve was most comfortable with a table, whiteboard, and an honest exchange of ideas.”
Though as Charlan Nemeth told Russ Roberts, it’s more than the MBA method of assigning a devil’s advocate.
Sometimes arguments mean not knowing. Good, says Hempton. “If in finance someone asks you thirty questions, the answer to at least seven of them should be, ‘I don’t know.’ If your answer is not ‘I don’t know,’ I’m probably not going to hire you.”
These kind of back-and-forth, honest conversations get to a deeper understanding. “If you just stole an idea without understanding the analysis, you’ll get it wrong and trade it badly.” Cohodes agrees, “When I short a company I know it better than the guy running it.”
This kind of work is needed because there’s a lot of work to do. Hempton says there are lots of shorts available and when one busts, co-founder of Bronte Capital will tell John to go find another one. Similarly, this is true for our time.
We’ll end with a quote from another investor, Howard Marks:
“One way I help myself make these decisions is that I constantly remind myself that there are two risks that they face every day. The first one is obvious, the risk of losing money. The second one is not so obvious, it’s the risk of missing opportunity.
Thanks for reading.