Lessons from The Front Lines of Short Selling

About ten years ago, my good friend Whitney Tilson put together an education business called Kase Learning.

The idea was to take Whitney’s experience as a hedge fund manager – both as an investor and a business operator – and share it with people who were interested in starting funds. It was an interesting idea back then and is one now.

In my career, I have been part of launching four separate hedge funds with two where I have been Managing Partner. In total, those funds raised over $5 billion of assets while I was there and one of them is a $40 billion+ fund today. Given this experience, Whitney asked me to come speak to the class each semester.

Speaking to that class was one of the most enjoyable events of my career. We were told the class enjoyed my unorthodox but brutally honest and straightforward advice. The same type of advice we give here at HX Research!

One unanticipated benefit of teaching the class was the chance to meet the students. All of them were very smart and diligent and went on to do remarkable things.

One of those is Gabriel Grego of Quintessential Capital Management.

QCM is a value-focused investment that Gabriel started about ten years ago and he now runs out of Europe.

Recently, he joined us on our HX Podcast and told us his story. You can hear the podcast here or watch it here.

Like me, Gabriel has a unique background in the investment business.

He was born in Italy, went to Tufts University in the USA and then began his career at a small hedge fund in Italy. After some time, there he went out and joined the Israeli Defense Forces (“IDF”) and served as a paratrooper before getting his MBA.

He graduated with his MBA right as the Global Financial Crisis began and the company, he was working with came under duress. This unfortunately left him without a seat during the most difficult economic period of the last few decades.

His fund started originally as him running his own investments. As he tells it, he had become interested in stocks as a hobby.

He thought he would focus on running these investments to bide time during the recession. He quickly, however, found out that he genuinely enjoyed it. Also, he was quite good at it.

His friends and family learned about his endeavor and began giving him some of their funds to manage. Fast forward a decade and Gabriel has a well-established money management business with a great reputation.

Gabriel has also built a reputation as one of the best investigative short sellers on the planet. Gabriel carved out a niche doing intensive research on fraudulent companies.

There are far fewer of these out there today than when I started my career, but they are still out there. Gabriel has some incredible stories about the work that he shared on the podcast. We encourage you to listen to it!

At the end of the podcast, we asked Gabriel what advice he would have for regular investors. While he is well known for short selling investigations, he spends his time focused on long investing and it is where he has made all his money.

His background gives him a unique perspective, and these were his thoughts:

1) STAY INVESTED

Gabriel says that this is unusual advice from someone known for their short selling, but he emphasizes the power of the stock market through time.

He notes that through time it goes up and that timing it can be difficult. The times when you most NEED to be invested are the most difficult to remain invested. The times when you MOST want to be invested are the ones where you should be cautious.

Remaining consistently involved is the solution and allows you to capture the long-term benefits of the stock market.

2) DON’T BELIEVE THE HYPE

He has a unique perspective here as a short seller. He has made a career of identifying the “hype” and helping debunk it. Over his career, he has saved investors a lot of money by exposing these frauds.

He doesn’t recommend regular investors go out and look for shorts like he did but to be cautious when they hear something that is too good to be true.

Here is what he had to say…

“The second thing also that you can learn from short selling is I would say you should develop a natural instinct to be very skeptical of hype. Euphoria, the latest fads, a sexy industry, get rich quickly ideas, everything that's shiny, that looks very sexy or just really flamboyant, super optimistic statement by management. I'm not saying that they're all bad. Not only easy, I mean, you should be skeptical of this high emotional content. You see what I mean? It doesn't mean that it's always wrong. Sometimes, yes, you will lose some great opportunities every once in a while. But I can tell you that I go fishing for frauds always in those kind of environments. And it's not a coincidence. That kind of environment tends to attract fraudsters.”

This is especially true for smaller companies. Stick with more well-established stories and avoid the hype. The greater the hype, the greater the risk.

3) DO YOUR OWN WORK

This is one of our own points of emphasis and Gabriel had several insights here.

First, he notes that you should not just trust the work of the Wall Street analysts. He notes that there are many natural conflicts of interest in their work.

Gabriel has seen many times where they have defended outright company frauds.

We think that there are a lot of great people working as analysts on Wall Street and most of them do fine work. We do agree with Gabriel, though, that there are real potential conflicts out there. Especially in the smaller capitalization area.

We always looked at the Wall Street analysts as a source of information but nothing more. We used them for data but always made our own decisions.

The other part of Gabriel’s insight in this area goes back to the single idea we hear the most from smart investors – KNOW your investments.

He relates a story about investing in Microsoft Corporation (NASDAQ: MSFT) at the start of his career. At the time there was a lot of skepticism about their competitive position. He went out to his professional network and learned that it was going to be impossible for the company to be displaced.

He bought the stock and still owns it today. He has done well with it!

Doing your own work allows you to better identify these types of opportunities and stick with them.

We have been super impressed by the development we have seen in Gabriel as a money manager in the decade that we have known him. We encourage you to check out the podcast!

Check out Enrique Abeyta’s conversation with Gabriel Grego, founder of Quintessential Capital in the latest episode on the HX Podcast, or watch on our YouTube.

Gabriel has been a value investor and activist short seller for more than a decade, focusing on uncovering frauds and illegal activities to identify short-selling opportunities.

While all investors need to do their research, Gabriel has taken it to a near “secret-agent” level of investigation. We’re talking cloak and dagger stuff, dressing up like a delivery man, infiltrating essentially criminal organizations and the like. Not for the faint of heart!

Luckily his experience as a paratrooper in the IDF has given him the nerve, and his education and intellect have given him the wherewithal to sniff out and act upon his discoveries. Lots of great stories and insights to enjoy on this one!