Long or Short Capital

Long or Short Capital receives a lot of reader email asking us how to trade using insider information. Naturally, we are experts in this field and we find that insider trading is a strategy which is extremely effective, especially when you route all your trading through a bevy of untraceable Cayman Island shell corporations. Many readers already know and practice buying and selling on material non-public info, so we thought it would be more helpful if we explored how to hold on material non-public info.

1. Have a position in a company which issues tradeable public securities (stocks, options, bonds, etc).
2. Obtain material non-public information from insiders of this same company.
3. Do not buy any of this company’s tradeable public securities.
4. Do not sell any of this company’s tradeable public securities.
5. Profit.

Susan Solovay, a woman by trade, has started a fund of funds whose mandate will be to invest only in hedge funds run by women. Solovay is marketing this FoF on the claim that women manage investments better than men. (quotes from Business):

Solovay commissioned extensive academic research into the performance of hedge funds run by women and claims that it showed that women fund managers performed consistently better than those run by men.

Other examples of commissioned “academic research” show that:

• Cigarettes taste great and are healthy
• Lead is perfectly safe for the lining of our water pipes
• Corn based ethanol makes any sense whatsoever for reasons other than padding the pockets of Archer-Daniels-Midland (NYSE: ADM) and making idiots feel better (wrongly) about the environment

More from the article:

She claims that the research showed that male-run hedge funds managers tended to shoot from the hip making big returns one year and poor ones the next.

So what Susan Solovay is saying is that the men she has been with have not had consistently “big enough” returns. In this case size does matter and obviously Solovay has not invested in Long or Short Capital. Along with our investment strategy of “not losing money”, we use the tactic of “making returns so big that the next year we can lose as much as we want, whenever we want”.

For non-abstract financial advisors and managers, performance problems are understandable and not infrequent. But these problems are not due to male analysts and portfolio managers alone. Women are involved in these funds too. If not where would the coffee come from? Who would do some of the back office functions and the bulk of secretarial work? And who would provide massages to male analysts and male PMs? And how would any large investment manager be able to adequately staff their investor relations department? Women are part of the performance of these funds and it is sexist to abdicate them from responsibility just because they are never put in positions to drive actual investment decisions or because nobody takes them seriously.

Recommendation: Setting aside my qualms about Ms. Solovay’s rampant sexism, Pomegranate Capital seems to be a dubious gimmick. As an investor, you have two layers of fees and you have a restricted pool of PM talent.

LoS has witnessed the success of our Satan’s Portfolio thesis against opposite minded strategies such as those embodied by PAX Fund and we see Pomegranate Capital as a similar opportunity. Although different in composition, we think a great play would be to go long the all-in return of the Vice Fund and short the all-in return of Pomengranate Capital, effectively creating a “PC spread” of sorts.

Recently, recruiters at top universities and college administrators alike have recognized a growing trend in the student job market, namely the adoption of “adjusted” GPA figures. It appears that students have realized what investment bankers have known for years: if you don’t like a number, you can change it.

Say you are an investment banker at a large Wall Street Firm, like Silverman Sachs or Layman Brothers, and you are trying to syndicate Theoretical FCF Corp’s bonds. The problem is that Theoretical FCF Corp seems to lack any actual cash flow and will almost certainly never actually pay down any debt. What do you do? Just pro forma their EBITDA to what their cash flow would be if they actually generated cash flow, as you kinda expect they may sometime in the future. And if that doesn’t get your bond customers to a number that makes them want to write big tickets, adjust that number for “one-time” expenses like “bad debt”, “restructuring charges” or the vague but powerful “fees”. This is how you get it done when syndicating debt or selling IPOs.

Now for a student, their GPA is basically the equivalent of a firm’s 4 year trailing cash flows. The number itself carries huge weight in job interviews, yet for decades students have reported GPA exactly as it appears on their transcript. While entirely accurate, this is a huge mistake. Job applicants are now realizing that adjusting their GPAs can give a more accurate misrepresentation of their performance and expected future production.

Why should an employer hire an average of you over the last four years, when what they should be interested is a real misrepresentation of what you could be now if not for certain events? Here are some ways students are making themselves look better on paper:

1. Add-Backs for non-recurring GPA deductions, such as getting drunk at a final, or anything that happened freshman year
2. Pro forma GPA for dating someone smart or at least someone who wears glasses in the morning.
3. Projected GPA levels for future years using the same class load. Surely a student would be more efficient in those classes if the student took them again. Thus the student should adjust their GPA to better match their future production.
4. And the most common move, arbitrarily making their GPA a 3.6 – good enough to get by, but not good enough to raise suspicion.

Recommendation: If you are serious about a job in finance, it’s important to signal that “you get it” before you even arrive. We heartily endorse the use of adjusted and PF GPAs for this reason. Remember, it’s not what you did or will do, but what you can convince people you did or will do.

When it comes to meeting young ladies out at the bars
I won’t lie, I get a nice amount of love

…

So when I do hit the club I ain’t hard to catch
On the dancefloor, spilling my drink, throwing bows
Doing old school dances like the Smurf and Cabbage patch
One shot, Two shot, Three shot, Four
Somebody shoulda stopped me from drinking any more
When I was sober that broad looked like Al Gore
Now she look alot more like Demi Moore

I’m just a regular dude
I do my thang a lil bit, nothin major
I’m not makin excuses
But when it gets like that
You gotta blame it on the Jager.

-From the Soul Position song “Blame it on the Jager”

Past Quotes Entirely Relevant to Investing

A lot of people think “being intelligent” is about having a powerful brain, being creative or being able to understand things. This, like a lot of things a lot of people believe, is false. Being intelligent is about one thing and one thing alone — making other people BELIEVE you are intelligent. That is how you become intelligent. “Being intelligent” is something that anyone can manage their ways into.

1) Do not actively think.

If your opponent says something, it is incumbent upon you not to answer them but instead to position your response in such a way that you maximize the opponent’s ability to interpret what you say as “smart.”

Example:

Opponent: I think Google is gonna break $600 by April 2007.
You: I do not disagree.

In this example, “You” has positioned his answer in such a way that he can never be wrong. If Google does hit $600 in April, he can point to the fact that “he did not disagree” with the assertion and thus it can be interpreted that he believed it to be true. If Google does not hit $600 in April, he can point to the fact that “he did not disagree” with the assertion and thus he explicitly did not agree and thus it can be interpreted that he believed it not to be true that Google would hit $600. “You” put himself in the catbird seat without actively thinking anything on his own.

A lot of people, the same lot from above, think that “having an opinion” or “standing for something” are ways for your peers or superiors to think that you are a man or woman of intelligence. This is a common pitfall of people seeking to be intelligent and it is absurd. “Having an opinion” is just a way to demonstrate to those people how foolish you are for leaving yourself exposed to judgment and to make you an object of ridicule for their merriment or a tool for their advancement. Avoid this mistake by becoming a blank slate.

Most firms produce an object or service which they sell. This is normal “business.” But with margins where they are, is this type of business the best way to do business?

Why sell something which costs something, when you can sell nothing which costs nothing? The margins on selling nothing are 100%, a fact which Rambus (NASDAQ: RMBS) has known for years. Now nothing production has come to the mobile market with silent ringtones:

[Conceptual] artist Jonathon Keats has digitally generated a span of silence, four minutes and thirty-three seconds in length, portable enough to be carried on a cellphone. His silent ringtone… is expected to bring quiet to the lives of millions of cellphone users, as well as those close to them.

Recommendation: We are bullish on firms which embrace this contagion and switch from selling something to selling nothing. The margin improvements are completely post-modern.

Corporate speak:

“I have a fiduciary duty to defend the company. These manipulative activities have caused tremendous damage to Overstock. I believe that this conduct is harming our company and our shareholders deeply, and that investors have been failed by those who have a duty protect them. The best way to address and solve the problem is to get it in front of a jury of 12 Californians.”
-Patrick Byrne, CEO of Overstock.om (NASDAQ: OSTK) in a February 5th 2007 press release announcing a $3.5bn suit by OSTK against Wall Street itself more or less.

Translation:

I am obsfucating my fiduciary responsibility to produce anything but disappointing results from Overstock.com’s operations. The best way to do this is to get worked up about something (naked shorting and related conspiratorial behavior) which would likely have a very marginal impact on any long term long position in OSTK stock. Please ignore the fact that companies are supposed to produce money not lawsuits.

Corporate speak:

“The fourth quarter was a difficult end to a tough rebuilding year. While there are plenty of negatives to report, I believe the company has fixed the problems that began in Q4 2005, and we are entering 2007 with a fresh start….The company is healthier as a result [of actions taken in Q4].”
–Patrick Byrne in his February 5th 2007 letter to OSTK shareholders

Translation:

The company has improved its health from not healthy to unhealthy.

Corporate speak:

“Based on our preliminary January numbers and our internal 2007 plan, I expect our 2007 results to improve. Specifically, we should:

• Achieve immediate and substantial gross margin improvements;
• Reduce sales and marketing as a percentage of revenue;
• and Reduce technology and G&A expenses from 2006 levels.”

-Patrick Byrne in the same letter

Translation:

After spending Christmas studying with Yoda on Degoba, I can channel the force to see the future like a powerful Jedi. We should:

• Achieve an immediate reduction in gross margins;
• Spend more on marketing as a % of revenue
• Have one time increases in technology and G&A expenses which I will describe as mud pies in some future shareholder letter;
• Claim in next quarter’s letter that after a disappointing quarter (which relative to now would be “next quarter”) that next quarter (which relative to now would be “next next quarter”) will be the quarter we finally turn it around.

In closing, having seen the future, I can assure our investors that Overstock.com will never ever turn the corner.

(Pointer by Gary-Weiss.com)

Amaranth once sent chess sets as year-end gifts, inscribed with a quotation from the late grandmaster Alexander Kotov: “It often happens that a player carries out a deep and complicated calculation, but fails to spot something elementary right at the first move.”

-From an WSJ article

Past Quotes Entirely Relevant to Investing

Seriously it’s getting ridiculous. Valentine’s Day is less than two weeks away. Do you want to die alone? No? Then hedge your flower exposure immediately.

If you fail to get these flowers, and your gf breaks up with you, you can no longer cheat on her with your mistress. And if your girlfriend AND your mistress dump you, you won’t be able to cheat on them with the eastern european escorts your firm supplies you with. Think about that. Get it done.

Long or Short Capital’s second quarter of fiscal year 2007 closed on January 31st, 2007. After reviewing our financials, we have determined that the quarterly dividend will be the ceiling level of $1.50 per a subscriberholder as of 1/31/2007. To qualify, all you need to be is a subscriber, either by XML or E-mail, as of 1/31/2007. If you were not, you will not be eligible.

For more information on how to collect your cash or cash equivalent dividend for Q2, please refer to our Dividend Policy. Given our float of 508 subscriberstakes (as of 1/31/2007), a 5% growth assumption and our trailing twelve months total of dividends of $3.17 per subscriber, our current capitalization is $56,362 using a dividend discount model. Our market cap has grown 28.3% sequentially.

Ben Graham usually gets credit for being the inventor of value investing. Recently, we sat down with Jacob who says he perfected the art about 4,000 years before Mr. Graham came along:

LoS: Hi Jacob

Jacob: Shalom

LoS: How did you get into value investing?

Jacob: Well I have to say it started at birth. Actually that’s wrong, it started at my twin brother Esau’s birth. You see he was born first and by his birthright had claim to my father’s estate. He was stronger than I was so I knew even in my mother’s womb that he would probably push his way out before me. Right from the start I realized I wouldn’t be handed anything in life and would have to make my own way. I saw value investing as the best way to do that. I think recognizing my value bias while still in the womb has been key to my success.

LoS: Tell us about your first deep value pick

Jacob: My early career was unique in that I really only monitored one asset: my brother’s inheritence (NYSE: MBI). Having watched it my whole career I was well prepared when MBI fell out of favor with the street, at the time I thought the market in general was over-valued so I was holding a large portion of my assets in the “cash” of the day which was actually just soup. The largest holder of MBI, my brother Esau, always had a Food-At-a-Reasonable-Price bias (FARP). He was tired of waiting for the intrinsic value of MBI to be realized by the market, and he was hungry and wanted some soup. I saw an opportunity to buy MBI at 0.003% of intrinsic value so I sold my soup “and the rest is Old Testament” as they say.

LoS: That’s impressive, what are your best ideas now?

Jacob: Sorry but I never discuss my current portfolio, you never know when someone might dress up in wool and trick you into bequeathing your fortune to him. Or dress his ugly daughter up to look like his hot daughter and have you end up marrying the wrong one. I do have some advice for young investors though: Don’t live until you’re 180. It’s much easier to have lifetime 20% returns if you die at 75.

LoS: Great point Jacob – thanks for your time. Next week Noah tells us how one contrarian bet on weather futures changed his life forever.

Well, Ash Wednesday is coming up so I’m thinking about how some day I’m going to die, and so are you. I thought I should look into some posthumous procedures in order to make sure that I leave this world the same way I’ve lived in it: as a mini-baller. You can imagine my excitement when I found Celestis. Celestis will burn your flesh and bones into a dusty paste and then put it in a vial, tape you to the side of a rocket and shoot you into deep space.

You might think it’s pricey, but you’re wrong. The cost is only $495. Now naturally as a mini-baller I was hoping to pay more and luckily, there’s a premium product. For an extra $800, Celestis will actually put you in orbit around the earth for eternity. Better, closer, warmer. . . but still on the cheap side for my last huzzah. After some reflection I decided I would prefer that the earth orbit me. I sent them an email for an estimate and will report back.

Side-Note: Through a proprietary and patented process we call due-dili, Long or Short has discovered the reason that NASA has a $17bn budget, a staff full of “rocket scientists” and still can’t make a plane that won’t shed ‘suitcase sized debris’ every time it takes off. It’s all a scam. That’s not debris, it’s the dead, and NASA is KILLING IT by taking them to space, or sometimes just really high off the ground.

Situation: The City of New York wants to upgrade its police radio system so that officers can maintain radio contact in New York’s extensive subway system.

Homework: Calculate the City of New York’s ROI subway infrastructure investment based on the following facts.

• Original project budget was for $115mm and completion in 2003.
• $140mm has been spent so far.
• The system does not work. The police currently refuse to use it.
• Making the system work will probably require at least one more year and a total cost of $210mm.
• Even if the system does work at that point, the fire department still won’t be able to use it due to compatibility issues between the two department’s radio systems.

Enjoy your tax dollars at work.

Recommendation: Long or Short Capital recommends a simple, strict rule of investing in governments. Only go long a government (or government-related entity) if clear catalysts are in sight; at all other times, short governments…in size. For example, if you happen to know that Hugo Chavez is about to nationalize all the productive private assets in Venezuela, you may take a very short-term long position as long as you remember to realize your gains immediately. However, in general and at all other times, you should be actively shorting all governments.

Our Four Simple Steps to Becoming a Billionaire guide was met with great enthusiasm. For those who wish to start with smaller goals and then build from there, we now offer our Four Simple Steps to Becoming a Thousandaire.

1. Go to college. Or not.
2. Work a max of 40 hrs per week. Do not break this rule under any circumstances.
3. Have kids with many women. Paying child support is fun.
4. Treat yourself to a car you can’t afford. Gas inefficiency is a plus.
5. Remember that money which you save will probably be stolen by those crooks at the bank. Spend all your money now to avoid future losses.