Whitney Tilson On T2 Partners' Netflix Short, Shorting Skills In General
Last month T2 Partners' fund declined 2.8 percent in January, with declines of 4.3% (net) in the last five months, which managing partners Whitney Tilson and Glenn Tongue noted "in isolation, isn't a terrible number." Having said that, "given that the S&P has surged 23.5% over the last five months, this has been, by far, our worst relative performance in history." So, some thoughts are necessary.
On strengths vs weaknesses: "Over time we’ve been quite successful shorting fads, frauds, promotions, declining businesses, and bad balance sheets. Where we have had much less success, however, especially in recent months, is shorting good businesses that are growing rapidly, even when their valuations appear extreme. Such open-ended situations, regardless of valuation, are very dangerous, so going forward we will avoid them entirely unless we have a high degree of conviction about a specific, near-term catalyst."
On 'deemphasizing' shorting: "A far bigger mistake we made was maintaining a large short book even after the crisis had passed. Allow us to explain why this occurred by starting with some background: From 2003 through 2007, our typical portfolio positioning was 80-100% long and roughly 20% short. In early 2008, when we became convinced that the housing market would collapse, we tripled our short book to around 60%, with an emphasis on highly leveraged housing, real estate, and financial companies that were most exposed to the subprime bubble. Needless to say, this worked out spectacularly well – so well, in fact, that we became accustomed to running a short book in the 50-70% range and – we’re embarrassed to admit – we pushed to the back of our minds two facts that have always been true: 1) shorting is a terrible business (as we highlighted in our book), and 2) we’re much better long investors than short investors. Said another way, long investing is a massively better business than shorting, plus our experience, skill set and temperament is much better suited to it. We will not forget this again.
To be clear, our conclusion isn’t to abandon short selling altogether. Done very carefully and selectively, in limited size, we are confident that our short book can provide both hedging and positive returns. But at most times we will have a short book in the 25-40% range.
In summary, we are redoubling our focus on what we do best – buying cheap stocks – and are deemphasizing short selling – both in terms of time and capital. Still, we are always keeping a close eye out for the occasional big bubble that might give us the opportunity to make a lot of money on the short side."
On Netflix: "Since we first wrote to you in December about our Netflix short position, we have received quite a bit of new information including results from our survey, input from investors, and the company’s recent earnings release. We are still digesting this information, which has both bullish and bearish implications, and will write to you about our conclusions in the near future. "
