We generally don’t do any short selling at Cabot. We’re stock pickers—we recommend buying stocks when times are good, selling your losing positions when times are bad, with some nuance in between. We don’t think it’s wise to short sell stocks you don’t own.
David Einhorn has made a name for himself by short selling. You’ve probably heard of him; he manages the New York-based hedge fund Greenlight Capital. Einhorn has been called the “Grim Reaper of Wall Street” – when he’s shorting a company, it’s often a death knell for its stock. Or at least it used to be.
Lately? Not so much. Last year, for example, Einhorn made short calls on Netflix (NFLX ) and Tesla (TSLA). It didn’t turn out so well; NFLX stock was up more than 20% in 2019, Tesla stock was up roughly 40%. Thanks to those big whiffs, Greenlight Capital’s portfolio underwhelmed in 2019, posting a 13.8% return—less than half the gain in the S&P 500.
It was the latest in a string of bad years for David Einhorn and Greenlight Capital. In 2018, when stocks were down more than 6%, the hedge fund fared way worse, down 34%.
In 2017, the S&P was up 19.4%. Greenlight Capital eked out a 2% return.
In 2016, the S&P and Greenlight Capital posted near-identical 9% returns.
In 2015, the S&P was down slightly at -0.73%; Greenlight Capital’s portfolio was down 20%.
Noticing a pattern yet? You have to go all the way back to 2011 to find the last time Einhorn and company beat the market—with a paltry 3% return (the S&P was flat that year). Prior to that Einhorn regularly beat the market.
Why the cold streak? Because this is a bull market, and has been for about a decade. When stocks are rising, short selling doesn’t work—not even when it’s done by someone as renowned as David Einhorn.
Don’t Short Sell; Buy Long
I’m not trying to pick on Einhorn, by the way. He earned his reputation as being a particularly prescient doomsayer for a reason. Plus, all of us in this business live in glass houses, with plenty of ups and downs along the way.
Rather, my point is to discourage you from trying to guess that a stock market top is imminent or to start short selling stocks now as a hedge against any impending pullback.
It’s true that some sort of market correction is likely coming. But no one knows when. As our CEO Tim Lutts is fond of saying, “Bull markets don’t die of old age.” If you’ve been reading what our market expert Mike Cintolo has been writing of late, all indicators are pointing to higher stock prices by the end of the year. There’s almost certain to be a pullback along the way. But it may amount to a temporary, 5% to 6% retreat—emphasis on may. No one knows for sure.
We prefer to go with the evidence in front of us. And right now, stocks are behaving quite well. Most of our 13 investment advisories beat the market last year, despite the 28.8% run-up in the S&P.
Tim Lutts’ Cabot Stock of the Week advisory, which offers a new stock pick every week and currently has a portfolio of 20 stocks, has an average return of 116%.
Tyler Laundon’s Cabot Small-Cap Confidential advisory, which currently recommends 15 different small-cap stocks, boasts an average return of 113%.
Carl Delfeld’s Cabot Global Stocks Explorer advisory, which recommends stocks from around the globe and particularly in emerging markets, has an average return of 51% on its 11 positions.
Those performances not only easily outpace David Einhorn’s, but are bigger returns than Greenlight Capital has managed in the last decade combined. They’re the types of returns that have kept Cabot in business for 50 years.
So, if you’d prefer to buy stocks than short sell them, we can help you identify which ones to buy. Our track record is much better than David Einhorn’s. And we’re much cheaper to invest with too.
To learn more, click here.