This article is about a week too late.
At least, for the purposes of current WiseTech Global Ltd (ASX: WTC) shareholders.
No, I'm not going to suggest they should sell, for the record.
What's 'too late' about it, is that many have been whipsawed — financially and emotionally — by recent events.
The share price moves are unavoidable, at least until the laws are changed, but the emotional impact is far less absolute, and is much more controllable.
At least, if you're prepared.
Now, I'm on record as saying I think short-selling is a huge and unnecessary distraction for capital markets.
I would simply ban it.
Not because of sour grapes (I don't own WiseTech shares, but I should disclose that The Motley Fool does own shares, as part of a 'real money portfolio' service we run for members), and not because I haven't made any money out of shorting.
Rather, there's just no need for it. And the presence of it — and the fear generated by it — rob average shareholders like you and I.
How?
Let's compare two scenarios:
Scenario 1: I tell you that Foolish Follicles (a new hair transplant company for us, ahem, follically challenged blokes) is a great, well-run company, whose shares are undervalued and you should buy them. You are sceptical, but consider my case well made. Maybe you buy, maybe you don't. My report goes to a small audience.
Scenario 2: A short seller writes an explosive, sensational report, heavy on allegations and full of reasons for doubt. Throw in some 'interviews', photos, and innuendo-heavy inferences, and some rhetorical 'questions' that invite the reader to conclude wrongdoing. Then, share that report with a news-hungry media, whose readers love nothing better than salacious allegations and a 'car crash' style narrative. Then, tell readers that there's a 'Part 2' coming soon — just to lengthen the media cycle and get maximum coverage.
How do you reckon that plays out? Yep, my report might see the share price rise a little. Or stay flat. Or even fall.
And the short case? Playing on our evolutionary fear instinct, and with plenty of investors scared as hell, panic ensues and the share price craters.
A reminder: At this point, we don't even know who — if any of us — is right!
This is human psychology in action. And a bastardisation of capital markets.
Which is precisely what short sellers are playing on, when they publish these sorts of salacious reports.
And remember, this is so screwed up that the report itself is the catalyst for their own thesis. The most cynical of all self-fulfilling prophecies.
Is this really how share markets should work, do you think?
"Ah", but the short-sellers' supporters will say, "… if the short seller is wrong, the share price should go back to previous levels"
Excuse me while I finish laughing.
Next they'll tell me that markets are efficient and Bill Shorten is popular.
Doubt, once created, is hard to shake.
And that's cold comfort for the poor bastards who sold in a panic, likely at the lowest depths of market gloom, because it was just too hard to hold on.
I wouldn't call it predatory… but if you did, I wouldn't argue with you.
"But what if the short-sellers are right?" they say.
Then that'll come out, in time. Let's not pretend shorters are doing us a service. Talk about a fig leaf.
In any event, until I get a call from the Treasurer to be the new head of ASIC (I'm standing by the phone, Mr. Frydenberg), short-selling will likely remain possible.
Which means more of these sorts of sensational reports will almost certainly arrive in the months and years ahead.
So, we have two options:
Either avoid investing in any company that could be the target of a short-seller; or
Invest, but with a strong stomach.
Let's look at WiseTech again for a second.
The company's share price, as we turned over a new page on the annual calendar, was $17 or so.
Today? It's $26.30 (though the shares remain halted, and will likely drop once trade resumes).
That's a 50% gain in less than 12 months, which is very impressive.
Of course, you and I know that it was much higher in the interim.
Yes, it's a(nother) question of psychology.
If you'd have avoided WiseTech in January, on the basis that it might, at some stage, be a target for shorters, you'd have missed a 50% gain.
Don't get me wrong — the share price was high, last week,on any given multiple. Price to earnings. Price to sales. All high. (Probably why the shorters came sniffing. The bigger they are…)
But Amazon was expensive at $100. And $500. And $1,000. Today? Shares sell for $1,780 (I own some, for the record).
Is WiseTech, Amazon? Of course not, but you see my point.
Shorters had a go at Amazon off and on over the last 20 years, based on its price and lack of profits.
You could have avoided Amazon because it was a potential or actual short target, but that would have been very expensive.
Now, there is one reason you should avoid Amazon. And WiseTech. And other high-flying, high-promise stocks:
If you're someone without the stomach to hold tight when the shorters come with their pitchforks, you shouldn't own the stock at all.
Why? Because they're going to shake you down and you'll sell in a panic.
Remember, the very worst thing you can do is buy high and sell low. And that's precisely what some WiseTech ex-shareholders have done in recent days.
I don't know how this one plays out. Maybe WiseTech was unfairly targeted by opportunistic short-sellers, simply looking for a convenient target about which they can create unfounded fear.
Or maybe the shorters are dead right.
But here's the other thing:
Investors spend way, way too long obsessing over individual positions.
I'm sure you've heard of the venture capital approach — they expect to only make serious money in one out of every 20 investments. That is, they miss the mark 95% of the time.
As public market investors, we expect a better strike rate. But not perfection. Famed US fund managed Peter Lynch described being 'good' as being right 6 times out of 10.
The question for any investor (or fund manager) is 'What is the net result of your investing approach, overall?'.
Warren Buffett himself bought businesses that subsequently went broke. I'm sure he wishes he didn't — but that occasional failure doesn't invalidate his half-century of market-smashing success.
That's what I want you to remember — whether you own WiseTech or not.
You will have times when stocks you own fall. Sometimes by a lot. Perhaps at the hands of a short-seller. Or fraud. Or bad management. Or bad luck.
But if the investment approach that delivered those clunkers also delivers market-beating performance?
Well, you want to be careful how hard you try to avoid those 'mistakes', because they may well cost you your winners, too.
(Speaking of, any time you hear someone tell you about one of their winners, ask them about their losers, too. Don't let them cherry-pick results and blind you with half-truths. At The Motley Fool, every single one of our service recommendations — ever — are available to members of that service.)
As our Chief Investment Officer, I'm incredibly proud of the performance of our team and our services. I — like you and our team — would love less losers. God knows I've had my share, too.
But I'm constantly reminding my team to make sure they don't learn the wrong lessons from share price movements.
I don't want them pulling their punches. I don't want them 'de-risking' their stock picking. I don't want mediocrity through fear.
I want them focused on delivering long-term, market-beating overall performance.
I want them taking calculated risks — that's what investment is, after all.
Every company has risks. Sometimes, those risks eventuate. Often they don't.
We can't go back to last Wednesday.
And I can't (yet) get rid of short-sellers.
So we can all do the next best thing: prepare.
Prepare your portfolio by buying a diversified collection of attractively priced, quality businesses.
Prepare your emotions by knowing that there'll be more short-sellers, more surprises, more volatility.
Prepare your finances by having enough cash for short-term needs and a portfolio that's built for the long term.
Remember: volatility is the price you pay for investing.
But, done well, the rewards are well and truly worth it.
Fool on!
