I don't short stocks.
I've been public about why, going as far as to say that I'm not convinced there should be a place for derivatives (options trading, CFDs, short-selling and the like) for non-physical products.
It didn't exactly make me many friends, especially among those who like to trade options and sell shares short.
I probably shouldn't have been surprised, but I was a little taken aback by the personal nature of the criticism rather than an engagement with the argument, itself.
(In short, I'm not convinced that those financial products add anything to what investment markets are supposed to be. They seem more to me like ways of taking advantage of others and, in the process, distorting the orderly raising and exchanging of capital. Not all products and not everyone… but on average I think we'd be better off without them. Cue the hate mail and Twitter outrage.)
All of which is to say I've never been a short-seller. I've never traded options. (I've owned Telstra warrants, I was issued options in Magellan Flagship Fund back in the day, and I think, from memory, I might have sold rights I was issued for a renounceable capital raising once, but that's it.)
I don't expect I ever will.
But if I was going to reinvent myself as a short-seller, I know which company would be first on the list.
Before we get to that, though, remember that if you're going to be a short-seller, you need to pay for the privilege (you need to borrow the shares you sell short, so you have to pay a form of interest to the person lending you the shares). And, like being 'long' (a bit of jargon which just means you own shares), you might need to wait a while to be proven right.
If you are, indeed, right, that is!
Now, I've acknowledged my lack of experience with shorting, so I'm not the bloke to learn from. But generally speaking, shorters target three types of opportunities:
Outright frauds. If something is a fraud, the bet tends to be that it'll be found out eventually, and the shares will go close enough to zero, making money for the short-seller. The poster child for this one is Enron.
Overvaluation. When we buy shares, we do it because we think the market is undervaluing them. If we're right, and the market comes to its senses, we make money. Short-selling is the same theory, but in the opposite direction.
Bad businesses. This is a type of overvaluation, but whereas overvaluation can apply to any business (*cough* Woolworths *cough*), this particular area tends to focus on companies that just have bleak futures as going concerns. Past examples might have included Kodak, Blockbuster, or Dick Smith.
And if I was going to start shorting stocks, it's that last category that'd be the one to tip me over the edge.
It doesn't mean I'd always be right — or always make money. Even the worst businesses can hang around for a long time and/or at (unjustifiably) high prices for years. Other times, a company can pull itself out of the fire.
(Having to pay for the privilege of waiting is, in part, why I don't do it!)
But, as I said, if I was going to…
I'm pretty sure I'd have to start with Myer.
No, I'm pretty sure that's no surprise. Except that, every day, people buy those shares. Someone, somewhere, thinks not only that Myer has a future, but that they can make money buying the company's shares.
To be fair, they might. I mean, even a dead cat bounces, as they say.
And investors, as a group, aren't that rational, despite what the textbooks laughingly say.
So, sure, I can imagine a scenario where Myer shares are selling for more than they are today
But that doesn't mean they are actually worth more.
Can you think of a business that is more structurally challenged?
I mean, department stores were shopping centres before we had, well, shopping centres.
They were the place to shop for a range of different brands… before those brands had their own shops just outside Myer's front door.
When we bought what the shop assistant recommended, from three or four brands.
We (well, those of a certain age) used to dress up to go into town and spend the day buying everything we needed from those places.
Now?
Well, you can shop online.
Or at a shopping centre.
Or a shopfront in the street.
Are you going to Myer for range? Maybe, but there's 10x the range in an average Westfield.
For the prices? When was the last time Myer was the cheapest for anything?
For the service?
…
…
…
Let's just move on.
Frankly, I don't love seeing some of our oldest and most venerable retail brands struggling. I like just a little of the magic of the journey into the city, the food hall, the feeling of buying something special..
But it's gone.
And it won't be coming back. At least not in its current guise and almost certainly not in a Myer store near you.
I read the other day that 10% of David Jones' sales are now online. And 25% of Country Road's.
That's the future. How many stores — or any sort — do you need when 30, 50 or 70% of retail purchases are made online?
A few, maybe. You might like the idea of seeing it in person. But when you do, you'll probably use the in-store kiosk to order it for delivery.
Will it be a Myer though?
I can't remember the last time I shopped there. I think it was for a suit. It's probably the one purchase I might buy at a department store, given the proliferation of brand choices, sizes and fit.
I honestly can't think of what would be number 2. Not shirts, I order those online. Not jeans; ditto. I buy my boots from a little place near home.
I'm told it's not a bad place for cosmetics. But if an entire department store empire hinges on no-one finding a better way to do cosmetics, then I think it's hanging by a very thin thread.
I've been known to be a value hunter. I don't mind a Buffettesque play on a 'quality business whose share price is on the operating table'.
But, and I take no delight in saying this, Myer ceased to be a quality business maybe a decade ago. I don't blame (current) management. The department store is a wonderful solution to a difficult problem: bringing many and varied products together with a sizeable community of willing shoppers.
The issue? That problem no longer exists.
Myer is the answer to a question no-one is asking any more.
In its place are fast, nimble retailers, like Motley Fool Share Advisor recommendation (currently a Hold), Premier Investments, which owns Just Jeans, Peter Alexander and Smiggle. Or Buy recommendation Kogan (I own shares), which is both mirroring and trying to better Amazon's strategy. And yes, Amazon, too (I own shares of Amazon as well), which is also a Buy recommendation of ours.
Investing well is about both finding tomorrow's winners, and avoiding the losers.
As ice hockey great Wayne Gretsky said, we shouldn't skate to the puck, but to where the puck is going to be.
For my money, that's Amazon, Kogan and Premier. I fear Myer is on its last legs… as an investment proposition, anyway.
Fool on!
