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| Photo by Muneeb Ul Hassan Khan on Unsplash |
The GameStop short squeeze in 2021 caused a lot of problems for hedge funds that had bet against the company. It showed that this investment strategy is very risky and not suitable for regular investors.
However, some short sellers have been successful by finding problems with the companies they bet against and making a lot of money from it.
Here are the stories of eight famous short sellers who have become masters of this trade and have had a big impact on the world of investing:
1. Andrew Left
Andrew Left is a well-known short seller who founded Citron Research. He is known for being very careful in his research and analysis of assets. He looks for companies that are overvalued and have weak fundamentals, as well as a history of engaging in fraudulent practices.
One of his most famous short positions was against Valeant Pharmaceuticals International Inc., which is a big pharmaceutical company that operates in multiple countries. In October 2015, Left released a report accusing the company of charging excessively high prices for its products. The report also claimed that Valeant Pharmaceuticals manipulated its sales figures by creating fake invoices and working with a pharmacy called Philidor to boost its sales numbers.
After Left’s report was sent out to his email subscribers, Valeant Pharmaceuticals’ stock price dropped by more than 39%.
2. George Soros
George Soros was born in Hungary and later moved to the United Kingdom (U.K.) in 1947 to study at the London School of Economics. In 1970, he started his own investment company in the U.S. called Soros Fund Management.
Soros is famous for something remarkable he did in 1992. He made a very smart bet against the British pound, which means he believed its value would go down. At that time, the pound was part of a system called the European Exchange Rate Mechanism (ERM), and Soros thought the pound was too expensive compared to the German mark, another currency in the system.
So, Soros took a risk and bet $10 billion that the pound would lose value. As a result, the British government tried to prevent the pound from falling by increasing interest rates. But their efforts didn’t work, and eventually, the U.K. had to leave the ERM. This caused the pound to lose value, just as Soros predicted.
Because of this successful bet, Soros made a huge profit of $1 billion. It was such a significant event that people started calling it “Black Wednesday,” and Soros himself became famous as “the man who broke the Bank of England.”
3. Bill Ackman
Bill Ackman is the CEO and founder of a hedge fund called Pershing Square Capital Management. He is known for being an activist investor, meaning he actively gets involved in the companies he invests in. One of his most notable actions was when he targeted the wellness company Herbalife.
In 2012, Ackman publicly announced that his company had made a big bet against Herbalife by shorting its stock, which means he believed the company’s value would go down. In a presentation that lasted three hours and was titled “Who wants to be a millionaire?” he claimed that Herbalife’s business structure was like a pyramid scheme. He pointed out that the company made more money from recruiting new salespeople than from selling its actual products. As a result of Ackman’s announcement, Herbalife’s stock price dropped by over 10% on the same day.
However, Ackman’s short position didn’t turn out to be successful in the end. Although the Federal Trade Commission (FTC) took action against Herbalife, it allowed the company to continue its operations. Ackman’s research did lead to Herbalife agreeing to pay $200 million to provide relief to consumers and implementing significant changes in how it conducts its business.
4. Carson Block
Carson Block is the CEO and founder of a company called Muddy Waters Research. His company does research on different companies around the world.
Block became famous for successfully betting against a Canadian-listed Chinese timber company called Sino-Forest Corp. He released a report accusing the company of fraud. Muddy Waters Research found evidence that Sino-Forest was basically running a Ponzi scheme. They were raising money from investors but not giving anything in return.
Although the exact financial details of Block’s successful bet have not been publicly disclosed, his research caused the company to collapse. Since then, Block has continued to bet against other Chinese companies, which has helped bring more transparency and accountability to the market.
5. David Einhorn
David Einhorn is a famous hedge fund manager and investor. He co-founded Greenlight Capital in 1996 with Jeff Keswin. Einhorn is known for being a value-oriented investor, but what makes him different is that he often goes against the popular opinion.
One of Einhorn’s successful investment moves was in 2011, when he bet against Green Mountain Coffee, a company that many people were optimistic about. However, his most significant short sale was on Lehman Brothers.
In 2007, Einhorn criticized Lehman Brothers, a big financial services company, for their questionable accounting practices. His statement made people lose trust in the bank. Einhorn has such a strong influence on the stock market that people started calling it the “Einhorn Effect.” It refers to the rapid change in a company’s stock price due to his comments or trading activities.
As Einhorn predicted, Lehman Brothers eventually collapsed during the subprime mortgage crisis. His insight turned out to be correct.
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6. Jesse Livermore
Jesse Livermore was a smart investor who was born in 1877. He became famous for being able to predict and make money when the stock market goes down. One of his biggest successful bets was during the 1929 stock market crash, where he accurately predicted that stock prices would fall. He made a very large bet against the market, and it earned him $100 million. Because of this, he became known as “The Great Bear of Wall Street” and is considered one of the best investors in history.
7. John Paulson
John Paulson is the founder of a company called Paulson & Co. He became well-known for taking advantage of changes in the market. One of his most impressive moves was when he bet against subprime mortgages after the credit bubble in 2007. This bet brought him from being relatively unknown to being a very important person in the financial world.
To understand how amazing his trade was, Paulson made $1.25 billion in just one morning in 2007 when a subprime lender called New Century announced that it was having financial problems. This trade also helped his hedge fund make an incredible $15 billion in just that year, 2007.
8. Jim Chanos
Jim Chanos is a well-known American investor and the founder of a hedge fund called Kynikos Associates. He is very skilled at identifying companies that are overvalued, financially weak, and engage in fraudulent practices that people don’t notice.
Chanos has been successful in betting against companies like Baldwin-United Corp. and Tyco International PLC by using a strategy called short selling. He was also one of the few people who correctly predicted that the subprime mortgage market would fail. However, his most successful trade was with a company called Enron Corp., which was an energy company.
Chanos discovered troubling information in Enron’s financial statements, such as details about offshore businesses and questionable accounting practices. Based on this, Chanos and his team at Kynikos Associates made a bet against Enron in the 2000s, expecting its stock price to go down. Their prediction turned out to be right, and they made a profit while Enron collapsed due to its accounting scandals. This case was one of the biggest financial frauds of the century.
Concluding
These eight prominent investors have made a significant impact on the financial world through their successful short selling strategies. From Jesse Livermore’s astute predictions during the 1929 stock market crash to Jim Chanos’s ability to uncover fraudulent practices in companies like Enron, each investor has demonstrated their skill in identifying opportunities and capitalizing on market shifts. Their achievements have not only earned them substantial profits but have also shaped the course of the investing world by exposing weaknesses in targeted companies and promoting transparency and accountability. Their stories serve as inspiration and a reminder of the potential rewards and risks involved in the art of short selling.
