The following is an excerpt from ValueWalk’s interview with the CEO of Grizzly Research, an activist short selling firm. In this part of the interview, the CEO discusses his approach to generating ideas on the short side and how he uncovers fraud. The CEO whose identity is still anonymous will be revealing it shortly exclusively to ValueWalk. Please stay tuned for the full video interview with transcript or hear his top idea it our upcoming conference.
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Pros And Cons Of Tail Risk Funds
Editor’s note: This article is part of a series ValueWalk is doing on tail risk hedge funds. The series is based on over a month of research and discussions with over a dozen experts in the field. All the content will be first available to our premium subscribers and some will be released at a Read More
So how do you generate those ideas on the short side and how do you uncover the fraud?
Sure. So I think there's a couple of approaches, and I don't think that they're terribly unique there compared to other short sellers. So, you know, I like to, for example, screen bottom up, screen and then do bottom up analysis. So just a general screen where you say, okay, you know, when a company that, you know, meets certain liquidity requirements, you know, where the stock may be up and then you know, you just do a simple screen if you can, on the first look, discover something in the financials, that looks too good to be true, you know, and you are already down to manageable list. And then, at this point, I feel like there's no replacement for just going through the financials of each company, really reading the SEC documents or conference call transcripts, the investor presentations, and, you know, spending a lot of time on really understanding what's going on. And I think at this point, oftentimesI like to take a step back and I'll put myself into the perspective of the CEO of that potentially fraudulent company and think about, you know, if I was, you know, the main guy there at this bad firm and I had criminal energy and I was, you know, willing to do it, how would I go about it? You know, what are my objectives? You know, what do I try to get accomplished? You know, and how could I do it? But there's only so many levers that companies can pull, you know, and if you have read a lot of short cases you know, for certain industries, you'll probably also have a couple of ideas on how work will be conducted. And then, you know, after you make your little plan for yourself, you go back to the company and see if any of this is going on. This is an approach that I think has worked very well for us. Another approach, I think that works for us, you know, just following the bad guys and the people that are known to engage in bad behavior and, you know, enable fraudsters, bad auditors, bad investment bankers. You know, I'll just say that fraudsters are guys that we follow closely. I think one thing that we don't like to do, maybe as much as in other circles, is just network and talk with other people. For the research, we like to do that, of course, but we don't, not necessarily for the idea generation, we really like to just sit around a table and stare at the screen and then come up with our own idea, independent of anybody else. I think that also, you know, there is a greater chance to come up with something that the others on the street are not yet talking about. But you really work for yourself rather than, you know, trying to listen to what their best ideas are right now. So, yeah. That's, I think, what we do right now.
When you're talking about not for the idea generation not talking with other short sellers and trying to find opportunities that the street isn't recognising. Does that apply to your long idea generation as well to not?
I am not to saying we do not talk to other sources, I think there are very smart guys out there that have a lot of interesting things to share. I'm just not looking for our ideas, to come from anywhere outside our system, you know, like, I want only our guys to know about it. But on the long side, I think that it's not as applicable. I think on the long side. I don't think that you will lose an edge or as much as an edge by getting your ideas from other people.
And you hear an activist short seller. So is that also another reason why you try to come up with your own ideas, so that way you can inform everyone else about the opportunity and to take that activist approach?
Yeah, yeah, I think like just if you have, if you if you're coming out with something that people generally weren't aware about, then I think you have a bigger chance of getting attention from the public from the company from the shareholders, rather than commenting on something that, you know, has already been fairly known.