Muddy Waters Research has made a name for itself, exposing corrupt companies like Sino-Forest. Born in the age of the Internet, the Muddy Waters approach is thorough, swift, and often devastating for a company. Founder Carson Block gave his tips for a successful short at a recent Absolute Returns symposium.
- Timing is everything. A volatile stock market can make a campaign to expose a company’s wrongdoing much easier, like with Muddy Waters’ look at cybersecurity firm Proofpoint at the end of last year. “We are in an environment now where these stocks are more fragile,” says Block. “Doing this in 2013 would have been a mistake.”
- Keep the research report short and sweet. A 90-page report may seem like the best way to prove you’ve done your homework on a company, but serious allegations can get lost in that many words. Block bemoans his company’s failure shorting wireless and broadcast communications operator American Tower. “The research we did was excellent,” but the message was lost, he says, adding that Muddy Waters now sticks with 20-30 page reports.
- Prepare to fight a battle. Crooked companies aren’t going to go down easily; they’re going to keep lying. “They’ll stop at nothing to ramp the stock on you,” says Block, explaining that a company stock often spikes right before it falls. When Muddy Waters now famously took on Sino-Forest, the company spent more than $50 million trying to discredit Muddy Waters’ research, says Block. “These companies are going to fight back with everything they’ve got.”
- Use the Internet. The Internet “has really democratized investment research,” says Block. Anyone can dig deep into a company’s records, suss out sketchy numbers, and publish it for the public without the education of an Ivy League school or the backing of a big name firm, he says.
- Don’t forget social media. “Twitter for short-side activists is a very important tool,” says Block. The social media communication goes both ways. When Muddy Waters announces a new short or shares research, people often reach out with additional information supporting them, he says.
Photo: Mathieu Cheviron