Warren Buffett & Charlie Munger: Short Selling

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01. hi i'm dave staples from hanover new hampshire and i've got two questions for you uh first i'd like to hear your thoughts on selling security short and what your experience has been recently and over the course of your career the second question i'd like to ask is how you go about building a position in a security you've identified uh using usg as a recent example i believe you bought most of your short shares at between 14 and 15 a share but certainly you must have thought it was a reasonable investment at 18 or 19.

02. why was 14 and 15 the magic number and now that it's dropped to around 12 do you continue to build your position how do you decide what your ultimate position is going to be well we we we can't talk about any specific security so our our buying techniques depend very much on the kind of security we're dealing in sometimes uh it's a security might take many many months to acquire and other times you can do it very quickly and sometimes it may pay to pay up and other times it doesn't and and it's true that you never know exactly what the right technique is to use uh as you're as you're doing it but you just use your best judgment based on on past purchases but but we can't discuss any specific one short sell it's an interesting uh item to study because it's i mean it's ruined a lot of people uh it's it is the sort of thing that you can go broke doing bob wilson's there's famous stories about him and resorts internationally he didn't go broke doing in fact he's done very well subsequently but but being short something where your loss is unlimited is quite different than being long something that you've already paid for and it's tempting you see way more stocks that are dramatically overvalued in your career than you will see stocks that are dramatically undervalued i mean they're it's the nature of securities markets to occasionally promote various things to the sky so that securities will frequently sell for five or ten times what they're worth and they will very very sell themselves for 20 or 10 percent of what they're worth so therefore you see these much greater discrepancies between price and value uh and on the overvaluation side so you might think it's easier to make money on short selling and all i can say is uh it hasn't been for me i don't think it's been for charlie it is a very very tough business because of the fact that you face unlimited losses and because of the fact that people that have overvalued stocks very overvalued stocks are frequent frequently on some scale between promoter and crook and that's why they get there and once they're and and they also know how to use that very valuation to bootstrap value into the business because if you have a stock that's selling at 100 that's worth 10 obviously it's to your interest to go out and issue a whole lot of shares and if you do that when you get all through the value can be 50.

03. in fact there's a lot of chain letter type stock promotions that are sort of based on the implicit assumption that the management will keep doing that and if they do it once and build up the 50 by issuing a lot of shares at 101 it's worth 10 now that now the value is 50 and people say well these guys are so good at that let's pay 200 400 or 300 and then they can do it again and so on it's not usually that quite that clear in their minds but that's that's the basic principle underlying a lot of stock promotions and if you get caught up in one of those that is successful you can you know you can run out of money before the promoter runs out around ideas in the end they are they they almost always work i mean i would say that of the things that we have felt like shorting over the years the batting average is very high in terms of eventual uh they would work out very well eventually if you held them through but it is very painful and it's it's in my experience it was a whole lot easier to make money on on the long side i had one situation actually an arbitrage situation when i was in was when i moved to new york in 1954 so much june or july of 1954 that involved a surefire type transaction and arbitrage transaction it had to work but there was a technical wrinkle in it and i was short something and i felt like a for for a short period of time i uh i was uh i felt like fenoba was failing last fall i mean it was very unpleasant it you can't make in my view you can't make really big money doing it because you can't expose yourself to the loss that that would be there if you did do it on a big scale and charlie how about you well ben franklin said if you want to be miserable you know during easter or something like that he's just borrow a lot of money to be repaid at lent or something to that effect and similarly being short something which keeps going up because somebody is promoting it in a half crooked way and you keep losing and they call on you for more margin it just isn't worth it to have that much irritation in your life it isn't that hard to make money somewhere else with less irritation it would never work on a berkshire scale anyway i mean you could never do it for the kind of money that that uh would be necessary to do it with in order to have a real effect on berkshire's overall value so it's not something we think about it's interesting though i mean i've got a copy of the the uh new york times from the day of the northern pacific corner and that was a case where two opposing each owned over 50 percent of the northern pacific company uh northern pacific railroad and when two people each own over 50 of something you know it's going to be interesting and northern pacific on that day went from 170 to a thousand and it was selling for cash because you had to actually have the certificates that day rather than the normal settlement date and on the front page of the new york times which incidentally sold for a penny in those days it's had a little more inflation than coca-cola front-page new york times right next to the story about it it told about a brewer in new newark new jersey who had gotten a margin call that day because of this and he jumped into a bat of hot beer and died and that's really never appealed to me as you know the ending of a financial career and who knows you know when when they had a corner in piggly piggly wiggly they had a corner and auburn motors in the 1920s i mean there were corners that was part of the game back when it was played in a kind of a footloose manner and it did not pay to be short actually during that period you might find it interesting in the current issue of the new yorker maybe one issue ago the the one that has an interesting story about ted turner there's also a story about hedy green and hedy greene was one of the original incorporators of hathaway manufacturing half of our berkshire hathaway operation back in the 1880s and heavy green was just piling up money she was the richest woman in the uh probably maybe in the world certainly in the united states maybe some queen was richer abroad but eddie green just made it by the slow old-fashioned way i doubt if hedy was ever short on anything so as as a spiritual descendant of hedy green we're going to stay away from shorts and berkshire