Chit Chat Stocks - The Art of Short Selling With Upslope Capital

Episode Date: October 19, 2023

Upslope Capital Management is a long/short fund focused on identifying frauds and fads as potential shorts. Listen as Brett and Ryan ask George questions about how to identify shorts and how to properly manage a short portfolio. Enjoy the show! ***************************** Chit Chat Money is presented by Interactive Brokers. Switch to the best brokerage in investing today: ibkr.com/info ***************************** Want updates on future shows and projects? Follow us on Twitter: https://twitter.com/chitchatmoney  Subscribe to our Substack to receive free show notes and charts for our Tuesday episodes: https://chitchatmoney.substack.com/ Want more from George and Upslope Capital? Find more info here: https://www.upslopecapital.com/ Contact us: [e-mail] Timestamps Upslope Capital | (2:49) Shorting Misconceptions | (11:28) Memorable Shorts | (33:41) Disclosure: Chit Chat Money hosts and guests are not financial advisors, and nothing they say on this show is formal advice or a recommendation. Brett Schafer and Ryan Henderson are general partners and portfolio managers at Arch Capital. Arch Capital and its partners may hold securities discussed on this show. Learn more about your ad choices. Visit megaphone.fm/adchoices

Welcome to Chit Chat Money. This is our Thursday deep dive episode where we interview an analyst, portfolio manager, or another investor to discuss a single stock, industry, or even I guess a broad topic. And today we have on the show George Lovatis. He is the portfolio manager at Upslope Capital. And this is kind of a unique episode because we typically try to look at an individual business. But with George, we recently came across his presentation on short selling, And we thought it was a good kind of short selling 101 for people that aren't that familiar with the process. And so we asked George a bunch of questions about all things short selling, how to target

different shorts, what to look for, what kind of red flags to try to identify in potential short positions. And then we also talk about his long book. It's a long short fund. So we also look at kind of what he's trying to identify for potential long positions and what his holding periods are. and really just general strategy for running an overall long-short fund and some of the personal challenges or personal advice that he would give to potential

fund operators or fund managers. So this was a fun one, I guess. Nothing else to add here. So without further ado, here's our interview with George Lovatis. welcome to chit chat money on this show host ryan henderson and brett schaefer interview industry experts and riff on the world of investing as a quick reminder chit chat money is a ccm media group podcast ryan and brett are also general partners at arch capital and arch capital may have positions in the securities discussed in this podcast anything discussed on chit chat money by ryan or brett or any other podcast guests is not formal advice or recommendation. Now, please enjoy this episode.

Welcome in. Today, we are joined by first-time guest, George Levatas, Portfolio Manager at Upslope Capital. We spoke, if you're a regular listener, we spoke a little bit about a presentation he created, I think in June, and we spoke about it last week on the Power Hour around short selling and some of the misconceptions. And so George reached out and he was gracious enough to give us some of his time to talk about both his career and then that short selling segment we want to touch on as well. So not our typical interview, not any specific deep dive on an individual company, but we're going to get to, I think some unique topics that we don't usually talk that much about here, but let's start with you, George. First of all, welcome to the show and kind of give

us some backgrounds on your career. How'd you get into investing? How did you end up deciding to start Upslope Capital? Yeah. So thank you guys for having me. I mean, my career, I sort of divided into pretty standard in some ways. First half was more investment banking oriented. Second half is investing. I'd say I really was a bit of a late bloomer to investing in the buy side. I wasn't somebody reading Buffett letters when I was 12 years old or something like that. If I could point to sort of one moment that really got me hooked, it was frankly the financial crisis. I happened to be in business school right smack in the middle of the financial crisis. And I just remember being glued to my screen. No idea what I was actually doing with my own account,

it, but kind of doing my best to try to navigate it and protect the money that I had and try to make a little. And so I think that was a key moment for me that, you know, it sort of clicked for me that it was something that I really wanted to do long term. And I think it also hammered home that, you know, I wasn't going to be a long only investor. I like to have all the other tools available. Um, so I'd say that, that sort of got it in my head. Um, it took me some time even after that to, I think, to, to acknowledge to myself that that's what I really wanted to do. So kind of coming out of business school, I, I hit out in investment banking for a few more years, um, and then moved over to research, uh, at a bank of Montreal, um, where I covered the packaging

sector for a little bit, um, before kind of pulling the bandaid and jumping to a buy side role at a startup long short fund. So. All right. And how did you start Upslope? How, how long has that been around and maybe give any sort of what's your guys' basic philosophy over there? Yeah. So I, I, so I worked for, as I mentioned, I, I worked for a startup long short fund. I only did that for about a year. Um, and, uh, you know, it was, was kind of itching to, do my own thing. I have my own investment philosophy. And I think given that I was a late bloomer, I was kind of eager to get going with it. And so after about a year at that fund, I asked them if I could sort of start my own strategy, raise some friends and family money.

And so that was in 2016. And then I sort of formally spun out and formed Upslope in 2017. um the strategy is really really a classic long short uh equity hedge fund strategy uh fairly concentrated long book usually kind of 10 plus names uh and then shorts are we'll i'm sure we'll get into it a lot but uh shorts are a lot more diversified you know usually 20 20 to 30 or more at times um have generally a mid-cap focus uh pretty global so you know i'd say longs are majority US, but do a fair amount in Western and Northern Europe as well. All right. Yeah. And that does lead into what we're going to talk about today, which is short selling. But I would say, and maybe I'd guess about 90% of the listeners, maybe more,

don't actually understand how short selling works. I don't think Ryan and I maybe understand a little bit, but we definitely don't understand it fully either. Can you explain, before we get kind of the details of your presentation, can you explain the basics of shorting? How does it work for you guys when you're, say, going into a example position here? Yeah, I mean, so I think when I think of short selling, I think, first of all, I sort of divide it into two broad categories that I think most people may be confused sometimes. So I think there's a big difference between hedging, so shorting indexes, shorting SPY or a major index versus shorting individual stocks. The former I think of is really kind of a form of insurance where sometimes it pays off,

sometimes it doesn't. In general, markets go up over time and you're going to lose money doing that. And maybe that's okay because like I said, it's an insurance policy. individual shorts. So betting against individual companies, betting on them doing poorly or derating or going down effectively. The goal there is to make money. It's not just an insurance policy that you expect will lose you money over time. In reality, obviously, it's really hard to, you know, you're fighting a rising market over the long run. So it's a tough game but um that's that's the goal of individual shorts um you know where you're picking companies that you you either believe you know fundamentals are deteriorating you think it's a we'll go in

all these i'm sure but fads and frauds things like that where something you think is going to break with the stock or that will cause the stock to go down in some form okay or go ahead And I guess just in terms of how it fits in with the long-short strategy, I mean, I think of it as a way to – so you can reduce market risk. So in theory, it depends on the strategy, but in theory, you could use shorts to sort of enable you to get longer so you can have more longs on at a time than you might be comfortable otherwise. um i don't personally go go you know so you know i think some funds are levered long against some shorts um that's not my strategy but in theory you could do it um and i think in general it's it's a good it's a good kind of blunt mechanism for managing volatility and market risk so okay and i think some listeners are aware of this but i just want to catch up any of the beginners here

what are like what is mechanically happening when you're saying i want to short this thing how are you you know you're probably going to the broker what is like literally happening what is exchanging hands why are you getting the cash in what security are you getting what you know all that stuff because i think people are very it's it's a little bit backwards but at its core it's not truly that hard people are probably imagining buying put options i think is probably what a lot of people guess. So maybe the actual mechanics. Yeah. I don't know. I'll probably do a poor job of explaining the behind the scenes stuff at the brokers for actual, you know, what happens with the short, but effectively you're borrowing shares, you know, and promising to buy them

back at a later date. You know, ideally you get to decide when that later date is. Sometimes the broker, you know, you can lose your borrow that you have on a short. That happens pretty rarely. But it happens with really, you know, really, really heavily shorted stocks where there's no borrow available anymore all of a sudden. So in my experience, that's probably only happened a handful of times. And it's usually not a total shock when it does happen. um but so in general i i think maybe one way to to lay it out in layman's terms so when i when you short a stock um if when you pull up your account on interactive brokers or wherever you'll literally see you know minus 200 shares um you know next to the position you know or

however many shares you're short um and then you'll receive the cash proceeds in your account as well. So you've, you've effectively sold that stock, even though you never owned it in the first place, but you have the negative share count as sort of a liability that you'll, you'll have to buy back at some point. I don't know if that actually explains it, but there, there, there's a lot more to it that, that, you know, I'm sure I'm either not explaining well, or that I don't even understand, frankly you know, all the nitty gritty details, but at a high level, that's kind of how it works. Yeah. To me, and it's sort of like when people explain the Federal Reserve, I think you can explain it, but for some people, I think almost everyone, you need to explain

multiple times before you actually understand it. But I want to talk about a fun question here, and maybe we could probably do a whole podcast on this, but what are some of the misconceptions out there about shorting stocks that you've seen? Chit Chat Money is brought to you by Interactive Brokers. Designed for active traders and sophisticated investors, Interactive Brokers offers trading assets in 150 markets with 27 different currencies. They charge USD margin loan rates from 5.83% to 6.83%, rated the lowest among margin fees. The ability to trade stocks, bonds, options, futures, commodities, and more with high interest rates paid on instantly available cash balances, plus the ability to lend your eligible

stock shares to earn passive income all on one single unified platform. That is why we at Chit Chat Money use IBKR and wouldn't use anything else. Restrictions apply. For more information, visit IBKR.com slash info member SIPC. Open an account with IBKR today. yeah so i think what i think there there are a lot of them certainly uh i wrote some notes down on this in advance um so i think probably one of the biggest ones is i think people that don't short tend to assume that you only short a stock if you think it's going to zero um and that's you know that's clearly not the case there there there's a pretty wide variety of shorts um you know the assumption that you only short frauds or fads or you know that there's

something nefarious with anything that's short that you know that you're shorting that's that's not necessarily true you can short perfectly great businesses it's not necessarily a great idea but you can do it. Valuation, you know, being a primary driver of shorts, I think people kind of understand that that's generally a bad idea, but that's not how most short sellers approach it. I think time horizon is probably a big, big difference or a big thing that people don't understand. So I think in general, I think at least I view most shorts as kind of shorter term oriented and a little more trading oriented. So I see like a common thing I see is somebody pulling up an old, you know, like a two or three year old short pitch and sort of giving somebody

a gotcha that they got it wrong. And I think most of the time, that's not necessarily what the short seller is going for. You know, they might have a six month time horizon or three month time horizon, and there's some event that they're looking for. And maybe they got it right, Maybe they didn't. But usually I don't think they're necessarily I don't think they necessarily have the same time horizon that longs do. And then what else? I think those those are kind of the main ones. Moral, you know, you see a lot of moral crusades and, you know, I think some short sellers have that as their approach. But I think most most don't and most realize that having sort of a moral element is is, you know, if anything, probably a bad idea for for a short seller. Yeah. And ladder attacks. They don't they're not real. Right.

No, they're friendly. Yeah. George is winking at us. No, but seriously, what? So in your presentation, you lay out kind of how you. what your strategy is for targeting shorts can you maybe explain what that is for anyone who hasn't seen the presentation and then sure has this changed over time or did you kind of always have this strategy since starting upslope yeah so my i'd say my approach to shorts has changed a bit over time um really the SPAC bubble was the biggest driver of that change so before Before in the before times, before the SPAC bubble, my shorts tended to be, you know, nine out of 10 of them were pretty boring companies. So they were cyclicals that were, you know, I thought were going to roll over or melting ice cubes.

So like the classic, like I was short Franklin Resources, you know, Franklin Templeton for years and Owens, Illinois, a glass bottle company. Like those were the typical shorts that I tended to focus on where they just kind of ground down over time and they'd underperform the market and, you know, occasionally have a little blow ups here and there. And so I tended to focus on those. They were, they'd be sized smaller than my longs, but they'd still be kind of chunkier positions. So, you know, maybe two, three, four percent positions. um and then i you know i did a few fads and frauds but they were really the exception and um you know so i i i generally found them to be too much of a headache and you know i i just didn't enjoy enjoy the process um then this back bubble came along and it was just this fire hose

of ideas um it was just and you know i'm i'm a i'm a one-man band so part of it was was the the practical reality of trying to come up with a strategy for dealing with all these obvious opportunities and not getting blown up in some form. So I've observed others and other successful short sellers and came up with an approach to deal with the sort of fads and frauds and SPACs where it was much more of a basket approach and much smaller position size and kind of go through a checklist of things that I was looking for, for fads and fraud and say, okay, this, this company meets these, you know, checks off these five boxes. I'm good to put on a 50 basis point short position in the company. I don't need to, you know, I don't need to know everything there,

there ever is to know about the electric vehicle industry or something like that. I, you know, I know this is a fraud in some form, so no need to overcomplicate it. So I sort of honed that, that element of the short strategy, and it wasn't necessarily a wholesale change to only focusing on those. But, you know, as sort of a subset of my shorts, you know, develop this strategy. And I think that, you know, that bucket has kind of come and gone over time. So I think, you know, at its peak, I probably had, you know, a 15% short position in SPACs total. So it might be, you know, 30 different SPACs totaling up to 15% or something along those lines. And then, you know, nowadays it's closer to like 5% or 6%. And so it's sort of pulled back a little

bit. But I still do, you know, still do the traditional melting ice cubes and cyclicals. Still, you know, still short some sort of more quality type stocks, you know, where I think Somebody people view it as a compounder, but it's, it's, you know, in my opinion, it's not, um, so still have sort of all those different buckets. Yeah. I do want to talk about, I think you're referencing maybe a flip, uh, as you coined it, which I want to talk about later. Okay.

Yeah. So that's a different one, but I want to talk about that because I think that was quite interesting. Uh, but in your presentation, which we will link in the show notes for anyone interested and you can either DM us or email us and we'll share it, but you have this present or this chart that I might share the screen with, but it's pretty easy to describe. You just have one, the Y axis as odds of being profitable. And then the bottom axis is mental health cost, right? And you have fads and frauds, both kind of in the upper right. So the odds of being profitable

are super high or maybe the highest, but they're very stressful. So can you talk about why they're so profitable, but also stressful at the same time? Yeah. So I think, um, they, I think they tend to be more profitable because you can figure out the ultimate end point for where the stock is going to go with, with a pretty high degree of confidence. Um, so the, the easiest example, and they're definitely not, and I guess this wasn't easy and they're definitely not all this, this sort of perfect but tattooed chef was sort of the prototypical example here um where i think you know you could research the company and and you could be very confident that it was eventually going to be a zero um because it was you know the story didn't make sense the financial model

didn't make sense it was a it was a fad that you know benefited from the pandemic and sort of a point in time bubble in the market. Um, and at one point, you know, valuation got, I forget what its peak valuation was, but it was, it was chunky for, for, for something that was probably going to be a zero. Um, and so you, you could, you could be very confident that you knew where that was going to go. Um, now the mental health cost element and the stress of managing a position like that, you know, you're obvious it's, if it's that obvious, you're, you know, you're not going to be the only one that sees it. Um, so short interest is going to be high management is going to be, you know, tempted to sort of promote and push the stock as much as possible. Um, you know,

I remember being short tattooed chef kind of in the early days. And I think it, you know, had one of many short squeezes where it was up kind of 10 to 20% in the middle of the day on, no news that I could find. Um, and eventually I remember it happened one time where the stock spiked, you know, something like 20%. And I did a little digging and I found out that this penny stock newsletter guy who used to be on Fox business had been charged. I think, I think he'd been barred by FINRA at this point. Um, but he had just put out a newsletter promoting tattooed chef um so stuff like that happens um and uh you know it's it's you can you can sort of laugh at it because you know it's not real and it's gonna give it back at some point and you know the end

result but but you also have to manage your risk and you have to be realistic about you know how how much you can handle how much pain you can handle in the short term so that's where sizing i think comes in and um you know position management um but there's a lot you're you're fighting a lot of stuff even if you do know the you know what the actual end result is okay and you mentioned tattoo chef but you don't have to give the specific examples there but what are some characteristics maybe we'll hit fads first because i know they can be slightly different and sometimes maybe the best opportunity you can you can correct me if i'm wrong is when is both a fad and a fraud, but what are some characteristics of a fad that you're looking

for, you know, generally? Yeah. Um, I mean, I think of it, I think of it as kind of know it when you see it, which is not probably not a very satisfying answer, but like tattooed chef was, I'm guessing most people are actually not familiar with, with the company and their products, but it was a um so a vegetarian like frozen foods company um sort of a trendy you know trendy frozen foods company um and they you know they benefited from the pandemic from kind of launching right around then um and you know people were staying at home and and order eating more frozen meals at home um and they played on to this they sort of even though they had no there's nothing proprietary to what they were doing they were just coming up with vegetarian meals um they sort of

glommed on to the beyond meat and like the fake meat trend um even though they you know like i said they had there was nothing that they were doing that was proprietary or unique about it Um, so I think, you know, to me, that was, that was an obvious sort of fad that they were glomming onto. Um, and I think you mentioned, you know, ideally in some ways you have fads and frauds combined. And I, in my mind, I sort of meshed the two of them together because that's that, especially with the SPAC boom, I think there are so many SPACs that combine both of those things. Um, so like, you know, so many of the EV SPACs, the electric vehicle SPACs, I think hit, hit both of those categories um and uh yeah i mean some i think sometimes fad is maybe too strong of

a word that that i use but um you know like i said you still you still kind of know it when you see it on the on the fraud side what are some of the signals you're looking for i'm sure a lot of people when they hear like a fraud they think enron or something that's like massive whereas maybe there's probably some more simple red flags to identify what are some of those that you were looking for yeah so i'd say for me i i'm not as uh i'd say i'm probably not as hardcore of like a fraud hunter as as some short sellers are it's it's it's kind of a lighter a lighter version of fraud if you will that i'm looking for so i i think like shady promoters um so like i said this guy who'd been barred by FINRA promoting Tattooed Chef, like that's a sign to me that

there's something probably wrong with Tattooed Chef itself if this guy's glommed onto it. I mean, in theory, he could do it all on his own, but it's a sign. So, I think aggressive promotion, I mean, there's some, obviously, general accounting red flags, so changing auditors, stuff like that you know that people know about um one of so in the before this back boom i was short a company called eros international which was back then it was known as the the quote-unquote netflix of india um and i don't know that fraud was ever proven but i think it was a pretty you know people suspected fraud and one of the big red flags there was they out they just had this ballooning receivables balance. So they always showed really impressive revenue growth.

And then at the same time, though, the cash never actually showed up. So receivables kept going up and up and up. And then they'd get called out on it. On earnings calls, analysts would push back and say, hey, what's with the receivable growth? And they'd say, oh, no, we'll get it under control. And then the next earnings call, revenue growth would suddenly stop. Receivables would get a little bit under control. And so you could see the push and pull where they could either deliver revenue growth or manage receivables, but not both at the same time. So to me, that's sort of an obvious sign that something is not right. But I don't know. I think those are, say, promoters and some of the red flags I kind of listed on that slide. I can mention a few of them.

Right. You did have, yeah, I think it was maybe two dozen. Yeah, something like that. Yeah. When management teams on the call talk about controlling the accounting, I think that might have been a red flag as well, right? Because they're like, well, shouldn't that just be, you know, taking care of itself? But yeah, I think just to highlight a few of them, I mean, I think so going after shorts, I think any any management team that so one of the things I find interesting is, you know, when you see an activist short report come out, just watching the reaction of the company, you know, if they if they actually go out and sue somebody, that's that's usually a pretty good sign that something's wrong. I think there's pretty good research that those stocks tend to underperform. What do you think is a good reaction to a short report? What should management do if they see it? Just not care? I think in general, just not care. I mean, I think it's just sort of thinking out loud.

But in theory, if you had a short report come out and the stock went down, you know, a lot, 10%, 20%, acknowledging it might be okay. But I think, you know, I think the I sort of grimace, at least if I owned a stock when that, you know, if I was long a stock and a short report came out and that happened and management put out a statement and, you know, snide remarks about short sellers, you know, being, you know, evil or standing to profit from this or, you know, any kind of threats whatsoever to me is a red flag. but just sort of acknowledging you know acknowledging it is is maybe okay um saying you know we we believe in the business and that's it i mean i think in general they just shouldn't care too much yeah that makes sense what all right wait let's let's get through more any other important yeah red flags that you can yeah you see uh so i think related party stuff i think is always is always a big red flag um any examples that come to mind there uh if you don't want to call now you don't don't feel like you need to i i mean one interesting one and um you know

frankly it hasn't worked out as as the way i thought it would over time is uh this company coke consolidated one of the coke bottlers um they have an interesting one where they are you either of you familiar with this this story no um so it's a coke bottler on the southeast of the u.s uh it's a really strange company um and their their ceo so in their in their actual 10k they i'm forgetting the exact line but um their company says i think their their company motto or something is along the lines of you know our purpose is to honor god um and their ceo has seemed you know is clearly a very religious character and nothing nothing wrong with that um however if you go through their you know their proxy you see that he's

you know he leases he owns a bunch of the buildings and and you know uses a corporate jet and sort of pays himself very generously um for you know considering this as a relatively small you know it's kind of a mid-cap company um so just i i always thought that was an interesting very quirky quirky company um you know where the related party stuff doesn't really jibe with kind of the messaging of the the ceo um so like i said we'll see how that how that one turns out someday though it is i think yeah like you said there's nothing wrong with being a leader at a company and being religious but co-mingling the two feels like you're doing it to promote the business to you know other other people that are religious so i i think that's that's one we've

seen too where it's like it kind of feels like when you're when you're doing it for the greater good or you start to invoke that it starts to feel like a red flag yeah especially when i think some of the like i said the related party actions are not consistent with the greater the greater good at least from, from the outside. That's what it looks like. Makes sense. Any others? Not, not examples, but any other red flags? So it probably seems like a throwaway one, but little, little obvious lies. I always, I always, you know, that's something that I pay a lot of attention to. I think people roll their eyes sometimes when I point things out. But I, you know, I, I, I remember one CEO

going on mad money a few years ago and he was he had been buying buying stock and he is a very promotional i won't name names or i'll try not to uh he's a very promotional guy and he had been talking about kramer asked him about you know how oh i i see you've been buying shares recently you know this is a good sign and he just the ceo you could you could watch it and see he was just lying through his teeth, but he said, Oh, I really wanted to buy more. I had my, you know, I had my buy order in, you know, that day, but it just barely missed my price before the close. And now it's like the blackout window now, so I can't buy more. But just, just stuff like that, because I think, you know, it's sort of the, the cockroach theory where, you know, you, you see the little

obvious lies, you know, you know, there's more behind it. And so I, I, I, I pay attention to, to stuff like that. Now, is this another good example, which I guess this one has been sort of revolved because the entire management team is gone now. But back in, I believe it was 2018, 2019, the Peloton CEO and founder went on CNBC and said, it was either we're surprisingly profitable or we're incredibly profitable, something along those lines. And then the S1 came out and they went public and you could see that they're hemorrhaging money. is that a clear example of like okay that would be a big red flag for you for uh that's a company i might want to look at yeah i i didn't look at it but yes it would be okay all right what are

what are some of the most memorable shorts short positions that you've had where it was either for good reasons or bad reasons like something that ended up going totally against you or something that was like the most chaotic or uh what's the term you use most detrimental to your mental health a long list of those um i so eros the one of the netflix of india that that one i mean that was that was early on and and you know my my uh in upslopes existence um that was memorable just because of, it was, I mean, everything about it was kind of hard to believe the, just how obvious the, you know, I won't use the F word, but how obvious the sort of scamminess of management was. And, you know, like I said, there's this push and pull between revenue growth

and receivables and they would frequently miss. So they would say, we're going to, first of all, they wouldn't tell you when they were going to report earnings and then they'd say, okay, fine. We'll report earnings, you know, really late in the quarter and they'd give you like 24 hours notice of when the earnings call would be. And then the earnings call would come and they still wouldn't have put out their press release for earnings because I mean, it was, you know, they'd put it out half an hour into, into the earnings call.

So it was just that, that was really, you know, one of my earlier exposures to kind of blatant manipulation or promotion or whatever you want to call it. I don't know. I'm always afraid to use the F word. And I think probably related to that, so Eros actually sued a bunch of folks on Twitter. So it was a pretty contested stock. It was a pretty well-known short thesis. And I forget how many people they roped into this lawsuit, but they actually sued I want to say it was almost a dozen anonymous Twitter people, which became not anonymous through the lawsuit. So I just I remember, you know, when the lawsuit came out, being worried that, you know, making sure that I hadn't said too much about Eros and that I wasn't going to get roped into some some lawsuit that I had nothing to do with.

And, you know, it was it was an interesting case study, I guess. have you found it easier or do you prefer to just be kind of quiet about active shorts uh it kind of depends i think i think for for the ones that are working i'd rather not mention them um you know sometimes sometimes there's a narrative that i see out there that i i don't know it just kind of offends me in some way and it's really hard to resist not not kind of poking it a little bit um but i i think in general that's that's probably where i've wound up is you know i'd kind of rather keep a little more a little more quiet um but like i said sometimes i think the narrative is just too too ridiculous to resist that's understandable okay so i think

So we've touched on maybe some of the characteristics in trying to identify perspective shorts, but like you said, it's competitive. There's a lot of people out there that can identify these. How do you think about the portfolio management side of things? You mentioned that you've become a little more diversified over time. Just any thoughts on managing a long short book overall? yeah um so like i said i think i've become more diversified probably probably just through the addition of of this this kind of fraud and fad you know i i called it the spac plus short basket um you know so it's it's i've got sort of my regular way shorts you know any cyclicals um you know anything that i think is going to break fundamentally in some form and then i've got sort of the frauds and fads and SPACs, on the other hand. And so really, it's just kind of making room for those and keeping an eye on aggregate exposure for those fraud and fad shorts, making sure that aggregate exposure doesn't get too big, keeping positions, individual positions

right-sized. So I think there's always a delicate balance between where you're kind of, I'd say, more passively short frauds and fads where you don't know when necessarily something's going to break, you know, eventually it will. Um, and for those, you know, I try to keep position sizes really small so they can be 25 to 70 basis points or so is kind of typical. Um, and then once things really start to break, um, so like tattooed chef in the end, you could, you can kind of push it a little bit more um maybe 150 basis points if you get really really adventurous um and um you know but but like i said yeah i think you need to manage around events and um one thing that's i think both frustrating and an opportunity for for these type of shorts is

because they they're susceptible to squeezes and promotion um you know they do move around for non-fundamental reasons a lot. So I think the goal should generally be to, you want to be in a position where you can add to the short when that happens. So if you wake up tomorrow and this, you know, whatever your short goes up 20% on zero news, you know, ideally you're already small enough

that you can add to that position. And then, you know, maybe when it pulls back, you ease off a little bit. Um, but it's, it's really kind of managing around stuff like that. Do you think you'll ever see, I guess, as much of a, maybe gold mine might be the right term as what you saw during the SPAC bubble for trying to identify shorts? I think so. I mean, I, if, if you had asked me, I wasn't investing during the first tech bubble in 99,

But, you know, if you had asked me in 2019, would we see that again? I probably would have said no. And I'm guessing these things kind of, you know, they just happen. And it's, you know, it's impossible to know when, you know, maybe the next one will be 15 years from now or something. But I'm sure at some point it'll something wild will happen again. is the opportunity are you still seeing the opportunity there today like in some of these specs or has it for the most part are you reverting kind of back to what you were the way you were shorting prior to covid yeah i i've reverted a fair amount back so i think today like i said i think i'm probably five or six percent is sort of the big the aggregate size of those that type of short for me now um you know as as they get smaller you know the the actual market caps and enterprise value shrinking um you kind of want to shrink a little bit with them um so it it gets tougher i think over time right now one interesting thing i saw in your

presentation was a what you call a flip and i don't know well you can correct me if it seems like it's uncommon in short selling, but maybe it is common. So what exactly is that? Yeah. Okay. So it's, it's really, so it's hard. It's, I'd say hard psychologically, but the idea is, you know, if you're long a stock and you have, as, as you should, you have a clear thesis and something happens that causes your thesis to break. And it's a really obvious, you know, it's just, okay, I'm just going to cross off these, you know, two out of three of my thesis points and we're done. You know, so you've, you, the thesis is broken enough that you know that you should exit, you know, promptly. If you're in that position,

you should, if you, if you also short, you should consider flipping short and not, so not just selling and exiting your long, but, but actually flipping short. And I guess my idea here is that If, if you have such a clean thesis break, there will be other people that have, you know, that, that have a similar, that are in a similar position and they're not going to move. Most people tend not to move that quickly, um, because they're institutional constraints to the exiting, you know, you're not just going to exit in one shot. And, um, so usually I think it represents an opportunity to, you know, to, to get short

and actually make some money out of, out of a bad situation. um the the example i had um you know i've so it's it's rare for me i think i've done it maybe three three or four times um the sort of classic example for me was i was long a company called crown holdings they make um you know beer and soda cans mostly and they and i had even pitched this. Crown was one of my biggest long positions. I think it was my first time at the ValueX Vale Conference, which is where I made this short pitch. So I think it was my first time there. I pitched Crown as a long idea. And about six months later, they announced this horrible acquisition. So Crown historically, the pitch was basically that Crown was this ultra defensive

company. They make beverage cans and food cans at the time. And they came out, I think it was right before Christmas and said, we're going to buy a transit packaging company. And they completely blew up the long thesis because part of the company was now cyclical, whereas before it was not cyclical at all. They were no longer going to be returning capital and accelerating a buyback program they were going to be levering up and buying this cyclical thing and then there was also no strategic rationale for the deal it was just that they kind of kind of liked the asset um so i i you know that that was one where i flipped long from long to short um felt really stupid for i think about a week or two maybe even longer than that but eventually i think it worked

doesn't always work great, but that was sort of what got me thinking about this framework of, okay, if you have a very clear thesis break, you should consider actually shorting it. Did you come back to the conference and pitch it as a short? No. Okay. So talking about the long book, when I was looking at your shareholder letter, I was going to pick out a couple of companies and try to ask some specific questions. But But aside from one, I really did not know any of the companies whatsoever. And so it looks like a pretty unique set of businesses.

Is there any common characteristics that you're looking for in these businesses? And then maybe what's your typical holding period? Are you trying to hold forever? Is it like a never sell approach or is it you kind of have a price target in mind? yeah so i i'd say my my style is i i'd say my personality more than anything um is i i gravitate towards pretty defensive you know growing but but boring businesses so not like for me a growth company is like high single digit organic growth that's that's like an exciting growth stock for me um so non-cyclical good balance sheet um easy to understand um so like i covered the packaging

sector when i was on the sell side and so sectors like that and companies like that where it's just it's a simple product i get the model like i can figure out where they are in you know in the cycle and expectations um you know there's i'd say i i want to see either at least sort of a neutral secular trend so it doesn't have to be some amazing you know growth tailwind but i don't want it to be a melting ice cube that i'm i'm trying to get cute with um so i i do try to fight my tendencies to you know to only buy boring defensive businesses because it's a it's a tough way to to i'd say to make money over time if you only do that um so i try to force myself out and you know, and look at more value, but you know, more, uh, I'd say more cyclical stuff that,

that might have a little more, more zip if I'm, I'm right. Um, I break up the longs into two categories. So core longs are more compounder types. Um, and holding period on those tends to be multi-year. So I think, you know, of, of core, the core long positions today, I think average holding period is, you know, at least, you know, two, three years. Biggest position in the portfolio is a company called Aptar. And I've owned that almost since inception of the strategy. So almost seven years. And then tactical positions are more what I, what I describe as more traditional value stocks. So they're not, no one's going to mistake them for some world beating compounder. They're there, you know, they might have some hair, they might have, you know,

have some leverage. They're definitely more cyclical. And for those, I'm a little more price sensitive. I have a price target in mind. And when the stock approaches that price target, I'm starting to leave. And so ideally for those, I think holding period is like six months to two years. There's definitely more turnover in that category where if something doesn't look right and it's not working out, I'll cut it and move on. Whereas with the core positions, I'm a lot more patient. Right. Now, where's your idea generation on the long side? Is it the traditional way? Is anything unique? Because I know the shorting stuff is kind of looking for the promotional CEO, stuff like that. But the long side, what's your research process? Where do you

start? Yeah. So I lean a lot on my sort of prior background. So when I was a banker, I covered the exchanges and brokers sector. So I do a lot in that sector. I do a lot in the packaging sector, which is what I covered when I was in research. And I mean, it's funny, they're two completely unrelated sectors, but I found them to be really good, especially packaging, I think is a great sector for long short investing because it's it sort of hits my my my point on like easy easy to understand it's a very finite universe um and on top of it there there's this great diversity among among the companies within there so there's you know you have some really cyclical really tough businesses you've got some really good steady businesses um and kind of a range of management

quality um so i found in packaging like there's something there's always something to do both long and short. And the exchange sector is one that I've always liked because it's more on the long side, but I love the business model of exchanges where they've sort of moved away from this a bit, but where they have leverage to volumes and volatility and then sort of a secular trend over time of people investing more and individuals investing more and becoming more sophisticated, things becoming more electronic and more profitable for the exchanges.

Are there any, I guess maybe I should rephrase it. How do you get comfortable with some of the markets that you're investing in? So when I was looking through your long book, there was a lot of markets that I've never personally invested in. I'm trying to remember them right now. I know that I saw Switzerland, some others.

Norway. Anyway, is there anything that, like, I don't know, what do you look for to get comfortable investing in those markets? Does it feel that different than investing in the US? um not i guess not at this point i kind of think if there was i'm sure there was sort of a learning period where you know where i i got used to i mean i think sometimes the disclosures are definitely a little slower um you know just in terms of um you know reporting can be less frequent and and that's something you just have to get used to um i think in general like i i So part of, I mentioned my focus is on mid caps mostly. And I think to me, that's a little bit of a, it's clearly not perfect, but it's like a little bit of a check on governance. And it's like if a company has made it to the sort of the mid cap range, it's probably less likely to be super sketchy versus, you know, like if I'm if I were buying a, you know, 200 million dollar stock on the London AIM exchange, like I'd be a lot more worried versus, you know, a five billion dollar Norwegian company.

But like I said, it's not perfect, but it's it's just a little bit of a check on it. okay unless brett has any more questions i think we've got a last one for you here which is if someone listening today is thinking about starting their own fund let's call it call it a long short fund what advice would you give to them um so a few things i think i think uh having your significant other if you have one having that person on board 100 is like priority. Number one, uh, number two is I think, uh, being aware that, uh, so when I, when I started my, before I started my, my fund, I talked to a lot of people and got, saw advice from a lot of people who had done, done it before. Um, and I realized there is sort of two different paths

or two different types of advice I would get. Um, some people would say, don't do it. There's you have almost 0% chance of succeeding. You need to raise at least like half a billion dollars to be successful and on and on and on. And then other people say, yeah, just like keep your costs low and, you know, focus on what you're doing and, you know, give sort of general advice, like, you know, said it's tough, but if you really want to do it, go for it. And so I sort of realized that you've got these two different types of people that give you advice and, you know, they don't do it, you need to raise half a billion dollar types. You know, they're completely correct if your goal is to start a big asset management firm, you know, and be completely

institutionalized. But if your interest is in forming sort of a boutique, you know, one or two man band asset manager, and you don't need to raise half a billion dollars, and it looks and feels and smells very different from, you know, the big asset manager thing. So I think just keeping that in mind, you know, all the advice is useful, but keeping that in mind that people have wildly different perspectives, I think is important. And then I think if you do go the, you know, the boutique route, just, you know, setting yourself up to succeed and to have as long a runway as possible to actually build a track record, I think is the best thing you can do. So the last thing you want is to have financial pressure while you're trying to develop a track

record. So I think keeping your expenses low, you know, you don't need to do anything too crazy in the early days and no one's going to care, you know, if you have, you know, some really impressive vendors right when you're starting out. So just making sure that you have the pressure kept off of you in those early days, I think is important. Yeah, I think that's all the questions we have. So I guess for any listeners that want to learn more about ESC, more of your work, what are the best places to do that? So my website, it's just upslopecapital.com and also on Twitter, Upslip Capital. Awesome.

All right. Before we sign off, I want to throw a disclosure on this. Brett and I are not financial advisors. Anything we say or discuss here on Chit Chat Money is not formal advice or recommendation. We are, however, general partners at Arch Capital, so clients may have positions

in the securities discussed in this podcast. Thank you all for tuning in. Thank you, George, for joining the show. And we'll see you all next time. you