How a 25-Year-Old Investor Spurred Lumber Liquidators’ Plunge • Hacker News Board

Re: How a 25-Year-Old Investor Spurred Lumber Liquidators’ Plunge

#71

Post by spinlock » Wed, Mar 04, 2015, 10:38 PM UTC

jared314 wrote: post #57

koenigdavidmj wrote: post #20

Earlier quoted context omitted.

There was a case study of short selling on NPR's Planet Money a few weeks ago: http://www.npr.org/2015/01/30/382587945/winning-at-short-sel... Basically, the guy discovered a Chinese test prep company (think College Board) that had recently started to be listed on American stock exchanges, and discovered that their payment system returned an error. He emailed their support address, and it bounced. He hired a guy on C…

> He shorted the ever living crap out of the stock, broke the news, and won big. Wait, I thought shorting meant he effectively sold shares to some other, unfortunate, investor. It sounds like he participated in a pump and dump scheme/scam.

Everyone who sells a stock is sending a clear signal that they think the money they are getting is worth more than the stock they are selling. So, I'm hard pressed to consider it a scam when someone acts in a completely transparent manner.

Also, why does it matter that he shorted the stock? What if he had previously purchased it off of a hot tip then, upon further due diligence, had decided the company wasn't as valuable as he had previously thought? There still has to be a counterparty to that trade.

At the end of the day, this guy probably saved more investors from being taken by this scam because he exposed it early. Without the incentive to make money, he would not have hired someone to investigate their offices in China. Without that investigation, he would not have shorted the stock, sending the market a clear signal that the stock was over-priced, and written up his research. Without his signaling and research, more people would have bought the stock, creating a bigger scam, and destroying more wealth.

Re: How a 25-Year-Old Investor Spurred Lumber Liquidators’ Plunge

#72

Post by rwallace » Wed, Mar 04, 2015, 11:30 PM UTC

zerocrates wrote: post #36

Someone1234 wrote: post #23

Earlier quoted context omitted.

Everyone loves to give California a hard time, but they've done more to bring US product safety into the 21st century than any other US state. I'd describe California and the EU as being similar, and the rest of the US to be worse than either (some by far). Fortunately since international companies want to sell all over the US and Europe, it has meant that this is the new baseline most of them shoot for. "Legal in Ca…

> It is better for everyone. It really is. Except of course when they get it wrong and have to reverse course, as seen in the news over the last several years in the case of flame retardants for furniture.

What's the latest verdict on flame retardants? Last I heard, the conclusion was that they are carcinogenic, but you have to weigh the risk of dying of cancer in twenty years against the risk of dying in a fire tomorrow, and the best guess seemed to be that they save more lives than they cost.

Re: How a 25-Year-Old Investor Spurred Lumber Liquidators’ Plunge

#73

Post by downandout » Wed, Mar 04, 2015, 11:37 PM UTC

jared314 wrote: post #57

koenigdavidmj wrote: post #20

Earlier quoted context omitted.

There was a case study of short selling on NPR's Planet Money a few weeks ago: http://www.npr.org/2015/01/30/382587945/winning-at-short-sel... Basically, the guy discovered a Chinese test prep company (think College Board) that had recently started to be listed on American stock exchanges, and discovered that their payment system returned an error. He emailed their support address, and it bounced. He hired a guy on C…

> He shorted the ever living crap out of the stock, broke the news, and won big. Wait, I thought shorting meant he effectively sold shares to some other, unfortunate, investor. It sounds like he participated in a pump and dump scheme/scam.

>It sounds like he participated in a pump and dump scheme/scam.

"Pump and dump" means touting a stock using false information, and then dumping the shares before others realize that the information is false. On the other hand, information advantages (as long as they did not come from company insiders) are completely legal. This guy had an information advantage over those who bought the shares because he invested the time to investigate the company and others didn't. You are saying that outworking others is a "scheme/scam".

Re: How a 25-Year-Old Investor Spurred Lumber Liquidators’ Plunge

#74

Post by rokhayakebe » Thu, Mar 05, 2015, 1:50 AM UTC

jordan0day wrote: post #9

rokhayakebe wrote: post #4

Earlier quoted context omitted.

Investigative journalism? There is definitely an opportunity for a site that allows such reporting.

Who would pay for it? We've already seen that people aren't willing to pay for quality journalism, so we're left with advertisers? Who obviously don't want their own products being investigated. Perhaps though if somehow you could get companies to pay for investigations into their competitors? Like an anti-advertising model? I presume this would end up a zero-sum game though, and companies would opt to not play at al…

Who would pay for it?

That's the whole point: No one. I care enough about some subjects that I would work on it for an entire year if it meant enough people would read it.

Re: How a 25-Year-Old Investor Spurred Lumber Liquidators’ Plunge

#75

Post by karmacondon » Thu, Mar 05, 2015, 2:02 AM UTC

jared314 wrote: post #67

syntheticcdo wrote: post #63

Earlier quoted context omitted.

The short seller did nothing wrong. Shorting simply means he borrowed the stock in order to sell it-- sell high, wait for the price to drop, then buy low in order to return the shares to the lender. The buyer on the other side of the short sale should have done more due diligence. No one forced them (be it a person or an institution) to take up that position. The Chinese company (or some affiliate) was the one who ha…

If you listen to the story, he shorted the stock, knowing it was a fraud, and then exposed it. He knowingly created more victims of the scam.

His short position added information to the market. At least in theory, other investors could have asked "Why does this person think that this company is less worth than it's current value?" and done their own research.

The short position provided incentive for him to expose the fraud publicly. It would have been nice if he'd done this research and told everyone about his findings out of the goodness of his heart, but that's a lot of work for little personal reward. The ability to short provided an additional incentive to make the information as public as possible.

Re: How a 25-Year-Old Investor Spurred Lumber Liquidators’ Plunge

#76

Post by analog31 » Thu, Mar 05, 2015, 3:14 AM UTC

koenigdavidmj wrote: post #20

parfe wrote: post #2

The idea of private citizens both being able to investigate companies for wrong doing and earn income for their work appeals to me. No lawsuit, no legal process. After doing some investigations, just some quick transactions on a trading account, and a blog post later.

There was a case study of short selling on NPR's Planet Money a few weeks ago: http://www.npr.org/2015/01/30/382587945/winning-at-short-sel... Basically, the guy discovered a Chinese test prep company (think College Board) that had recently started to be listed on American stock exchanges, and discovered that their payment system returned an error. He emailed their support address, and it bounced. He hired a guy on C…

Did he engage in insider trading? He traded on material, non-public information, although one could certainly argue that the non-existence of a business is public information.

Re: How a 25-Year-Old Investor Spurred Lumber Liquidators’ Plunge

#77

Post by dankohn1 » Thu, Mar 05, 2015, 3:38 AM UTC

bstar77 wrote: post #35

This is sort of off topic, but I'm right in the middle of ripping up floors from Lumber Liquidators that I put down a few years ago- parts that are at the center of this cluster fuck. My whole family has been struggling with health issues that coincide with when I put these floors down. I have a Chihuahua that has developed terrible sinus problems, my 6 year old son is having sinus and cough issues and my wife has br…

Thank you for the post and here's hoping for a speedy recovery for your whole family (and the Chihuahua).

I have sold short stocks in the past that I have believed were fraudulent (and they always eventually went to zero, although riding them there can be a challenge).

But I think your story represents the best example I've ever seen of how short sellers have an incentive to add information to a market, and how this can make participants better off.

Re: How a 25-Year-Old Investor Spurred Lumber Liquidators’ Plunge

#78

Post by koenigdavidmj » Thu, Mar 05, 2015, 3:39 AM UTC

analog31 wrote: post #76

koenigdavidmj wrote: post #20

Earlier quoted context omitted.

There was a case study of short selling on NPR's Planet Money a few weeks ago: http://www.npr.org/2015/01/30/382587945/winning-at-short-sel... Basically, the guy discovered a Chinese test prep company (think College Board) that had recently started to be listed on American stock exchanges, and discovered that their payment system returned an error. He emailed their support address, and it bounced. He hired a guy on C…

Did he engage in insider trading? He traded on material, non-public information, although one could certainly argue that the non-existence of a business is public information.

Attempting and failing to buy your product is one of the most public bits of information there is.

Observing the lack of any activity at your claimed corporate headquarters is pretty public too.

Re: How a 25-Year-Old Investor Spurred Lumber Liquidators’ Plunge

#79

Post by eru » Thu, Mar 05, 2015, 3:48 AM UTC

analog31 wrote: post #76

koenigdavidmj wrote: post #20

Earlier quoted context omitted.

There was a case study of short selling on NPR's Planet Money a few weeks ago: http://www.npr.org/2015/01/30/382587945/winning-at-short-sel... Basically, the guy discovered a Chinese test prep company (think College Board) that had recently started to be listed on American stock exchanges, and discovered that their payment system returned an error. He emailed their support address, and it bounced. He hired a guy on C…

Did he engage in insider trading? He traded on material, non-public information, although one could certainly argue that the non-existence of a business is public information.

If you wanted to follow in the guy's footsteps, you might want to move a jurisdiction that's more accommodating of insider trading?

Re: How a 25-Year-Old Investor Spurred Lumber Liquidators’ Plunge

#80

Post by eru » Thu, Mar 05, 2015, 3:54 AM UTC

bradleyjg wrote: post #15

vec wrote: post #13

Earlier quoted context omitted.

Short selling is necessary and good as a stopgap measure, but there's at least one good reason we shouldn't want it to be a go-to reward strategy. Most investments have a bounded worst-case loss. You can only lose as much money as you put into it. Short selling, however, is backwards; you have a strictly bounded best-case profit and the theoretical maximum loss is infinite.

If you know the time frame you expect the market moving news to come out you can go short with limited downside by buying put options. You also get more leverage that way.

How do you get more leverage? Aren't the put options another expense?