Interviewing specialist bear raider Lucian Miers
Lucian Miers gave a walk through his process for selecting shares that deserve short shrift, and particularly how to avoid disasters in these unlimited downside plays. Miers finds short selling comes to him more readily than ownership simply because he finds it easier to spot companies that will fail than those than will win, especially in small caps.
Market timing and God save us from QE –
Shares are being pushed up by negative real interest rates. “People think they are smart enough to see the warning signs and get out.” They are deluded. History shows that optimists claiming QE will not end badly are wrong. The consensus is that QE countries will gradually inflate themselves out of trouble. In fact we will probably see a sovereign debt crisis.
Interviewing Lucian Miers: East London’s most feared Short Seller
The shorting process
- Read the accounts. Miers reads three or four years of his prospect’s RNSs.
- Look at the corporate website to get a feel for how the company presents itself to the public. Is it all substance or show?
- Know your enemy: who are the company’s owners, brokers etc. Are there bulletin board cheerleaders?
An example of a share he did not short is Zoltav (AIM:ZOL). It is “grotesquely overvalued” but Roman Abramovich’s son is part owner so it is too risky a situation.
- Instinct: Miers has often been advised to short Gulf Keystone Petroleum (AIM:GKP) but there’s something about it he can’t put his finger on. Thats’ not much help to the rest of us who have a fraction of Mier’s market experience.
- Timing: Avoid selling when the price is hitting new highs every day. He is currently monitoring Churchill Mining (AIM:CHL) whose only asset is interst in a court case in Indonesia. It has zoomed up on no news. Risk manage your short by waiting for it to drop 15% or even 25% from its peak.
- Patience: If you are forced out of a position don’t try to get your money back ASAP. Wait until it’s coming down the mountain.
- Getting out of a disaster: He doesn’t hang onto soaring shorts like Evil Knievil does. He took a loss on Ocado (LSE:OCDO) at 100p from a 74p start. The newsflow was relentlessly positive, buy notes were appearing. It’s on his watch list, waiting for sentiment to turn negative again.
Top tip – if a company tells you the shares are probably worthless then guess what, they are probably worthless. The RNS will use a phrase like ‘there is likely to be little or no value left in the equity’ yet the market cap will often continue to levitate at well above worthless.
We interviewed Lucian Miers – The ‘new Evil Knievil’
Zak: I would like to begin with how you became known as a great bear trader rather than a great bull?
Lucian: I started off as a mere broker, when I was young and naive, and where I used to play in shares for other people as opposed to myself. Then I started to realise that temperamentally I was much better at spotting the shares that were going to do badly! In a sad example of just what a minefield the markets are, it became apparent that the numbers were actually on my side, namely that a lot more of these AIM type start-ups (then known as the USM) did somewhat more badly than they did well!
Zak: But isn’t it usually the case with most recommendations that the punter receives either a tip or so called ‘professional’ broker research and, as sure are eggs are eggs, the shares will actually go down initially and then, if you are lucky and patient, you might eventually get onside?
Lucian: Yes, especially when you are getting the hard sell on stocks “in play” and where a lot of the ‘characters’ involved with these companies talk a lot of hype. More often than not, and as you can see with the AIM market at the moment, things tend to end in tears… Human nature dictates that people tend to promise much more than they can actually deliver. Obviously there are exceptions to that, and as someone of a predominantly bearish nature you have got to stay away from the exceptions and quite simply buy them. I am in fact not averse to buying a situation if I really like it.
However, with the more hyped stories, the ones talked about on the bulletin boards and that capture the private investor’s imagination, there are far more occasions when it ends in tears than when everyone makes money and is happy. That’s a fact.
‘Just to pick you up on one point and possibly the most controversial aspect of what you said: private investors, are they simply doomed to lose money?’
Zak: Just to pick you up on one point and possibly the most controversial aspect of what you said: private investors, are they simply doomed to lose money?
Lucian: I think most private investors lose money. By private investors I mean traders, people who try and trade. There are probably many private investors who are smart and buy and hold. But the type of investor who spends time writing on or reading bulletin boards, getting in and out of stocks and talking the talk, yes, I think over 90% of them lose money because basically they are not equipped for dealing with trading.
Are most private traders doomed to lose money?
‘In Technical Analysis you have a method that works in both bull and bear markets, but which seems to receive greater credibility in bear markets – prime example being the gold market at the moment which looks to be in the early stages of a bear market.’
They buy when they should be selling; they sell when they should be buying. They are hard wired as a human to react in this way. In many instances they are dealing on margin so they get stopped when things go wrong, they do not really understand how to analyse companies and, sadly, believe what they are told by company management. For the average Joe or average private investor, I am sorry to say that in my experience, and what I have seen, that it will always end in tears and recriminations.
Zak: I think I have been on the receiving end of those recriminations myself in recent weeks, in the sense that I believed that Gulf Keystone was a sell below £1.70 — the two-year uptrend line – and people did not want to hear that. The flak I took was quite something.
Lucian: It is a cycle of blame; who’s the first in the firing line? For instance, private investors are very patient people with management, not mentioning any company in particular… But the first people to take the blame when things go wrong are the bears. There is this ridiculous term “de-ramping” that is used. Surely de-ramping is a public service as it presupposes that a stock has been ramped, and to thus de-ramp it and add balance is a good thing?
So basically, the bears, de-rampers and nay-sayers / merchants of doom, however you want to describe us, get it in the neck first. Then when things go seriously wrong it is the brokers, the management, advisers and the board of directors who follow. Generally speaking it is the board of directors who are to blame 99.9% of the time with a company’s demise / poor performance, and yet they are the last people to receive the ire of the private investor when the company finally keels over.
Zak: You say the management are to blame, but is it not very often the case that the management don’t actually know significantly more about the business they are running than the investors who are backing them? They run a mining company, but they haven’t got a clue about mining?
Lucian: In many cases, management can be running a mining company even though they know nothing about mining, just get in there because it is the latest hot thing and typically the ‘old boys network’ has put them in that position. However, at the end of the day, it is 99% of the time management’s fault if things go wrong. You could argue that it is the investors’ fault for investing in it, but when a company fails to deliver on what it promises, it is generally speaking the management’s fault, particularly when they have been economical with the truth — as they are wont to do – remembering the ‘over delivering’ desire of humans and that very few actually can do.
Zak: Is this a problem specific to the AIM market or small caps, in that the larger companies have, by definition, proven themselves?
Lucian: Yes, once a company has become larger, unless it is a bubble stock like in the dotcom boom, then there is typically more checks and balances and greater governance. Still, that doesn’t stop inept management ruining a large cap – HMV being the prime example. So yes, this does seem to be something which is specific to AIM what with its lax rules as to what people can get away with…
Zak: But isn’t the good thing about this area of the market that you can make millions given the risks involved, that it is the Wild West / New Frontier? Would investors be best served by being philosophical about the whole issue?
Lucian: It is always caveat emptor in the markets, and so in part you are correct. I do however feel quite sorry for retail clients who get into a stock and end up losing a lot of money. I do not have a particular moral judgement against it, but I do think that the AIM authorities are actually fairly gutless when it comes to dealing with downright dishonesty: the purveying of false and misleading information, lying to shareholders and investors.
When directors are actually guilty of misconduct there is a very strong case for saying that AIM should be much more vigilant, rather than ‘You knew it was an AIM company – caveat emptor.’ That is the kind of thing that seems to be their attitude and that to me, is very, very wrong.
‘I do not have a particular moral judgement against it, but I do think that the AIM authorities are actually fa irly gutless when it comes to dealing with downright dishonesty: the purveying of false and misleading information, lying to shareholders and investors.’
Zak: You could have said that for shareholders of Lloyds Bank (LLOY) and RBS (RBS), could you not?
Lucian: Yes, you could have said that for a lot of financial institutions in 2008. That was a fairly exceptional time however, but whatever the market conditions, there always seems to be skulduggery going on in the AIM market, and no one seems to care a jot about doing anything about it.
Zak: Without giving away your trade secrets, are there any tell tale signs that people should look out for, either if they are long and have got great hopes in a company, or want to go short? Giveaway language or financial ratios?
Lucian: For a company to fail, then of course they have to ultimately run out of money, and so what I always look out for in a company which I regard as being over hyped is when are they going to run out of money, or need to come to shareholders for more money. When did they last ask shareholders for more money and at what price?
In particular, a lot of resources companies are obviously completely dependent on the goodwill of smaller institutions and private clients to stump up money every time they run out of it. So, as a bear, one has to gauge when investors’ patience may run out. A company like Pursuit Dynamics was a good case in point where investors’ patience finally ran out. They were happy to give it money all the way up from 100p to 700p and even on the way down from 500p to 300p to 100p to 3p before finally they say ‘enough is enough’ you are not getting any more money, and that is when a company will fail.
Zak: Pushing that a little further. From a non expert perspective let us say I thought that Thomas Cook (TCG) was going to go bust, or that Ocado (OCDO) should have gone bust. How come they are still around?
Lucian: Thomas Cook was actually a very good example of a company that was priced to go bust, and in my view in late 2011 actually came within a whisker of going bust. I was in fact short of the shares at about 30p – they went down to about 10p. In fact, I would put in the same category WPP (WPP) in 1989 and Next (NXT) trading at 12p. These were companies that came very close to being extinct and were priced accordingly.
If you are short of the likes of Thomas Cook and then you realise that they are probably going to survive, well, you have to close your position very, very quickly. I actually then went net long of Thomas Cook and think that after the latest fund raising that they could go a lot higher.
Zak: So, being short can actually be a very good vantage point in terms of judging objectively whether a company is going to survive?
Lucian: You have got to be on your toes Zak. Clearly, Thomas Cook is now not in danger of going bust any time soon. They have new bank facilities and have just raised equity. But, in 2011 David Cameron actually mentioned Thomas Cook in Parliament and said it would be a shame if they went under – an illustration of just how close they were. The major bank lenders to the Group, given that they are now mostly government owned, did lean over backwards to save Thomas Cook — it is a big brand name and in people’s consciousness. It would not have been helpful to the government if it had gone bust at the end of 2011.
When these things do survive, you have to be ready to jump ship, as in the case of WPP and Next; they have gone up several hundred times from where they were when priced for bankruptcy. Thomas Cook is now around 160p from 10p, and could go a lot higher – it was a FTSE 100 company at one point. If their profits recover, there is no reason why it could not be again.
Zak: So are you saying that if you are a bear, you should be wary of established brand names in trying to go short?
Lucian: You should be wary when a company is priced for bankruptcy and it looks like it is going to survive – that there is political will, lenders prepared to cut them slack. It is in fact irrelevant if it is a brand name – look at JJB, Jessops, HMV. What is key is when it is apparent they will be refinanced and survive that you close your positions very quickly and do not hesitate. You have to say, this company looks like it is going to survive – bang. Cut the position and, if necessary, actually reverse it by going long. This is what I did at Thomas Cook — I bought them again last Christmas at 35p after they had already gone up three times. I in fact got out again too early at about 80p, and they have doubled again since then.
Zak: That brings me to money management. When you get into a position, do you already know where you may be getting out in terms of the stop losses / profits?
Lucian: It depends. With Ocado I was short at 70p and I did not have a set stop loss. But when Stuart Rose got involved I could see sentiment was changing, and knowing that there was a huge short position out there I cut them at 90p – 95p. Of course, it was not a very nice loss, but something which was manageable rather than disastrous which would be the case if I was still short now as they approach 300p. I am not saying that I am a genius, but you didn’t have to be particularly smart to realise that sentiment was changing when Stuart Rose got on board.
Zak: But isn’t that the difference between you and the average private investor, in that you have a antenna for detecting whether a situation is going well or not, and most people just do not have that skill? I have spoken to numerous traders now for Spreadbetting Magazine in recent months, and they apparently just wake up in the morning, look at the screen, act and make money. Simple as that! These people have the IQ, the experience and the academic qualifications. With that backing you are likely to succeed in the way that the average person with average abilities is not and so, for them, is there actually any point getting into this game?
‘They are not interested in a compound return of 10% a year for five years. They want to double their money tomorrow. Therefore they cut corners and fall prey to very persuasive salesman out there who peddle the jam tomorrow / get rich quick stories.’
Lucian: I think probably not. By nature, most human beings are greedy — it is what our evolution and Western capitalism is based upon. They are not interested in a compound return of 10% a year for five years. They want to double their money tomorrow. Therefore they cut corners and fall prey to very persuasive salesman out there who peddle the jam tomorrow / get rich quick stories. You tend to get those companies where the management and / or the brokers are persuasive et al and these are the ones the private investors go for and which are very often unsuitable for them. In fact, one of the things that I attach very little importance to is meeting the management. I know a lot of people who get charmed and seduced by snake oil salesmen, rather than looking at the numbers. You can understand a lot by reading the accounts and also the style of an RNS announcement. But actually meeting people in City presentations I find pretty unhelpful.
The danger is you get caught up by the sales skills and take your eye off the ball. It is quite useful when examining a company not to meet the management.
Zak: Just to finish. The FTSE 100 is getting near to its all time highs, does this mean you are shifting your stance in terms of bear opportunities?
Lucian: Obviously if you are predominantly bearish it is helpful if the market is going down. However, dodgy companies on AIM are always going to be failing whatever the market is doing. I am actually long of quite a few stocks at the moment. As everyone is frightened of cash, the market could have legs for some more upside. I am long of the Japanese index and long of some UK mid caps. But the FTSE 100 is such an international index it is very difficult to link it with the UK now, it is heavily dependent on overseas earnings and has a large commodity element. Certainly, there is value remaining in mid cap UK stocks in my eyes.
Zak: So we are not in a bubble situation, more a business as usual phase in your opinion?
Lucian: I think that we probably are in a bubble as it is unlikely that the answer to the enormous debt overhang is as simple as printing of money. It can’t, to my mind, end in anything other than tears. We are just, to quote a common phrase, constantly ‘kicking the can down the road’. But, short to medium term, which is happening in all asset classes, other than cash and bonds, this rally could have further to go. People are frightened of sitting in cash and government debt. I think that is why equity markets all around the globe are doing so well.
Zak: This is a rhetorical question Lucian: the Japanese authorities have been able to weaken the yen in order to try and inject inflation and hopefully growth into the economy there. Why didn’t they do this 20 years ago?
Lucian: A very good question. I think 20 years ago people did not indulge in ‘Mickey Mouse’ economics.
Zak: But this has got to end badly as otherwise any time there is a recession you could just print money surely?
Lucian: I agree. I have asked people the question myself and I admit that I do not understand. Why is it acceptable now with everyone doing it, not just Japan, but the U.S., the UK and to a lesser extent the rest of Europe? If it were that easy then why weren’t we all doing it in every crisis in history?
Zak: We are obviously so much cleverer now!
Lucian: We are much brighter now. Certainly when I was a kid at University and stuff in the 70s if you put up your hand in class and asked, ‘Sir, why don’t we just print money to get out of problems?’ you would have been laughed out of class.
The answer was ‘No, that is what they do in Zimbabwe and Banana Republics; we don’t do that in the West.’ But now we do do it in the West, and in spades, and I cannot see why it is not going to end in tears just as it has when anyone else has done it before.
Zak: What a wonderfully bright note to end on – for a bear.