KILLING THE MARKET: ROBERT WILSON SHORT SELLER, INVESTOR

By Roemer McPhee, May/2016 (104p.)

Book Review

This was an excellent book that profiled the legendary investor Robert Wilson. Who famously turned a small inheritance of $15,000 into $800 million before giving it all away.  I suspect the reason he is not better known these days is he committed suicide.  Unlike Livermore, who reportedly suffered from depression and died broke, Robert Wilson lived a happy, productive, and rewarding life. So even though he ultimately chose to end his life shortly after a second debilitating stroke that left him disabled.  In his suicide note, he argued there was no reason for shame for he had lived a wonderful life and was making his decision rationally.  He even left instructions on the note for meetings that would need to be canceled from that day.  As McPhee puts it, it was like “just another trade.”

Jessee Livermore

Again like Livermore, Wilson was a one-man show. Who traded actively (both long and short) and deployed a high degree of financial leverage.  He made his fame in the 1970s bear market. Wilson was known as a short seller by his contemporaries.  I found several good articles and this classic interview from 1985 where Wilson follows Warren Buffett and John Templeton in the Adam Smith TV show.  What had elevated Wilson to such prominence, aside from his net worth, was his inclusion in John Train’s classic 1980 book,

The Money Masters

The Money Masters , where he was famously quoted as saying that “one of the dumbest things you can do with money is spend it.”  It is notable that by that interview in 1985, Wilson was only a year away from calling it quits. He handed his fortune over to dozens of outside managers to focus entirely on philanthropy.

 

Robert Wilsons career

Like the story of any great artist,” McPhee writes, “the story of Robert Wilson’s career will never get to the essence of what is ultimately an inexplicable gift. Wilson was a mythically talented stock-picker, who could routinely look at a list of twenty stocks and select the only two that were worth buying; and he had a nose for corporate death like no one else.”. An acquaintance once said of his short-selling ability.  McPhee knew Wilson personally, but only after he retired from investing.  So most of the information he shares in his book comes from articles and interviews and from Wilson’s SEC filings.

The Media

Wilson frequently spoke with the media, who would probe him for long and short ideas, much like occurs with celebrity investors today.  Using a handful of investment examples, McPhee was able to reconstruct the narratives that justified some of Wilson’s best-known positions.

While the examples themselves could not reveal all details of Wilson’s thinking, they were effective in illustrating the sort of investments that Wilson made.  FedEx, Lockheed, and American Express were notable examples on the long side, and bogus theme stocks like Memory Metals, National Video, and Pizza Time Theater were profiled on the short side.  He was also good at detecting when an entire industry was in trouble, such as oil in 1981.

Volatility and Growth Stocks

If he were active today, Wilson would likely be long high-beta tech stocks.  He liked growth, but as the book’s examples reveal, what he really liked was change.  He was attracted to “the explosive stock, the wild and crazy stock. The stock that was held by the fearful, or the greedy, or both, and thus had the potential for a big price move.” He once told reporters,  “I’m not interested in buying it if it can’t go down 30%,” but he also told John Train in 1979 that he would be “scared silly if my long positions were only ten of my stocks.”

At the time, Wilson owned seventy long positions. John Train even commented that “this was the most useful thing he had ever heard Wilson say.” Given his preference for surprise and controversy. Wilson sought to play the big secular growth themes through “step-sister” names.  One of his dictums was that in a gold rush. One should look for the lesser-knowns, who must work harder to survive.

Lesser-known Stocks

So he chose Compaq over Microsoft. K-Mart over Walmart, and Denny’s over McDonald’s.  When he explained his preference for fast growth in the 1985 interview, Adam Smith asked.  “But, rapidly growing companies, those companies are prizes – they are scanned for by computer screens. Emerging growth mutual funds look for them. Isn’t this quality already reflected in the price of each of those stocks?

Perception is Reality

To which Wilson answered:  “The only way one makes money in the market is when the market’s perception of stock changes. So basically, I am looking for stocks where perhaps earnings have not started to improve yet. Or if they have started to improve they are going to accelerate.  To buy stocks simply because earnings have been going up 30% per year for the last three years? To just do that on a rote basis, is a good way to lose money fast. As earnings growth slows down, the stocks tend to go down.”

Short Selling is the Key

His experiences on the short side were also precious. Especially the short squeeze with Resorts International, an Atlantic City gaming play.  He was forced to take a $24 million loss at the time. Like David Einhorn with Tesla these days, Wilson was vocally short a stock that became a rocket ship.  Reportedly he began shorting it at $9/shr and covered above at $180/shr.  Incredibly, even though that one loss amounted to 50% of his net worth, Wilson was up 25% that same year (1978), and 70% in 1979 and 60% in 1980.  When asked about Resorts International in the 1985 interview, Wilson pontificates:

God Like

I had God-like success on the short side in the 1970s. I shorted about a thousand stocks, and maybe five went up,” but “hubris is a very human thing that happens to all of us, and it particularly happens on Wall Street.  We tend, in this business to be terribly right for a while, or terribly wrong, and no matter how wrong and how often we have been wrong in the past, when we have a period when we are right it’s so wonderful and we think we’re so good,” before the interviewer asks, what happened?  “Well, I lost a lot of money.”  

Competitive Threats

Perhaps the most valuable insight I got from Robert Wilson was his view of competitive threats.  “Wilson stated many times that the single biggest mistake he made as an investor, the mistake that cost him the most money in his career, was worrying about business competition too early. Don’t sell out of perfectly good long positions for no good reason. The arrival of competitors often can mean something good: like an expanding marketplace.”

To say that Wilson was ahead of his time is not even fair, because he did very well in spite of his time, which included an extended bear market – but his advice about downplaying competitive fears in expanding markets has proven timeless.

Shorting Stocks

Another prized insight was his mentality towards shorting, and the fact that he admitted (in the 1985 interview) that “from the beginning to the end of it, throwing in the Resorts, I may have broken even on my shorts.”  This may seem like a disappointing statement coming from a man who was considered to be the best short seller of his time – but as he quickly adds, “it permitted me to make a lot more money on the long side.”

Indeed, Wilson always ran net long, and sometimes it was well above 100%.  “When I was bearish,” he once told a reporter of TheStreet.com, “I was maybe 25% net long, and when I was bullish, I might be 125% net long.”

Conclusion

So all told, this was an inspiring and informative book about an impressive, if not obscure, investor who showed the world that it was possible for someone to systematically beat the market and create tremendous wealth with shrewd stock-picking, meaningful leverage, and nerves of steel. When asked in 1985 if he had an end object in mind for his investment career, Wilson answered: “Yes, to make a billion dollars.”  He didn’t quite make it, but came remarkably close.

Best regards,

Adriano

2 thoughts on “KILLING THE MARKET: ROBERT WILSON SHORT SELLER, INVESTOR

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