WORDS OF WISDOM ON SHORTING STOCKS FROM HEDGE FUND LEGEND ROBERT WILSON

Robert Wilson hedge fund titan

Below is an excerpt from an interview at the turn of the millennia from hedge fund legend Robert Wilson and who died this Xmas holiday. RIP

“Tell me a little bit about the story — you went on a trip around the world one time.

I was on a trip around the world while I was short the stock, but I knew what was going on. It was not as though I didn’t keep in touch with things.

No, you were getting daily faxes.

And I was getting margin calls, too.

Explain: Before you left, roughly speaking, what did the stock do while you were on your around-the-world trip?

I don’t recall. It went up manifold from what it …

Five times?

I don’t know. You could check that.

It went up enormously.

It went up enormously and my losses — you know there is this old, untrue saying that you can lose an infinite amount of money in a short, because it can go up infinitely, whereas you would only make a limited amount when it’s going down.

You get margin calls on the way up, so that I was forced to sell to cover stock. I was covered with much of my stock before it had gone through the roof.

So you were buying it in, as it went up.

Yeah. Basically Newberger and Berman — who had a short position — and I agreed that the dollar amount of my short would not exceed — I forget the number — a certain amount.

And they were concerned because they wanted whatever money they had extended to you to be repaid.

Yes. They were concerned about their financial wellbeing.

Right. Which is always a concern of any broker who lends.

It’s certainly a concern of the customer who’s causing the broker such stress.

Now what was the zenith of the pain as Resorts went up? Was it when you were still abroad, and you finally capitulated or was it when you actually got back to the States with a position that you finally said, “Just cover the whole thing?”

I covered it when I got back. I was fundamentally wrong, you see, and once I realized I was fundamentally wrong. … Another thing: I thought competing casinos were closer to approval than they actually were. So Resorts had a monopoly for a couple of years.

Which you had not fully anticipated?

I did not anticipate that, no.

So what did you end up losing on that stock?

I think around $20 million.

In 1978? 1979?

Yeah. And I said to everybody at the time, I hope next time I make a boo-boo like this, I lose $200 million.

Because?

I’ll be so much richer. You can’t lose $200 million in an individual stock, unless you’re quite rich.

Talk to us a little bit about dealing with losses.

I should point out that for the year in which I had that $20 million loss, I was up 25%, in my overall account and that was a very strong year in the market. I should have been up 50%, or 60% or 70%. That was only one position, and I had a lot of longs that did very well. So it was a plus year. This is the point of hedging.

Right. Of course, it can weigh you down a bit if you make a big mistake.

Yes. Right. And it was a year when I should have been up much more, it was a very strong market year, and 25% was deep underperformance.

Now, do you think that … I’m wondering, in retrospect, do you think you should have just capitulated sooner?

Oh, of course.

What would be your general advice to an investor who, for some reason, has bet against a company and suddenly it’s going the wrong way — whether it’s a long that suddenly goes down a great deal, or a short that goes up a great deal?

Well, I think you should look at the fundamentals. I always used to say, if I shorted a stock and it didn’t go 20% against me, I probably made a mistake.

You mean before it went in your favor?

Yeah. Often it went up, because in the short side you get such delirious over-priciness that, who’s to say that when you short the enthusiasm won’t just all of a sudden evaporate?”

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