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Syllabus (Fall 24) 1

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Syllabus (Fall 24) 1

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AmaarAndroid
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SHORT SELLING

Professors Jaime Lester & David Horn

Syllabus

Office Hours:

Our tentative office hours are Tuesdays at 5 PM, before class. Professors Lester & Horn will
respond to email requests within 24 hours. Should a student want to speak or meet in person,
we will try to accommodate all requests. Please contact the course assistant for all
administrative issues.

Objectives & Description of the Course:

Objective: Give students a set of tools to apply short selling in today’s markets, as well as
understand and appreciate short selling in the larger investing context.

Description: There’s an old Wall Street adage: “Don’t short valuation.” So, is everything else fair
game? What about frauds, are those sure to implode? The purpose of this class is to answer
these questions and equip students to profitably employ short-selling investment strategies.

We will introduce students to all aspects of short selling. However, we will assume that students
have prior knowledge of accounting, and the various accounting tricks and “shenanigans” that
companies employ to mask weaknesses in their business. To that end, we will provide
materials that should be reviewed before the start of class to review these concepts.

In class, we will first dig into the history and the academic literature behind short selling. We will
discuss what approaches have worked historically, and whether it is reasonable to expect these
approaches to continue to produce alpha. We will develop and discuss case studies on
“famous” shorts and frauds. We will, with the benefit of hindsight, try to identify inflection points
in the arc of each company. The students will also become familiar with the risks of shorting
frauds too early.

We will examine various short selling strategies, including “activist shorting”, that are currently
being employed in the markets. We will evaluate what elements make for a compelling short
“pitch.” Additionally, students will learn about idea sourcing, portfolio management, risk
management, and compliance.

While the title and focus of the class is “Short Selling,” it is important to note that the techniques
and investment approaches we will discuss are highly applicable to long-focused investing as
well. Deciding not to own a security that is included in a tracking index is functionally the same
as shorting the security and understanding a company’s true profitability (and not the version
that it promotes through its accounting decisions) is highly important for valuation efforts. A
deep and skeptical research approach should assist fundamental analysts in all fields.

We will approach this topic from both theoretical and practical perspectives, drawing heavily on
the academic literature around short selling as well as highly experienced practitioners. We will
examine what makes a profitable short and pay particular attention to unsuccessful shorts and
how to avoid them. The mosaic of analysis will include accounting, market microstructure,
fundamental factors, behavioral finance, value-added research, and various valuation
approaches.

Outside Experts: There will be a robust line-up of guest speakers, including many of the
industry’s most accomplished short sellers. We will generally have them speak for a portion of
the class period to complement the lesson materials. These speakers will share invaluable
experience, research methods and investment anecdotes with the class.

Final Projects: Midway through the semester, the students will be asked to apply what they’ve
learned. In assigned groups they will source, research, and put together a presentation on a
short idea.

Method of Evaluation

The grade will be based on:

- 40% Final Project


- 45% Homework
- 15% Participation & Attendance

Recommended Course Materials

 There will be an introductory lecture to be reviewed before the start of class


 Readings, both books and articles, will be available at the CBS library
 A variety of online resources will be discussed and utilized

Class Session Description:

Pre-Class Assignment:
In the pre-class lecture we will discuss the most common accounting manipulations employed
by companies, as well as an overview of academic research around short selling. Please
review this lecture and attend our pre-term office hours if you have any questions about any of
the content. Additionally, there will be a short homework assignment due for the first class,
which involves skimming a meta-analysis of short-selling research and a selection from
Financial Shenanigans.

Class 1 (October 22):


Class 1 will introduce the concept and mechanics of short selling and then go on to discuss its
history. We will then begin our discussion of various case studies, which will continue through
the next few classes.

Guest speaker: Jim Chanos (Kynikos Partners)

HW: In groups of four, prepare a case study on a “famous” short (Enron, Valeant, VW,
Wirecard, etc.) Discuss the fundamental and technical developments and prepare an annotated
stock chart that reflects this. Be prepared to discuss an optimal strategy for shorting the stock,
with the benefit of hindsight. Additionally, select the company for your final project.

Class 2 (October 29):


Class 2 will revolve around various case studies. We will briefly discuss the cases prepared for
homework and move on to several dozen other representative case studies. We will focus both
on shorts that worked, and shorts that did not, or have not yet, worked. We will begin to
categorize shorts and develop initial guidelines and approaches for each category. Case
studies include:

Competition- consumer-facing
o Shorts that worked: GPRO, FIT
o Shorts that didn’t: LULU, ALGN

Competition- business-facing
o Shorts that worked: STEC, AVRW
o Shorts that didn’t: ISRG, RMD

Channel stuffing
o Shorts that worked: FIZZ, NUS, MDXG
o Shorts that didn’t: GMCR, UI

TAM saturation
o Shorts that worked: CWTR, VECO, BJRI
o Shorts that didn’t: NFLX, VEEV

Guest speaker: Mike Wilkins (Kingsford Capital)

HW: Students will break into groups of four. Each group will be assigned 20 investment write-
ups from Value Investors Club and predict which worked well and which did not. You will
prepare a report that identifies common factors of a successful short as well as what makes a
compelling investment memo.

Class 3 (November 12):


We will continue our discussion of various thematic approaches to short selling using various
case studies. We will walk through a short investment thesis in detail—sourcing, data
gathering, and analysis. We will then go over the VIC homework assignment and try to draw
some broad conclusions from the data.

HW: Read selected activist short pitches, as assigned. Summarize the differences among the
approaches of each of the activist firms and opine on which presentations are most effective
and why. Additionally, write a one-page memo summarizing the thesis of your final project.

Class 4 (November 19):


Class 4 will focus on activist shorting. We will begin by discussing behavioral finance and how
various cognitive biases apply to short selling and investing more generally. We will then
examine the leading activist firms, including Hindenburg, Spruce Point, Muddy Waters and
others, and compare their approaches. We will use various analytics to understand the
profitability of following each of these activists. Finally, we will discuss the accusation that
activists “short and distort” targets.

Guest speaker: Anthony Bozza (Lakewood Capital)

HW: Continue work on the final project. Remember to reach out to Professors Lester or Horn
with any questions.

Class 5 (November 26):


In Class 5 we will fully flesh out our framework for shorting. We will start by reviewing the
material covered to date and incorporating it into the framework. We will then expand this
framework by discussing the core principles of shorting. We will also go into some depth into
the process of stock lending, the fees involved in borrowing stock, and the concepts of short
interest and utilization.

Guest speaker: Nate Anderson (Hindenberg Research)

HW: Continue to work on their final projects.

Class 6 (December 3):


Class 6 will start with a discussion about high short interest stocks and short squeezes,
including GameStop. We will discuss trading, portfolio construction, and risk management. We
will touch on fundamental research methods and the variety of data available. Last, but not
least, we will discuss compliance, ethics, and notable examples of lapses in these.

Guest speaker: Jim Carruthers (Sophos Capital)

HW: Finish final project

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