Risk of Ruin
Audio documentaries about risk takers.
Risk of Ruin
Life's Too Short
Marc Cohodes made a living exposing fraudulent companies, and profiting when their stock prices collapsed. But the life of a short seller is spent on a high wire because executives willing to engage in fraud don't play by the rules when their freedom is at stake. Marc tells the stories of the adversity he's faced holding public companies accountable.
Marc recounts the war stories from his shorts of iomega, TCBY, Lernout & Hauspie, Novastar Financial, Jos. A Bank, Bally Manufacturing, Direct Focus, and more.
Follow Marc on Twitter: @alderlaneeggs
Marc's Mimedx Website: http://petiteparkerthebarker.com/
Email the show: riskofruinpod@gmail.com
Twitter: @halfkelly
My emails have been hacked more than once. I've been sued countless times. And I think in December of 2017, this fraud criminal operation, my medics, the CEO bribed Senator Isaacson to get the FBI to pay me a visit and tell me to quit tweeting. I've had numerous death threats when I was planning to learn out and how it began, which was a Belgian money laundering fraud. Once you're through that, You become sort of hardened or sort of immune, and you've been sued, you've been investigated, you've been sued by regulators in Canada, things like that. It just becomes part of it, and you just say, this kind of sucks.
SPEAKER_00:Risk of Ruin is a podcast about gambling and life and their intersection. I'm John Reeder. This is Episode 6, Life's Too Short. A reasonable thing to wonder upon encountering short seller Mark Cohodes might be, is this guy serious? I mean, is he for real? That was my reaction when I found Mark's Twitter feed. In December of 2017, Mark tweeted 50 times about a small biomed company called Mimetics. That's almost twice per day for the entire month about a company nobody has heard of, which Mark said was a fraud. And the thing about Mark is that he is uncommonly focused. While the rest of finance Twitter expounds on Amazon, or the latest jobs report, or Tesla, or the death of value investing... Mark keeps banging away at Mimetics. I should also specify that Mark doesn't limit himself to dry discussions of company fundamentals. In fact, the thing he really seems to enjoy is trash talk. Mark loves to say things like, Mimetics makes Theranos look like Johnson& Johnson. And lots of Mark's tweets are really just taunts directed at the Mimetics CEO, with different ways to say the guy is going to jail. He also started a blog about MyMedx, and the web address was MoreTrashTalkAimedAtTheCEO. I'll put links to Mark's Twitter feed and the blog in the show notes, but the point is Mark likes to mix it up. Keep in mind that this campaign to go after MyMedx began in earnest when the stock was near an all-time high. So when you see these tweets and the blog, but the stock seems to be doing pretty well, It's hard to know what to think. But then in 2018, things started to happen at MyMedix. Another way to put it is that the company fell apart like a craft project made of pipe cleaners and Elmer's glue. The highlights are roughly as follows. MiMedx had to restate years of earnings. Their outside auditor resigned. The company paid a multi-million dollar settlement to the Veterans Administration for price gouging. They paid another multi-million dollar settlement in a shareholder suit. The stock was delisted from the NASDAQ, and at one time it was down about 90% from its peak. Almost the entire senior management of the company was either fired or quit. Oh, and the CEO, the one that Mark had relentlessly taunted with accusations that the guy was a criminal, he was fired and charged with fraud. My reaction upon seeing all of this happen was something like, wow, I guess this guy is serious. But for Mark Cohodes, it was just another chapter in his long career as a short seller. This episode is about the highs and lows of short selling as told by someone who has seen it all. A central theme of Mark's career has been identifying trends in technology.
SPEAKER_01:So that's back in 1982 with my buddy Paul Landini. And him and I worked together at the Northern Trust. And I was 21 and he must have been about 30 and I was just starting out. I wasn't married at the time and life was very simple. And he came by my desk one day at work. He said, what are you doing tonight? I said, I'm not doing anything. He goes, let's go to the arcade. I said, fine, no problem. So we go to the arcade and we befriend the guy who runs the thing. And we talk about something. Landini asked him about coin drop. He goes, how's your coin drop? Which is the amount of coins people put in pinball machines, you know, every day, every week, every month. And he said, it's like 1384. And a week later, we came back and it was 1301. And a week later, we came back and it was$1,262. By the time we were done with this project, it was like at$1,000 and going down. And Landini said, we should short this Bally Manufacturing because they're big in pinball. It's all they do. And we shorted it and we made a bundle. And I think the thing on that iteration went broke because people stopped going to arcades and they started buying... you know, Frogger or Mario Brothers or things like that to play on their TVs.
SPEAKER_00:Maybe in gambling and investing, your edge can be approximated as the valuable information you have that no one else has. Looking for edge means looking for information that will be uniquely yours.
SPEAKER_01:I kind of believe that For anything
SPEAKER_00:you believe, you can ask the question, given this hypothesis, what should the data look like? Mark made a career out of verifying whether the evidence fit his hypothesis.
SPEAKER_01:I went with my buddy Dave Shalley, who I think In terms of short selling, I think he's the best to have ever done this. He doesn't do it anymore. He quit a decade and change ago. I think he was the best. He's my pal. And we were short a company called Direct Focus, and they were making all sorts of claims about their inflatable beds, that they were selling all these beds, and the numbers didn't make sense. And their distribution center was in suburban Las Vegas. So Shelly and I literally rented a car and hung out at the distribution center. And there were huge dumpsters to the side. And we literally jumped in the dumpsters to count the return beds. And a lot of these beds were never really opened or properly returned. They were just thrown away. So cell phones were just coming out back then. We literally called up the senders and asked them if they got credit for their return mattresses and they said no. And it turned into a big scam. I mean, the stock went way, way down and the company was sort of a sham. We used to do stuff like that all the time.
SPEAKER_00:The Dave Shalley from that story is now a part owner of the Golden State Warriors. So there's probably a great dad talk somewhere in there about the value of getting your hands dirty. But really, Mark's stories are as much about ingenuity as they are about doing dirty work. Mark would start with a question and then figure out a creative way to collect information that would resolve the question.
SPEAKER_01:Back in the day when software was sold on a shrink-wrap basis, where you could go into an egghead and literally buy a disc. I mean, a lot of people probably don't even know what that is. But software used to be sold on discs or even CD-ROMs in a box, and it was shrink-wrap software. We used to tag boxes and tag sound cards to see how many would sell in a week. So what we'd do is we'd put like an orange stick on the bottom of a box, 28 boxes down, and we'd come back. you know, in three days and count how many boxes were above the orange sticker. And we'd multiply the number of stores and figure out how many units were sold. I mean, this was back in the days pre-internet where to so-called channel check, we would literally tag boxes. And whether it was software, toys, soundboards, things like that, that's what we would do.
SPEAKER_00:Mark was also an early critic of subprime lenders, including Novastar Financial. The company's capital structure was like a revolving door where they would raise new money and then go through not very many steps before paying it back out in a dividend. But Mark's process is geared to uncover bullshit wherever it might exist in the company data.
SPEAKER_01:I would go to, again, Las Vegas where Novastar said they had all these agents originating subprime loans and they used to be in people's houses with fake addresses. So the one way you could really tell if something wasn't on the level or fake is you just do it yourself. And the best ally to the story was your own hands-on work with it.
SPEAKER_00:Even though shorting stocks... comes with myriad pitfalls, sometimes Mark and his partners hit it dead solid perfect.
SPEAKER_01:My former partner, Monty, and I were short this company called Avid, which made at the time post-production equipment. And the big thing was we knew and researched and found out that they were financing all these purchases of this equipment themselves through a captive finance arm and their sales and their business was shady. And it was a real growth company. And it was run by this tubalard named Kurt Rowley. And they had this captive arm called Avid Financial Services. And I used to get on their conference calls. And this is when they allowed me to get on conference calls. And whatever they would talk about, I'd always ask a question about Avid Financial Services. And Kurt Rowley would say, you know, Mark, we have a great quarter. You know, it's not our fault. You're short the stock and losing your ass. There is no such thing as avid financial services. And I don't know about others on the call, but I'm sick and tired of hearing about avid financial services. Okay. Right. This was like on the September quarter. So I said to mine, I said, fuck this Kurt Raleigh, you know, fuck him, you know, trying to show me up on the call. So we go to God knows where. They're having some conference of post-production editors because this technology is new. So we go and we have these cards printed up, M&M Video Services, post-production, commercials, advertising. We had to do something to get in. So we get in this thing, and there's all these production guys. What? We're researching this thing deeply, so I know all the lingo. And Avid is there. And I said, you know, my partner, Monty, and Monty has long hair and he has a long beard. I said, he's a bit of a hippie. And I'm dressed like shit. And I said, I don't know if we have$114,000 to buy the Avid 1, the Avid 6, and the Avid 3 to do it. Is there any way we can finance this? And the guy said, yeah. We have something called Avid Financial Services. I said, you do? They said, yeah. I said, can I get an application? They said, yeah, here's one. And I said, can I have the business cards of the rep of Avid Financial Services so we can call them? They said, yeah, here's one. I said, I'm a little spacey. Can I have 10 of these cards? And he goes, sure, take as many as you want. I said, wonderful. So we hit the fucking jackpot with this, right? I mean, Monty and I go out and then we have beers and do whatever. And I say, we're going to have some fun with this. So the main bull on the stock is this guy named Haney Nada. and he's now some VC guy or a private equity guy or whatever he is. So we call up Haney and say, Haney, it's kind of over. He goes, what do you mean? What do you mean? I said, we have proof. hard proof that Avid Financial Services exists. This is before camera phones, by the way, right? This is before, you know, you can just take a picture of the card and email it to somebody. So we either go to the copier and copy it and fax it to them or, you know, this, that, and the other. There's no scans back in the day here. No phone pictures. We send it to them. We say, call us back, call us back. He calls us back. He goes, you guys are really good. He goes, you guys are pros. We said, aren't we? We're pretty good, aren't we, Haney? He goes, where did you have this stuff printed up? I said, you have got to be kidding me. I said, you think we had this printed up? You think we had these printed up to send it to you? He goes, yeah, Avid Financial Services doesn't exist. I said, you dumbass motherfucker. We're not lying. This is the truth. So we go to Herb Greenberg, who at the time is writing for the San Francisco Chronicle, and we send him stuff. And he says, proof of avid financial services, this, that, and the other. The stock goes like 44 to 37, right? And it's December, December like 16th or 17th. And Haney calls me. And we're having our Christmas party in a restaurant. I'll never forget it. And he goes, you're right. Avid Financial Services does exist. He goes, I was wrong. I believe you. I said, OK. I said, so are you downgrading the stock to sell tomorrow? He says, no, I can't do it. I said, why? He says, because all the institutions are voting for the best analysts. And if I downgrade the stock to a sell tomorrow, Fidelity won't vote for me. Putnam won't vote for me. T. Rowe won't vote for me. All these guys will hold the stock. So he was keeping his recommendation as a strong buy because he didn't want to disrupt the stock at the end of the year because he wanted their vote. So this is like Thursday, like December 17th. So like on that next Tuesday or Wednesday, this avid like pre-releases and they like shit all over themselves. They say the quarter's bad. restating earnings, suspending all guidance, Kurt Raleigh to resign, you know, bad debt charge of Avid Financial Services, the whole fucking deal. And the stock literally, I mean, see, this is the days when things would get killed. The stock literally was like 37 to like eight. And we were like hooting and hollering and the whole thing. And Haney Nauta then calls up And it was like someone just lynched his dog in a tree. He goes, I don't know what to say. I am professionally embarrassed. I can't believe they pre-released. I said, you dumb fuck. I said, we gave this to you. Gave this to you. And you said we made this shit up. I said, I don't make anything up. You dumb fuck. But... You know, that's the story of Avid, and that's the story of the gotcha. But, you know, Amy Nada's probably worth$300 million in whatever private equity gig he's running, and everyone thinks he's smart, but he's probably one of the worst sell-side analysts I've ever run across.
SPEAKER_00:The 2000s would turn out to be an almost impossibly odd decade for Mark. But things started off on the right foot when one of the companies he was shorting, totally imploded.
SPEAKER_01:My son was born early and he has cerebral palsy and he's 33 right now and he's doing great. He's doing great. But when he was younger and learning and doing stuff like that, he used to go to regular school, went to regular high school, graduated, graduated college. I wanted to get him some speech software so he could dictate into a computer or something and it would write words so when i was shopping this thing i was shopping for it the best product on the market was something called dragon and but everyone was talking about learn out so i said what about this learn on house through software and everywhere i'd go people said the doesn't work doesn't work doesn't work doesn't work doesn't work and i said wow that's interesting so you know when you start something that's hyped And the product doesn't work. That's not a bad place to look. And then the financials made no sense. And then it was out of Belgium. And there's not many legitimate companies out of Belgium. It tends to be a crooked, was a crooked place. Maybe they've cleaned up their act. So I started getting involved in this thing. And then, man, oh, man, did I not realize what I was getting involved in? And then sometimes when you're in quicksand up to your belly button, you say, how the fuck did I get in this position? you know, damn me. And I think the thing went up three or four times on us. And it turned out it was a Russian money laundering fraud run through Belgium, selling to themselves in the most far flung places around the globe, including Korea. But it was one of these things where at the time, you know, they had, they were talking about the talking Jaguar, you know, they had their, you know, now, you know, whatever car you get into speech works, but They claimed to have the first talking car, and there was no way it worked. And I went to this show at Comdex in Vegas, and it was literally a talking Jaguar where you sat down. I mean, this is like 1999 or 2000. You sat down and said, you know, directions home. And it would say, what's your home address? Right? You know, the whole thing. And everyone was like, ooh, ah. So I go to Vegas at the talking Jaguar and it's all carpeted and the whole thing. And I noticed there was a seam in the rug that looked kind of funky. So I followed it. And sure enough, the car was fucking hardwired the car, you know, it was, it was a fake old demo. So I went under the thing when no one was looking and disconnected it and like broke the interface on purpose. So they couldn't replug it in. And then all of a sudden the car stopped talking and, And they were, like, furious with me. They, like, called security. They called the police. They called everyone. And I was with my buddy Joe Besseger at the time, and we were doing this fax from the other side of the track show. And him and I ran out of there like we were wanted. And he's not a small guy. And it was crazy. It was crazy, but a lot of these things, a lot of these type of situations that get hairy, you get so far in, there's like no turning back. There's not only like no turning back, it becomes, hey, it's either me or it's them, and it ain't going to be me, so it better be them.
SPEAKER_00:When the dust settled, the formerly$9 billion learn-out in Housebee was basically a zero. Over a number of years, a third of learn-out sales had been fiction. The CEO went to jail, and long after people had forgotten the company, Mark was still known to display in his office a picture of that CEO in handcuffs. The episode could have provided a template for fraud discovery, but it didn't. even in a world where the SEC is not sophisticated enough to police the companies it regulates. It was short investors that tipped off journalists and the SEC to the fraud. Mark frequently called attorneys at the SEC and told them where to find the suspicious activity. Because the agency actually listened, they were on learn-out before the stock hit zero, which doesn't always happen. Also, a murderer's row of finance journalists, including Herb Greenberg, Jesse Isinger, John Carreyrou, and Mark Merrimont, all made hay on the story. But if LearnOut could have provided a blueprint for the way that investors, journalists, and regulators could work together, it didn't. When Mark stumbled on another problem company, the subprime lender Novastar Financial, the one with the fabricated business addresses, Regulators had no interest in his help. He tried to sound the alarm over a number of years and was largely ignored. But adding to the problem of regulator indifference was the fact that heavily shorted companies came up with a playbook to deal with critics. The strategy was basically to go nuclear against short sellers and journalists. file lawsuits, claim defamation, hire political spin doctors, cry conspiracy, pay pump-and-dump bloggers to harass short sellers, and even lobby the SEC to scrutinize short sellers and journalists. For better or worse, the game plan kind of worked. When September of 2008 rolled around and policymakers were frantically looking for a scapegoat to offer up as sacrifice, short sellers were a convenient choice.
SPEAKER_01:In 2008, you know, we as a fund thought the world was going to come to an end over that year. And we were having a really good year sailing along. I think we're up like 35% going into the debacle, I think, in September of 2008. So we were up a lot. And we had about$2 billion under management at the time. So a guy who worked for us, his name was Rick Sauer. He used to be with the enforcement division. of the SEC. You know, the SEC was making all sorts of noise about changing rules and doing all sorts of stuff like that. Chris Cox was running the SEC. So Sauer went to meet with the SEC along with other general counsels of hedge funds. And Chris Cox told everyone that there was going to be no changes in shorting rules, absolutely zero. And if there would be any changes, he'd put them out for discussion or review or comment for 90 days. So we say, okay, no problem. All is good. So I'm literally at a baseball game and things start to blow about subprime land and financial issues, this, that, and the other. And I think it was like a Wednesday night and the SEC went and changed the rules about hard to borrow short stocks. They changed the rule on a Wednesday night, effective Thursday, effective the next day. And I said like, what the fuck is going on? So that next day, we got absolutely killed. We must have lost like 10% that day because everyone was scrambling to cover those names. So that was bad enough. And then a few days later, as I recall, again, this is 12 plus years ago, and I got enough PTSD from this event, they put a short selling ban on stocks that were viewed as financially important. And somehow that included about three to 400 names of all sorts of garbage that wasn't financially important. And those stocks all went through the roof because everyone scrambled to cover. We probably lost like 15% that day. So we've all of a sudden gone from like up 35 to like up 10. So this is like a Friday or a Monday. Goldman calls us up and says, your fund is too volatile. We're taking your haircut, the money that you have to put up to be short. We're taking it from 30 cents on the dollar to 60 cents on the dollar. And we're not leveraged at the time. And I said, okay, okay. What exactly does that mean? They say, well, you need to come up with another$400 million by the close of business in two days. And I said, well, you're going to make us then go cover everything, which is going to make it go crazy. I say, why are you doing this? This isn't a federal rule. This is a Goldman rule that they decided to impose. And they said, well, it's too risky or this, that, and the other. And I mean, this thing is making no sense because The market is starting to fall apart. And I called my buddy, Bill Duhamel at Farallon. And I said, can you help me out here? And he goes, what do you mean? I said, I'm having all sorts of problems with Goldman. I got these great positions. They got a short sale ban on. And I'm afraid that if they don't get the collateral, they'll try to destroy me. So he comes by. I walk him through the names. And Goldman said, what are you doing? I said, well, I'm meeting with someone right now to look at our portfolio. So he would take our positions and I'd get you your 400 million. So like no sooner do I hang up with Goldman as do Hamill would say about a half hour, 45 minutes later, Goldman calls up Farrell on the CFO there and basically says, don't help these guys. They're going to be out of business in 24 hours. Then I realized things were really fucked, and these Goldman guys had a game they had to play. And I think as it turned out, Goldman didn't have these names borrowed. And when the government changed the rules, the only way Goldman could get borrowing these names was to put us out of business. And they didn't exactly put us out of business, but they liquidated our funds to the tune, I think we were down 48%, which was just awful and terrible. But we had... one fund that Goldman never touched and they couldn't touch because these guys had their assets. It was a separate managed account. They had their assets to themselves and that account was up like 118 for the year. So where we had the bulk of our funds and where I had, you know, my money that was down like 48 or 51 or some number like that, but the names and the setup we had planned for so I'm not going to say it's the worst thing that's ever happened to me, but it was pretty damn close. The hardest part to me was letting people down, you know, our investors. That was the hardest part. The hardest part to me is I have taken it very, very seriously managing other people's money. I take it very seriously. And the thought that I failed them to me was the sickest part of the whole deal. You know, although Goldman completely and utterly screwed me over, you know, I was the captain of the ship. It's ultimately my responsibility. And, you know, I failed our investors. I failed our investors mightily. And there was nothing I could have done more than I did. But I'm the guy at the top and I was the guy at the top and I was, you know, I was responsible.
SPEAKER_00:The investors that nailed subprime have been lionized in movies like The Big Short, or have had their bets called the trade of the century. I asked Mark if it was hard to watch that happen, given his experience.
SPEAKER_01:I'm Mark Cohodes. There's no one who's put more guys away, exposed more fraud in the history of this business than me. So I don't really give a rat's ass what anyone thinks of anyone else, because other than Shelly... I'm the best that's ever done this by far. And everyone can come with a one name or this name or that name. But pound for pound, year in, year out, decade in, decade out, market cycle, market out, there's no one who's exposed more and done more than me. And that's without a firm. And that's just since I've played around on Twitter. So my record and what I've done speaks for itself. And I don't really... I don't really care about anyone else. I just care about me. There's no one who holds a candle to what I have done or what can do in this business. And that's the way I look at it. So if guys want to say this guy's great and this guy's made a good call. Yeah. I mean, I'll say super. It's wonderful. But when you do it since 1982, I mean, I'm 60 years old and I run rings around whoever's out there. And those guys have firms and they manage a lot of money. I'm just me doing this stuff. And whether it's Concordia in Canada or HomeCap or my medics, you know, you name it. I mean, this is what I used to do. And when these guys, you know, run a career from 21 to 60, then they can talk and they can be viewed as whatever. But until then, I don't really pay much attention to it.
SPEAKER_00:There's a New York Times feature about Mark from 2001, following his learn-out and Housebee success. In that article, Mark is said to proudly show visitors to his house an essay written by his son Max titled Perseverance. I don't think Mark could have known then how much perseverance would be required, but he understood from his son that it was important.
SPEAKER_01:You know, I really owe it to my son because he fights through it every day and he has a great attitude and he works hard to his therapy to stay loose and he has a tremendous outlook on life. And since he has a great outlook on life, I never allow myself, I never allow myself to feel sorry for myself ever, ever. And if I ever think I have it tough, I think of him and how he gets through his day and how he gets through his life and And I just keep pushing ahead. And when people are picking on me and threatening me and this, that, and the other, and this is his best line. He says, he calls me Mark. He's never called me dad, which bothers a lot of people. He goes, Mark. I said, what is it, Max? He goes, it's not what they call you. It's what you answer to. And that's right. I don't give a fuck what people call me. It's what I know I am. And it's what I pay attention to because people call me Mark. Mark lives
SPEAKER_00:on a farm in Sonoma County and invests for his own account. His life would make it impossible for anyone to feel sorry for him. And that's also not the point of rehashing 2008. The point is to illustrate a risk that's rarely discussed and which is the potential that the rules will change mid-game. Mark was like a baseball player in the prime of his career, having the game of his life, and looking at a big fat pitch over the middle of the plate. Then mid-pitch, the rules were amended to say that home runs are now strikeouts. Sorry for your luck. Today, Mark is generous with his time and advice. He offers his accumulated wisdom on Twitter and in podcasts, and he mentors young short sellers. Because experience is expensive if you have to learn everything the hard way, it might be good to hear the guide to short selling from someone who has already paid for that education. Lesson one is that you should place a high priority on learning quickly.
SPEAKER_01:There's nothing worse than losing, and there's nothing worse than losing money. And when you lose money, it hurts, and it's painful, and you're supposed to learn a lesson. And the people who are successful learn the lesson after one or two of the same mistake. The people who are horrible keep making the same mistake over and over and over again. And I try not to make the same mistake over again. And I try not to make the same mistake twice. But it requires a lot of discipline. It requires a lot of experience. And it requires a lot of attention to detail.
SPEAKER_00:One of Mark's strategies is what he calls... Bet the jockey. If he sees an executive from a shady company show up at a new job, he takes notice. And he keeps the database of problem executives in his head.
SPEAKER_01:So sadly, I was never much at school. I never did well at school. My grades were always horrible. And my SAT scores were bad. But I have a tremendous memory. And I don't forget a thing. I don't forget anyone. who's ever tried to screw me. I don't forget anyone who's tried to scam me. And I remember scams that I was involved in or others were involved in. And I remember names and I remember bad actors.
SPEAKER_00:The idea that bad actors will group together at bad companies is based on a simple observation.
SPEAKER_01:If you take the freshman class at, let's say Stanford, let's say it's 1800 kids. And you put them on the football field the first day of orientation. You put all the freshman class out there. After about two hours, and I don't know how this happens, the partiers find the partiers, the jocks find the jocks, the nerds find the nerds. Everyone finds people of like-mindedness. and who they can relate to. People find their pods. And it's the same thing with these bad operators, bad actors, bad people find these bad and shady companies. I don't know how it is, but it just keeps always recycling through. And by and large, when you find a bad actor at one gig that went south, he will show up at the next gig. Now, the gig will start out as being good or start out as some story, but failure leads to failure, and chronic failures are chronic failures, just like successes. Your track record and how you behave matters, and cheaters cheat. And, you know, it bothers me, and I don't forget. I do not forget.
SPEAKER_00:The Cohodes Guide to Short-Selling... also says that you shouldn't short companies that people will miss. The companies to bet against are the ones that could disappear without anyone noticing.
SPEAKER_01:For example, does anyone miss This Can't Be Yogurt? Does anyone miss Coleco? Does anyone miss Greenman Brothers? Does anyone miss Novastar? Does anyone miss The Money Store? Does anyone miss Concordia International? Does anyone miss Texas Air? Does anyone remember Joseph Banks? I mean, who cares? buy one suit, get seven for free? What kind of guy with a straight face would run a business, buy one suit, get seven for free, and have 60% gross margin? It's just impossible. But just think about this, right? You buy a suit at Joseph Banks, you pay full price, that's$600. They used to run a promotion, buy one, get five free. So you walk out of there with five suits that cost you 600 bucks, let's say it's 120 a piece. The company was putting down gross margins of like 50%, which means like that suit, right? The suit itself all in would cost like 40 bucks, right? What kind of outset is this, right? It was just a complete scam. And now that they're out of business, no one misses Joseph Banks. No one misses these crappy companies, right? If Starbucks went out of business, people would miss Starbucks. If Disney went out of business, people would miss Disney and Amazon and Netflix. And I think people would miss Tesla. They'd miss the cars. People like the cars. And people would miss Johnson& Johnson.
SPEAKER_00:Every short seller has stood on the train tracks and made a bet that a runaway locomotive will slow down before it destroys them. Mark has a different analogy for this experience.
SPEAKER_01:When something is going up and up and up, you have no clue where things are going to stop. And I call that climbing up a tree to wrestle the jaguar out of the tree. It's a lot easier to stay on the ground, look at the jaguar, wait for someone to shoot the jaguar. The jaguar falls out of the tree, falls into the ground. writhing in pain, all busted up, and then you carve the thing up. And it would have saved people billions and billions and billions and something called Tesla because you have to wait for the thing to completely and utterly blow up where it's clear that they'll never come back before you should even remotely get involved in shorting that stock. And it would have saved people a shit pot full of money.
SPEAKER_00:Two companies drove home the Jaguar in the tree lesson.
SPEAKER_01:This can't be yogurt, symbol TCBY, which was a frozen yogurt franchise that was brought public by a bucket shop in Chicago called Chicago Corp. I knew it was a fad. The product tasted like shit, but they were growing like crazy. And McDonald's was getting in the yogurt business, serving frozen yogurt at their stores. And I thought this thing was dead because McDonald's was getting in the business. And I think it went up about five times and we lost our ass on it before the thing blew up. And it would have made a whole lot more sense for them to have negative comps, pricing pressure in the first day where the stock got cut in half from where it got cut in half to where the thing sold out down 96%. From there, it would have been a lot easier of a fight. So I said, I'm going to learn my lesson there. And I almost learned my lesson there, except I ran into something called iOmega, which made something called a zip drive, which is completely obsoleted. They're completely out of business. But at the time, it was the first thing with removable portable storage. And after the stock was already up 20 times, we decided to get involved. And then it went up another, I think, 10 times from there. And we didn't almost go out of business because we weren't that big in it. But it cost us a year. One of those years, we had a really bad year. And it was all because of Iomega. Now, we cut our position way, way, way, way, way back. Because once it goes up blank times against you, who's to say it ever stopped? But I said to myself, Jaguar in the tree, Jaguar in the tree. The Jaguar knocked me out of the tree. The Jaguar broke my back, but I'm not paralyzed and I'm still alive. So when iOmega finally blew up, the stock went from like 60 to 28. And we shorted the shit out of it at 28. And then it went from 28 to 10. And then we shorted the shit out of it at 10 on top of it. And then it went from 10 to 5. And then we shorted the shit out of it at five. Then it went from five to 12. And we said, uh-oh, did we get too greedy and not cover it? We said, no, these guys are fucked. Then it went from 12 to like one. So we ended up doing really well in it. But it was only after they completely and utterly blew up. And blew up meant DVD, readable, writables, thumb drives, and things like that, which obsoleted what they did.
SPEAKER_00:Because in shorting, the risk is asymmetrically against you, and the market's upward momentum acts like a house edge, some investors refuse to short stocks. Mark even admits that his money didn't really come from the shorts.
SPEAKER_01:but really I've made the bulk of my money actually being long stocks. So people know me for being short things and I think I'm pretty good at it, but the money that people really can make is being long. Shorting stocks is as close to impossible as there really is.
SPEAKER_00:The past 40 years has offered an explosion of information about publicly traded stocks. But that hasn't exactly resulted in more good information for retail investors.
SPEAKER_01:And it's a very difficult process that people have tried to, over the years, dummy it down. I mean, they watch CNBC, it doesn't cost anything. They think they have experts on that stupid network pitching their stocks and it sounds good and people buy it and maybe they can make money, maybe they can't. But it's a good way to lose your ass because you don't know what the hell you're in. People, by and large, spend more time researching what restaurant they want to go to at night than they do researching a stock they own. I mean, most people have no clue, really, what the company does or how the company makes money.
SPEAKER_00:There's been a great democratization in the ability to own stocks, which probably could be a good thing for sophisticated investors, right? Wouldn't you always want the person on the other side of the trade to know less than you? But that's more complicated for short sellers because it also increases the odds that the other side gets bailed out if things don't go well.
SPEAKER_01:You know, airlines, for example, I mean, since I was a young guy, I think United Airlines must have been bankrupt four or five or six times. But now, for whatever reason, the government wants to bail out America and they want to bail out United. They want to keep bailing people out. And it makes stocks less risky for the holders because no one's actually worried that something can go broke. And the airlines, if they're mismanaged, should be allowed to go broke. And that's part of owning equity. That's part of owning risk assets. The first word in risk assets is risk. And as people don't see that owning a stock is risky, you have more and more irresponsible behavior, which leads to bubbles and all sorts of distortion, which is the current world today. People feel better mentally when stocks go up and they feel worse when stocks go down. You know, rightly or wrongly or this, that, and the other, this is the world we live in. I can't change the world. I can only fix a small part of it that has my attention. But, you know, it is what it is. And shorts, by and large, have been destroyed, sadly. A lot of these people are my friends. A lot of people are going to be out of business, which is sad. And I've been there.
SPEAKER_00:Mark's opinions are almost always delivered in an unvarnished form. he can come across as a hard ass. And sometimes his tough message is pointed at short sellers. But when it bothers me, I
SPEAKER_01:have to write an op-ed for the Financial Times to say that this shorting into a report calling something a fraud or a zero and covering the same day is wrong. There needs to be a holding period because the one thing I can't stand and it diminishes what I used to do is when people said, You're just saying this because you want the stock to go down and make money. And I always say, I'm not like that. And people don't realize that until the game's long over. But that's not what it's about. It's about getting it right. And my name and my reputation means a lot to me. And when I get it right, I get it right. And if I get it wrong, I'll say I'm wrong. But it's very important to do things the right way. And people by and large nowadays, do not do things the right way. And that bothers me.
SPEAKER_00:Mark is an interesting combination of realist and idealist. On one hand, he understands that to make money, he has to live in the real world. And he also understands that the world has changed.
SPEAKER_01:You didn't have the internet. Research was at a premium. And if you hustled your ass and made calls, you could get things figured out way ahead of everyone else. Now it's very hard. It's very dangerous. You have the internet and the money in propping up stocks and keeping a lot of these trends going is very much, and it's very extreme, and it's very dangerous. So I'm happy to say I did this in the heyday. I made a lot doing it, and I had a lot of fun doing it at the same time and met some real characters along the way.
SPEAKER_00:But Mark is also an idealist. He hasn't let himself succumb to the attitude that the only worthwhile activities are the ones that produce a profit. And even though he knows that to make money, he has to take the world as it exists, that doesn't stop him from doing what he can to effect change.
SPEAKER_01:But the problem is for the people who are mentally not quite there like myself, you just can't help yourself. You see something and you just can't let it go. A lot of times I'd like to let it go. I would have more money, more peace of mind, a whole lot less stress. And when I can't let it go, I, you know, if I wake up at 3 in the morning, so be it, because I'm a restless sleeper, I'm up at 3 in the morning working. And it's not like you can ever really turn it off. That's what people don't understand. It's a constant go. And if it was simply about the money, right, it would be a lot easier. But it's not to me. It's about the process. It's about having your process right. It's about seeing something through. And if I seriously believe something's a fraud or people are getting harmed or ripped off or scammed or this, that and the other, I won't stop. And, you know, it's not just about stocks. I mean, I stir it up, whether it's money laundering in Vancouver, whether it's subprime mortgage or syndicated mortgage in Toronto. I do a lot of things Earlier, Mark
SPEAKER_00:said that he was never very good at school. I think it really says something about the power of obsession and the power of being interested in what you do that Mark became an elite performer in his business.
SPEAKER_01:I love the business. I love playing the game. Sometimes Guys could play baseball because they were really good at it, and they loved playing the game, and the fact that they got paid doing it was just a blessing. And I view that like me with investments. I love doing this. I love figuring it out. I love going after troublemakers. I love solving the puzzle.
SPEAKER_00:Underlying Mark's attitude toward his career in investing and what that career means to his life? His perspective.
SPEAKER_01:You don't measure a man by how much money you had. You measure a man whether they're a good dad or a good husband or, you know, if they died tomorrow, would someone have made a difference? And if you can't check those boxes that you haven't made a difference or you're a good dad or a good husband or something like that, you should probably reevaluate what you're doing.
SPEAKER_00:The title of this episode is Life's Too Short, and I will admit that I am still undecided as to what exactly it means. For a clue as to why I don't think it's obvious, here's Mark again.
SPEAKER_01:It's not for the faint of heart, and I'm too old to be doing it now. I wish I was still doing it, but at 60, I'm very different than I was at 30. I wish I could take my 60-year-old experience and apply it to my 30-year-old mind. I'm still sharper than anyone out there, but it's not at a level that gives me great comfort. And it's just too damn hard. And I want to enjoy sort of the time I have left in doing more productive things.
SPEAKER_00:I could be convinced that life's too short means that when you see something that's hard, like short selling, where the world will offer little appreciation for the sacrifices made, you can just move on. There are easier ways to make money. But you could also convince me that life's too short means that you have a limited time on this earth. And if you haven't done something hard, and done it in part because it's hard, and also because you love it, then what will you have to show for your time?
SPEAKER_01:You do this because you want to make a difference in the world. I think if I died tomorrow, they would say at my funeral, that guy made a difference. He's put dozens of people in jail. He's exposed countless frauds. He's helped governments across the world collect probably billion dollars of fines. I've saved people's lives. I've made a difference in the subprime world, whether it's mortgage, education, travel, things like that. I try and I've tried to make a huge difference in people's lives and in society and along the way. If I shorted a stock or two and made some money, that's great.
SPEAKER_00:Risk of Ruin is written and produced by me. Special thanks to Mark Cohodes. You can find him on Twitter at Alder Lane Eggs. You can also follow the show on Twitter at Half Kelly or send an email to riskofruinpod at gmail.com.
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