TMF: What about the positions that you don't publish on your website?
Asensio: We short stocks other than those we put strong sells on. When we go public, we have to respond to every press release the company issues. Our track record is good on the positions that we don't publish, though not as good as our public record.
TMF: We have all heard about the theoretically unlimited risk that taking a short position exposes one to. How do you manage the risk of being short stocks?
Asensio: It is an entirely different process to be short a stock and have it go against you than to be long a stock and have it go against you. There are only two real ways to protect yourself. You can diversify. The second is to have both the conviction and the capital to survive a run-up. We don't want to be martyrs, and we haven't ever been martyrs. We've never suffered a big run-up.
TMF: Do you also invest in companies on the long side?
Asensio: Right now, in this market, we are not long any stocks.
TMF: It strikes me that Network Solutions/VeriSign
Asensio: We knew that Network Solutions and VeriSign were different than the typical companies we usually target. In this case, VeriSign's illegitimacy is endorsed by Congress. We knew going in that we were involved in a chasing the windmill, Don Quixote type of activity. But we initiated our actions because there was so little discounting by the market of the potential risks involved with that business.
Not that we don't believe that there isn't some illegitimacy both in the trading of that company's stock and in the company itself. It's just that the company is so powerful politically and has such strong institutional backing. There are 24 Wall Street analysts recommending the stock. The company has a $10 billion market cap and a billion dollars in the bank, and the amount of political contributions that they give to both Democrats and Republicans to make sure that their illegitimate business remains in place is huge.
The first time we went against them, it took about four months for the company to successfully secure its monopoly when all signs were against that happening. All outward signs would have led any non-biased, non-skeptical observer to say that Network Solutions should not have been given the contract they were given by Clinton, so during that period of uncertainty, the stock capitulated. Of course, when they later got everything they wanted and more, the market rejoiced and the stock ran up.
This time around, the amount of uncertainty is less, and the timing of that uncertainty is less. This time around our position is much larger than it was the first time around. There would be no barriers to VeriSign's business if the politicians didn't take care of them. And if the politicians didn't take care of them, the world would be a better place, because the consumer would benefit from the competition.
On a fundamental basis, the balance sheet and income statement at the company are already starting to reflect the little amount of competition the company is starting to face. The company denies it, but it's there. High sales to related parties, rapidly increasing accounts receivables, those are classic warning signs. We think that there will be material negative developments in that business to come. So now it's more a fundamental issue than a political one. Hopefully, that gives you a flavor of why that stock is different.
TMF: As you look at the almost celebrity status of some of the big Internet stock analysts like Mary Meeker and Henry Blodget that have an abysmal record of investment calls, and here you are 25 out of 26 in your calls... Investors would have been much better off in following your recommendations than virtually any other analyst out there. Yet you are often portrayed in a sinister light. You ever wonder why you haven't gotten your due?
Asensio: Let's just go over that. That's a very important point. These celebrity analysts were created out of necessity, and it all started with the money that came into the mutual funds. Once there, it had no place to go because there wasn't sufficient earnings capacity existing to justify the amount of money sitting in mutual funds that had to be invested. Once the money was there, but the legitimate investment potential wasn't there, you had a scenario that created the incentive for investment bankers to create blatantly fraudulent and misleading and outright bullish statements about the new economy and to create the celebrity status of the analysts to push that view. They had to market to Middle America. Middle America was buying mutual funds that specialized in Internet investing much faster than the fundamentals merited. There wasn't enough value there to justify the amount of investment that was sold to American consumers.
So it all had to be huge. There had to have been a Mary Meeker or a Henry Blodget or whoever to drive it. Their individual talents and skills are meaningless, they were just people who reacted to a set of circumstances so that they could get paid a certain amount -- they didn't have any idea what they were participating in on a larger scale. Wall Street convinced middle America that regardless of what you pay for them, stocks will always be the best performing asset class. That money has now been dissipated -- it's gone into the pockets of insiders, venture capitalists, bankers, brokers, and the analysts, and Middle America, by and large, has no recourse.
Now let's compare the massive amount of money, influence, and power these celebrity analysts have to the resources the shorts have. The short specialist typically has very little capital, very little in the way of support personnel, and is harassed by libel and securities laws, by the SEC, by shareholders, by the promoters, and by the media. If this weren't the case, I would guess that the market would have never reached the peak that it did, and the celebrity analysts wouldn't have ever really existed. But because there was really nobody to oppose the promotional machine on Wall Street, they drove prices up to ridiculous levels. Anybody who stood up and said this was madness was simply driven under by the powerful forces at work.
« Back: Interview With a Short Seller, Part 1
Zeke Ashton (TMF Centaur) wouldn't be caught dead owning any of the stocks mentioned in this article, though he owns others you can see in his profile. He heartily recommends Manuel Asensio's book -- it's a fun read.
Guest writer Whitney Tilson is Managing Partner of Tilson Capital Partners, LLC, a New York City-based money management firm. He owns no shares of companies mentioned in this interview. He writes Tuesday's Fool on the Hill column for The Motley Fool.
The opinions expressed by Mr. Asensio are his only and do not represent those of The Motley Fool, Inc.
The Motley Fool has a full disclosure policy.
