Longreads + Open Thread

Cardboard; Walkman; Shorting; Railroads; Computing; Accidental Gods


Chapter Twelve has a retrospective on the short attack on Home Capital Group, a Canadian bank. Activist short sellers play an essential role in markets; frauds suck up a lot of resources directly, and when they collapse the indirect chilling effect hurts other companies' ability to raise. This piece walks through the combination of accurate factual claims, spin, and innuendo behind a specific short-selling campaign. Since the campaign targeted a levered financial institution, it could have worked even without being correct if it induced a bank run. The bank in question had a lot in common with the model of Anglo Irish, which did in fact collapse catastrophically. But pattern-matching is always approximate. However, unfortunately for short sellers, the ability to provoke a bank run is not a free option, since it means that a well-capitalized investor can step in and take advantage of its ability to stop a bank run, which is what Berkshire Hathaway did with Home Capital.

This piece was originally published on April 2, 2021. Two weeks ago, Home Capital accepted an offer to be acquired for 44 CAD/share, close to where it was trading when the short-selling campaign started but up 537% from the depths of where the company traded during its liquidity crisis. It's entirely possible that this acquisition will work out terribly and that the short sellers will be vindicated—a risk short sellers run into is that acquirers, like the rest of the market, can be fooled long enough to part with their money. But it increasingly looks like Home Capital had a model that could have been the raw material for a fraud, but was a decent business instead.



Open Thread

Reader Feedback

Reader Michael has thoughts on this paywalled post about Chinese liquor giant Kweichow Moutai ($):

My mother told me, yes to many outsiders Maotai can taste unpleasant but they haven’t tried the cheaper erguotou. Maotai is like 30 year single malt scotch compared to most types of whiskey. When you have to drink a whole bottle for business in a night, the quality difference matters to both the host and guests.


The issue with corruption lies solely in economic incentives. Factory price is 950 RMB while wholesale price (aka ppl with power connections) easily go above 2500 RMB. It’s easy to see how corruption is bound to happen. Shareholders have been pushing the company to raise factory price, but progress is difficult to make. Thirty years of complicated power dynamics, I suppose… Ironically, not jacking up the price is actually theft of national assets. Sadly no corruption case has been that “huge”, in proportion to Maotai’s profit.


Wine and western spirits never made it huge in China, especially in terms of business setting. Anecdotally many elders get flush when they drink western liquor but they are fine with Chinese baijiu. When we think about one’s public image, mitigating risk of the flush becomes quite valuable to a product’s value.

Every company is more complicated than it looks!

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