Kevin Carter – The Math of Shorting a Stock Is Against You

Jun 1, 2021

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BIO: Kevin Carter is the Founder and CIO of the Emerging Markets Internet & Ecommerce ETF (NYSE: EMQQ) and Chairman of the EMQQ Index Committee.

STORY: During the Dot-com boom, Kevin came across Amazon, but he dismissed it as just a bookstore not worth its valuation. He decided to short Amazon and lost a third of his net worth at the time. Had he bought the stock instead of short selling it, he would be $50,000 richer today.

LEARNING: Short selling is a bad investment idea. Nobody can do a perfect valuation; always know that you are working with estimates.

“Good judgment comes from experience, and experience comes from bad judgment.”

Kevin Carter

Guest profile

Kevin Carter is the Founder and CIO of the Emerging Markets Internet & Ecommerce ETF (NYSE: EMQQ) and Chairman of the EMQQ Index Committee. Prior to EMQQ, Kevin was the Founder & CEO of AlphaShares, an investment firm offering five Emerging Markets ETFs in partnership with Guggenheim Investments. Previously Kevin was the Founder & CEO of Active Index Advisors, acquired by Natixis in 2005, and the Founder & CEO of eInvesting, acquired by ETRADE in 2000. Kevin received a degree in Economics from the University of Arizona and began his career in 1992 with Robertson Stephens & Company.

Worst investment ever

In the late 90s, Kevin was a very confident young value investor. He wanted to be like the likes of Warren Buffett. He had worked as an analyst professionally and got paid very well by hedge funds and mutual funds for his research.

The Dot.com boom hits

The Internet showed up, and then the Dot-com bubble burst. Kevin was relatively successful at that point and confident but also a bit naive.

Kevin got wind of a new e-commerce company, Amazon, but he thought of it as just a bookstore. He believed that it shouldn’t be valued any differently. He spent a lot of time comparing Amazon to Barnes and Noble and was convinced that it would not amount to much.

Kevin concluded that with a $1.4 billion market cap, Amazon’s stock would sell for just a fraction of that. He even predicted that the company would be lucky to sell for $200 million in cash.

Short selling Amazon

Kevin decided to short Amazon in March of 1998. He lost about a third of his net worth in a day and a half.

Amazon’s current market cap is $1.6 trillion. Had Kevin not short sold Amazon and instead bought the stock, his position today would be worth $50,000.

Lessons learned

Don’t make valuation shorts

Short selling to make money is a bad idea because it has complicated mathematics behind it. Most of the time, it is just not worth it. The other problem is when you short something, and you’re wrong, your exposure gets bigger.

Andrew’s takeaways

Let go of hindsight bias

When people make mistakes, they will often engage in hindsight bias. They look back and wish if only they had done this or that. The truth is, when you are making decisions, you’re making them with the best information you have and the application of your judgment at the time.

Nobody can do a perfect valuation

It is tough to make a 100% correct evaluation. The solution is always to question everything when developing a valuation estimate and accept that it is an estimate.

Actionable advice

Understand and work with the price-to-earnings-to-growth (PEG) ratio when picking a stock.

No. 1 goal for the next 12 months

Kevin’s number one goal for the next 12 months is to have fun and try to re-enter the real world.