Guest Interview: Edwin Dorsey
(Edition Number: Nineteen)
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Today we are welcoming Edwin Dorsey, author of the Bear Cave, to kick off the nineteenth edition of the guest interview series.
Edwin is an investor focussed on microcaps on the long side, as well as exposing fraud and malpractice on the short side of the market.
“Retail traders usually are long-only, so anybody that is making them lose money naturally won’t garner much sympathy. Also, the benefit of short-sellers often plays out in the long run. So, if an activist short accuses your holding of being a fraud and causes the stock to fall people will be pissed. But two years later after the company collapses because of issues raised by the short, many people will have forgotten about it. If more people followed people like Marc Cohodes and Gabriel Grego, I think they would have a different view on shorts.”
Edwin Dorsey is an individual investor passionate about exposing bad companies, which he carries out through his work as the author of the Bear Cave, a newsletter that provides analysis, commentary, and curated links on the short world.
He also writes the Comment Letter King newsletter, a free weekly newsletter about SEC comment letters.
During college, Edwin turned to the short side after heeding the lessons learned from mentors, Marc Cohodes and Jim Carruthers. You can Edwin on Twitter under @StockJabber.
Despite adopting the avatar of Atticus Finch, from To Kill a Mockingbird (one of Edwin’s favourite fictional characters), he is not anonymous. You can find Edwin discussing Otonomo with Ben Volkow and Jon Huberman below.
Just this week, Edwin also launched another exciting initiative he is building, Bullpen Careers, a financial job board focusing on being the best place to find young talent and the easiest place to find a job. He is building this platform in public, and you can find the one-page business plan over on his Twitter account.
For more information on the Bullpen, and any roles that are currently up for grabs, check out their website, here.
Good morning Edwin, thanks for obliging to my request to ask you some questions today. I am happy we have our first short-orientated guest with us today.
To kick things off, I think it would be great for readers to learn a little bit about who you are, and what you do. Some background context for flavour if you will.
Conor, thanks so much for inviting me on! I am someone passionate about exposing bad companies.
From a young age, I have been very passionate about the stock market and during my freshman year of college, I transitioned to the short side. Marc Cohodes and Jim Carruthers were two of my early mentors and really showed me the ropes in terms of digging deep into companies and building the right connections. I got some attention in college for exposing safety flaws in Care.com, a publicly-traded babysitting platform, by signing up as Harvey Weinstein and passing their “background check.”
Now I have turned my passion for exposing bad corporations into my full-time job. About a year ago, I started The Bear Cave newsletter. It goes out to over 13,000 readers and mostly discusses corporate misconduct and new activist short reports. I spend most of my time reading SEC comment letters, filing FOIA requests, and scrolling Twitter.
So, first off, you mentioned in the previous question that you run the Bear Cave, the newsletter for Wall Street bears. I am a reader of the Bear Cave and enjoy it very much. In fact, I first stumbled across you after someone shared your piece on Celsius Holdings with me.
The story of your growth with the bear cave is very impressive, and at such a young age, you have crushed the newsletter game, so big kudos. I get a genuine kick out of seeing people win.
So, for the readers who may not be aware of the Bear Cave and what its all about, I was wondering if you could share with us the general overlay of the newsletter, and then perhaps share with us the timeline for what inspired you to create the publications and the events that followed?
I think that would super interesting.
I started The Bear Cave in March 2020, my senior year, right as the pandemic was starting to gain traction. I did not have a job so I thought it would be a good way to use my free time productively.
The Bear Cave is really two newsletters. There is a free version that goes out every Monday. In that, I recap new activist short reports, highlight interesting tweets, and sometimes share my own investigations. In the past, I have written about shenanigans at Vista Equity and liquidity issues at Ark Invest.
On the first and third Thursday every month, I also publish a company-specific investigation exclusively for paid subscribers. Those are ~1,000 words long and will highlight U.S. companies that are misleading customers or investors. For example, I wrote about how Root Insurance (NASDAQ: ROOT) was hiking insurance on premiums during the pandemic and generating high rates of consumer complaints.
Following on from that, I know the newsletter has already performed very well, but what are your longer-term goals for it?
In one, two, maybe three years, where do you see it growing, and what are your intentions or hopes?
I would love The Bear Cave to have 100,000+ readers and become a leader in exposing corporate misconduct. People are starving for smart, accurate, and intellectually honest takes on companies and The Bear Cave should fill that void.
As it grows, I hope to not just share opinions, but also spark change. For example, if a company is doing something really egregious (e.g., stealing wages or stealing from customers) a future Bear Cave profile could jumpstart a government investigation or get major reporters interested. This can only happen if The Bear Cave grows, but at a certain size, big impact is possible.
So, you are both a long and short investor, but many know of you for your short work.
Clearly, there is a human bias towards the long side. However, the short side is often populated with analysts who go that extra mile to sniff out deception. I highly admire the work that goes into that. It’s not easy to go against the grain.
What about the short side attracted you at first, and how do you feel it differs from those who take a long-only approach?
What is unique about activist shorts is they can really make a difference. For example, Marc Cohodes went on a one-year campaign against MiMedx and showed that the company was overbilling the government and defrauding investors with questionable revenue recognition. In the end, the CEO was sentenced to a year in jail and the company restated financials. None of that would have happened without him. Another example is Gabriel Grego from Quintessential Capital who showed that a catheter made by Penumbra had a lot of adverse events. The publicity generated by his report likely led to an FDA recall one month later.
I have also noticed that short-biased research tends to be much more journalistic, you are almost acting like an investigative journalist. On the other hand, long-biased research is sometimes more numbers or model-based.
I usually ask guests about their investing process. So, I think it would be great to understand your process for both the long and short side, and perhaps how they differ.
Where do you source your ideas, what is your desired holding period, what are your goals with respect to returns, capital allocation, and so on?
Some flavour here would be great.
I LOVE Twitter. If somebody mentions an idea there, I will do three things right away:
1) Look at customer reviews, if they are bad that is interesting to me;
2) Look for any SEC correspondence on EDGAR and;
3) Look at management turnover.
If that raises red flags, I’ll start filing FOIA requests with different regulators to get more consumer complaints and also check PACER for lawsuits. I read short ideas published to VIC and Seeking Alpha, but that is less helpful.
On the long side, I am very quirky. Oftentimes I will invest in a company solely on someone else’s pitch to me. I follow some low-profile microcap investors and just copy their trades when they initiate new positions.
There exists a strange narrative towards short sellers. Many feel that they are out to profit from the failure of a company.
A market without the ability to take the short side is not a market I wish to be in.
There needs to be some form of check and balance in public markets, and the notion that short selling is unethical can be easily flipped to unravel a wealth of examples of figures who promote companies on the long side, only to end up destroying shareholder wealth through deception.
Why do you feel there is such a false perception of the short side?
Retail traders usually are long-only, so anybody that is making them lose money naturally won’t garner much sympathy. Also, the benefit of short-sellers often plays out in the long run. So, if an activist short accuses your holding of being a fraud and causes the stock to fall people will be pissed. But two years later after the company collapses because of issues raised by the short, many people will have forgotten about it. If more people followed people like Marc Cohodes and Gabriel Grego, I think they would have a different view on shorts.
I am a huge believer in the dynamics between investing style and one’s personality.
Do you feel that your approach to investing matches your personality?
If so, what specifically relates to your desire to take a short-side approach, as well as the long-side?
I’m not sure that my style matches my personality.
On the long side, I do some microcap investing, although I am much more shoot-from-the-hip in terms of my style. Oftentimes I’ll invest in something solely because I see another person I like involved or the CEO really impresses me. Sometimes I’ll do a lot of my own work, but it is easier to be a copycat in my opinion.
On the short side, I do not short stocks. I disclose in my newsletter that I don’t take positions against the companies I write about. I think that makes more sense for a paid product, otherwise, people would wonder why they are paying me to write about my own positions.
For someone who is perhaps looking to develop their analytical skillset, with a focus on the short side, what advice would you give them at the start of their journey? What is the best way, in your opinion, to get a solid layer of understanding before allocating funds?
First, follow these 20 Twitter accounts. Second, read activist short reports when they come out so you can see how they research companies. Citron Research, Muddy Waters, Aurelius Value, Quintessential, Friendly Bear, Culper Research, and Hindenburg are some good ones. Third, start reading SEC comment letters. This is informal public correspondence between the SEC and public companies about accounting and disclosure issues. Fourth, check out the free content in The Bear Cave
Who have been some of the biggest influences on your investing style, and why?
Marc Cohodes. He showed me what real work can look like and exemplifies how you can make the world a better place by uncovering misconduct. I think he helped send at least three different executives to jail and has uncovered tens of billions of dollars worth of fraud in his lifetime. He deserves a medal.
I also watched a ton of Warren Buffett and Bill Ackman interviews when I was younger. They both focused a lot on understanding the business and how it will do in the future rather than the short-term earnings guessing game. In particular, Buffett looks at the company-customer relationships a lot and I do that too, except he likes companies that delight their customers and I look for the exact opposite.
When assessing a company. What are the must-have factors that must be present in the company before you would even consider allocating one ounce of capital into their business?
It would be great if you could answer this question for both a long and a short position.
The two must-haves are ethical management and a company being run for the shareholders. Sometimes companies are being run to enrich management or the “suits” and in those cases, investors never win in the long run.
I also need to be able to understand it.
Other than that, I am very flexible. I prefer companies with revenue, but that is not required. I prefer profitable companies, but that’s not required. I prefer companies that have the potential to grow, but melting ice cubes sometimes are cheap enough. One of my favourite sayings is that “if it’s perfect it is priced in.” I think the best investments often have one or two cosmetic flaws that leave the stock depressed, and then once those are fixed it can really run.
When looking for a potential Bear Cave write-up, unhappy customers are critical. If a company delights its customers, I have no interest in criticizing it. I only like criticizing companies I think are bad for society. I also look for companies that will underperform materially in the future. A company that will just miss next quarter or is overvalued by 20% is not of interest to me.
Has there ever been a time where you passed up on a short, that went on to act out as you had envisioned?
I had followed Wirecard and Luckin Coffee on the sidelines for a while. They both “smelled wrong” to me, but I never really dug deep or wrote about them.
Lastly, I like to round off this segment with a few quotes.
What is your favourite quote, and why? Feel free to pick a few if you like.
I love quotes! Here are some of my favourites:
“In the long term, there is no difference between the customer interests and the shareholder interests”—Jeff Bezos
“In the world of business, bad news often surfaces serially.” -- Warren Buffett
“No great mind has ever existed without a touch of madness.” – Aristotle
“Nobody speaks twice until everybody speaks once.” – Supreme Court rule for discussions
“Laws, without enforcement, are just words,” -- Jay Clayton
"You must find a way to get in the way and get in good trouble, necessary trouble." – John Lewis
“You want to be the only person that does what you do.” – Jerry Garcia
“You can tell the greatness of a man by what makes him angry” – Lincoln
Questions from Twitter:
In this segment, we collected questions from the Twittersphere, and present them to Michael.
@Johnnyfreitag: “If he were to head the SEC, what would his priority projects be, and more broadly, how does he think regulators and policymakers are performing and which changes/improvements would he like to see?”
I love this question! First, more individual accountability. Fining an executive $1 million is much more effective than fining a company $10 million. It makes no sense to hurt companies and shareholders for the misconducts of executives. It is like fining a car company anytime someone is speeding.
Fine executives, publicize the misconduct of executives, put executives in jail. That is how you change behaviour. Corporate fines are ineffective in my opinion.
Second, I would put even more of an emphasis on public tips and whistleblowers. Anyone who submits a public tip should receive an email or phone call within 48 hours. Whistleblowers should receive their rewards faster. Overall, the SEC is moving in the right direction on these issues.
The U.S. has the best capital markets in the world. That couldn’t happen if the SEC was incompetent. I see a lot of people criticize the SEC, and regulators sometimes are too slow or too outdated, but on balance I think the SEC is a very good regulatory entity.
@Jayal1111: “What are the primary factors you look for in a company that you go long in, and how would you describe the current market state?”
I look for an awesome CEO, high customer satisfaction, or something insanely cheap on price to sales (e.g., a microcap trading at 0.2x sales). The market is probably overheated a bit.
@Riceparktrees: “Before the recent Hwang margin call, it seemed like shorting stocks was impossible. Post Hwang, will short sellers be more confident as Hwang types are scrubbed from the market?”
No. There will always be bad actors and short-squeezers. I do think the U.S. equity markets have gotten more efficient over time. We still have a long way to go, but this might be some of the reason short-selling is harder now than it was in the 80s.
@JCarapuco: “His largest position [as of a few weeks ago] appear to be Otonomo. How does he look at Blackberry as a competitor?”
My basic understanding is they are weak in this field and haven’t gained much traction. I probably don’t have the most informed opinion though.
@JapanSmallCap: “What is his most unsuccessful short positions, or one he had the most frustrations with, and what did it teach him?
Generally, the worst outcomes are when people miss the big picture over a small issue. For example, an accounting issue might not be super important if the company is actually growing 50%+ per year. For me, Ubiquiti Networks was the one I was 100% wrong on. It was $60/share when I first looked at it and now it is $280/share.
At long last, we have someone from the short side to pick their brain. For such a young gentleman, Edwin has his shoulders firmly placed on his shoulders.
I am looking forward to seeing how far he can go with the Bear Cave, and wish him well. Thanks for taking the time Edwin.
Remember, you can find Edwin over on Twitter under the handle @StockJabber.
Stay tuned, as we have more excellent guests coming soon.
You can find previous editions of the guest interview series below:
• Edition One: Bill Brewster
• Edition Two: Kris FromValue
• Edition Three: ValueStockGeek
• Edition Four: AdventuresInFI
• Edition Five: Brian Feroldi
• Edition Six: Brad Freeman
• Edition Seven: Mostly Borrowed Ideas
• Edition Eight: Richard Chu
• Edition Nine: Kermit Capitál
• Edition Ten: Liviam Capital
• Edition Eleven: David Belle
• Edition Twelve: Mark Cooke
• Edition Thirteen: 10-K Diver
• Edition Fourteen: Richard Moglen
• Edition Fifteen: Matthew Cochrane
• Edition Sixteen: Michael Mitchell
• Edition Seventeen: Pythia Capital
• Edition Eighteen: Chris Barto
Lead Analyst at Occasio Capital Ltd