Marc Cohodes: How Smart People do Stupid Things
I recently picked up a lot of followers so if you’re a new reader I welcome you and hope you enjoy my writing. As it stands I’m not really writing for any purpose other than to keep a public record of my investing thoughts and ideas and hold myself accountable. I hope I can add some value for you, if not feel free to unsubscribe. I totally understand. With that out of the way I suspect this entry may be a little spicy. Let's talk about Marc Cohodes.
The short selling world is very small so it didn’t take much time for me to come across Marc’s work as I got enamoured into the art and science of short selling. Marc is a seasoned veteran and arguably one of the biggest names in the space. He recently has seen a resurgence in prominence due to fantastically calling the fall of Silvergate, Signature Bank and Silicon Valley Bank. And this is only months after being proven right on the demise of FTX. This isn’t anything new either, having taken down multi billion dollar companies like Lernout and Hauspie and Novastar Financial, along with being on the right side of the famous ‘Big Short’ bet against the housing market in 2008. I bring these up to show that Marc is a smart guy and knows how to sniff out bullshit. This is what makes it almost unbelievable that over the past few years he has been aggressively bullish for iconic meme stocks Overstock and AMC.
I don’t want this piece to be an attack on Cohodes or his character. As the title suggests I’m simply using him as an example to explore how smart people make stupid mistakes and how we can apply this to our own investing. I think that ego and arrogance is one of the biggest issues within the finance industry and often the undoing of otherwise intelligent people and I think this is a good opportunity to explore that.
The Mistakes
Marc first started accumulating Overstock shares in May 2017. While he may be up over time depending on when he bought and sold, he has been publicly bullish on the company at frankly ridiculous valuations (now down 80%) so I consider this to be a mistake. Furthermore, Tzero’s crypto app - which was a significant driver of the thesis - has recently been shelved due to the difficult regulatory environment currently facing crypto exchanges. Additionally, the core retailing business revenues and profits have significantly declined from its 2020-2021 highs. It’s very strange that a short seller who claims to “bet the jockey” would bet on a CEO that literally sued his firm in 2005 and has materially misstated it’s financial statements in the past. Furthermore, as someone who has been heavily critical of many areas of the crypto space and has even called it “uninvestable” it is puzzling that he would hinge part of his thesis on the company's crypto assets (which look more worthless by the day).
Marc’s trumpeting of AMC can be described as nothing but bizarre. He initially showed an interest on twitter (from what I can see) around August 2021, showing sympathy for what happened to ‘apes’ on January 28th with the restriction of the RobinHood buy button. Personally I actually somewhat agree and in spite of understanding the reasoning behind it, also felt a lot of sympathy for apes who had the rug pulled out from under them by Robinhood. However over the following months Marc’s sympathy turned into silliness as he seemed to buy into the full ape conspiracy surrounding trapped naked shorts, share price suppression and media manipulation.
This culminated in Cohodes presenting his own plan for AMC to issue a crypto based “digital dividend” in order to flush the shorts out (issued on Tzero of course). This idea was convoluted and messy at best and stock manipulation at worst and was even shot down by the chief grifter himself Adam Aaron. Furthermore, the later issued APE dividend demonstrated these counterfeit naked shorts to be nonexistent, and even if there were trapped shorts they all had plenty of opportunity to get out as the price cratered 80% over the following year. Meanwhile, AMC management sold the entire way down, taking advantage of the exit liquidity as AA continued playing into the trapped shorts conspiracy. Looking back it’s very clear to see that even if the initial concerns were valid, everything following the initial squeeze was a big grift to enrich management and gain online clout and followers (for some of the big promoters) and it’s stunning that Cohodes couldn’t see that.
So what happened, how was a seasoned fraud spotter tricked by such blatantly questionable investments and what can we learn from it?
Confirmation Bias and Narrative
I believe the difference between a sceptical person and a conspiracy theorist is an ability to avoid confirmation bias and reactionary thinking. For example a conspiracy theorist see’s what’s put out by ‘official sources’ and discredits it inherently, as opposed to digesting the information on its own merit. As a short seller Cohodes has been programmed to assume the worst, and seems to (to varying success) lean towards more conspiratorial financial narratives. However, while he’s sceptical of people, his scepticism of systems and financial markets clearly overpowers that and seems to be his blind spot in these examples. In AMC he saw an opportunity for the ‘Big Short’ 2: the Big Long where (like Mark Baum in the original Big Short) he could stick it to the financial system and big bad actors like Citadel while making money. What followed was an example of confirmation bias that could be in a textbook as we were able to watch him descend into the AMC rabbit hole through his twitter feed. Similarly, Overstock CEO sold both the dream of a more transparent financial system through widespread adoption of cryptocurrency along with a stock being suppressed by “bad actors”. It’s much easier said than done, but we need to try our best to separate our own opinion from how we digest information and avoid getting caught up in narratives. Question yourself and question yourself regularly, and interact with people and ideas outside your own bubble.
Overconfidence
One of the biggest challenges I think facing most people in finance is overconfidence. It’s incredibly difficult to keep your own ego in check when you’re clearly succeeding, especially in cases like Marc where he is very good at what he does. The problem is that with overconfidence comes an overvaluing of one’s own opinion and an undervaluing of dissenting ones.
You’ve got 30 years of experience spotting fraud, these people disagreeing are just idiots on twitter, what do they know?
A 2015 study of CEO overconfidence found a direct negative correlation between CEO overconfidence and forecast accuracy. I believe we can really see this come across in Cohodes’ Twitter interactions; regularly referring to sometimes genuine disagreement as clowns, trolls and idiots and using the block button liberally. Marc’s opinion is the right one and if you don’t agree you’re stupid. This sort of behaviour can look cool and funny when you’re right but the problem is that nobody is right all of the time. If this is the attitude you decide to take towards dissenting opinions you’re bound to look like the clown yourself eventually.
Support Structures
The final area I want to explore is support structures. While it’s difficult to speculate about one’s personal life, Marc’s interactions with John Hempton are illuminating. Being high profile short sellers, Marc and John have both interacted regularly both professionally and seemingly as friends. While John is frank and brutal with his opinions, they are genuine and come with no malice and a strong mind supporting them. In stark contrast to this, Marc has referred to his old friend John as a “clown” and “mentally unstable” and has blocked him after genuine critiques from John of both AMC and Overstock. I believe that an essential part of staying grounded is a. surrounding yourself with smart, genuine people who will call you out when you’re doing something stupid and b. listening to them. It’s understandable to act aggressive and dismissive to random people on the internet, but when people you value in your network criticise you you should listen to them and at least seriously consider what they’re saying
While this analysis was targeted at Cohodes, realistically I could have used half the people in the finance industry. Cohodes just happens to be an example where the contrast is stark. Everybody is wrong sometimes, and we need strategies in place to identify when we are, mitigate the damage and learn from our mistakes. I want to add as well that I don’t consider myself a humble person at all, my natural ego and attitude is probably similar to Marc’s. I firmly believe that setting up systematic checks and safeguards for your own ego is essential and a potential point of difference in an industry full of smart driven people.