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When To (Maybe Not) Listen to Short Reports

Recent attack on Ginkgo Bioworks holds lessons for investors.
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A short report is when investors announce that they have taken short sale positions in a given stock. It’s generally seen as a vote of no-confidence in the underlying company, because short selling is literally a bet that the stock price will go down.

This isn’t necessarily wrong. But, writes Timothy Collins, investors should be careful before they take short reports too seriously. 

“I think it's too early to say, but I'm growing a bit more optimistic the more short reports I see," Collins wrote recently on Real Money.  "Like so many other things in life, sentiment will drive certain groups to emerge from the shadows. It doesn't matter if it is bulls, bears, crash callers (not the same as shorts), crypto HOLDers, crypto haters, and on and on.”

There are a lot of reasons to take these things with a grain of salt, Collins writes. One of them is to remember that just about everybody in the market has their own position. When investors issue a short report, it isn’t a neutral statement. They have a stake in convincing the market that their position is a good one. 

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That’s what happened, he writes, with a recent short report on Ginkgo Bioworks Holdings. “There was a lot of reaction to the Ginkgo Bioworks Holdings  (DNA)  short report on Twitter” earlier this month. “In the 175 pages, there may be 20 or 25 pages of actual material. These are written in presentation style, not investment research style. There's a lot of big, bold letters. The same things, in this case the words scam and scheme, repeated over and over. There are lots of charts and graphs showing comparison doom and gloom from the past, often in unrelated manner."

Frequently such reports are written to scare. "These are written to sell. These are not written to educate. It's the exact same marketing scheme many newsletters use to sell product from a diabetes ‘cure’ to a super food to even financial products.”

The upshot? Pay attention to how other investors are behaving, including when they release short reports. That can indicate where the market will go next. Just don’t sell your own shares before you’ve had a chance to ask your own questions.