About. My name is Richard Pearson and I am private investor based in Los Angeles. Moxreports.com is my personal site where I have been sharing my investment ideas since 2012. Much of the content on this site relates to securities in which I currently or historically have had a long or short position. My investment theses often originate from a seemingly disparate variety of industries and they typically go well beyond what is covered by traditional fundamental analysis. However, there are several consistent elements which tie together nearly everything I do. Since many people continue to ask, I have laid out some details about myself and my process.
If markets were efficient, there would be no point in even trying. The stock market is not random and it is definitely not efficient. A very small number of sophisticated investors understand this and they continuously enjoy outsized returns. Meanwhile, the vast majority of investors tend to either muddle along or suffer significant losses because their attention is focused squarely in the wrong place. My simple goal is to anticipate share price behaviors and trade accordingly. I do not bother lamenting about why Wall Street is so irrational nor do I seek to win verbal arguments over academic theories. Wall Street has always been and will always be irrational.
Buffett’s methodology works great, but only for people with Buffett’s advantages. In the short to medium term, much of the price action we see around an individual stock is often not driven by its fundamental business prospects at all. Companies which appear to have very strong fundamentals can still see significant share price weakness. And companies with very weak fundamentals can see sharp share price spikes. Ordinary investors who rely strictly on fundamental analysis consistently end up on the wrong side of the trade. My approach is to hunt down and explain the “exogenous elements” which drive share prices. I do this by reverse engineering the ever-evolving tactics used by sophisticated hedge funds and insiders who repeatedly make outsized returns despite contradictory fundamentals. Typical elements I may highlight include things like impending financing needs, capital structure engineering, short squeezes or even outright fraud. These are just a few of the elements that frequently cause price distortions divergent from what would be predicted by fundamentals. True, fundamental analysis is generally a useful starting point. But in real-world markets, few investors make consistent or meaningful profits by relying only on fundamental analysis.
My background. Up until 2005, I was a Director at Deutsche Bank during the peak of DBs investment banking expansion. At various times DB had me living for extended stays in each of New York, Hong Kong and London. For most of this time I sat on the capital markets desk as a specialist in “equity-linked structuring and origination” (the convert desk) helping large public companies raise money. On the industry side I was generally responsible for covering health care, technology and consumer companies, among others. I could hold my own in discussing any of those industries with C level executives at large public companies. But I was never meant to function as an “industry guy”. As an investment banker my responsibilities included pitching, structuring and executing products such as convertible bonds, bond plus warrant offerings, sometimes along with concurrent share buybacks, concurrent convertible call spreads or other corporate derivative solutions. At the end of the day, my focus has always been as a “capital markets guy.”
(Note: As these mega-banks including DB have continued their ever-expanding sprawls, compliance, oversight and proper risk management are becoming nearly impossible for any of them. It is a near certainty that we will see more and more headlines about “significant lapses” at the various banks emerging out of unexpected locations like Jacksonville, Kuala Lumpur and Tripoli. Not surprisingly, I do not invest in bank stocks.)
Focus on capital structure. In the present (as a private investor), I now seek out situations where the rest of the market may be overlooking or misinterpreting capital markets issues. This then creates the potential for profitable trades for those who are the first to figure them out. I continue to observe that the vast majority of buy side and sell side analysts tend to focus almost exclusively on MBA-style fundamental analysis. Many analysts make little effort to grasp the tremendous impact of things like share buybacks and leverage. They also have little ability (or incentive) to delve into anything which may be problematic, including fraud.
Short selling. Short selling is always a complicated subject to discuss. In recent years short selling has become quite vogue. But many of these newcomers have little grasp of the fundamental arithmetic that governs short selling. This includes not only retail investors, but also many newly launched “long/short funds”. The result has been significant over-crowding in many good short thesis as soon as they find their way to social media. Once overcrowded, even the most compelling short theses can become entirely irrational from the standpoint of a trade. The largest and savviest institutional short sellers are capable of riding out extreme volatility, and they can stay short even against the mathematical headwinds. But many small investors have gone bust as a result of shorting shares of fraudulent companies simply due to an unexpected short squeeze. The eventual de-listing that came years later would be of no consolation to those who went bust long before. Heavily shorted stocks often become the target of financial engineering because there is a built in ability to create “involuntary buyers” regardless of share price. However, the vast majority of short squeeze predictions seen in the media are ill founded and will never materialize. Like I said, short selling is a complicated topic.
Fraud. Short sellers have often played a valuable role in unearthing financial fraud. Since 2012, I have written dozens of reports on this site where I voiced my concerns about potential fraud. Subsequent to those reports, there were more than 200 instances of SEC investigations, fraud indictments, de-listings or accounting restatements which came about in connection with the same situations which had attracted my concern. Most of these subject stocks ultimately fell by 80-100%. From a valuation standpoint, fraud can also be seen as the most extreme instance of price distortion. Investors who understand these distortions can avoid losses or pursue gains accordingly.