TechniqueCase studyFraud and forensicsInvestingMarkets
The modern short report is built from local records, site visits and the filings
Muddy Waters Research · Muddy Waters' initiating report on Sino-Forest · 2011
The idea
Muddy Waters' 2011 report on Sino-Forest is the model of the form. The allegation was that sales routed through unnamed intermediaries were a structure for fabricating revenue without the tax invoices auditors rely on. The evidence was in Yunnan: claimed sales above the company's holdings there and above harvesting quotas, which the report said would have needed over fifty thousand truckloads on mountain roads. It valued the shares at under a dollar by treating the company as worth less than its debt. Whatever the outcome of any individual case, the method is what a reader should take: a claim in the filings, a fact in the world that contradicts it, and the arithmetic connecting them.
A short thesis is a public claim set against a fact the company does not control, with the arithmetic that joins them shown.
When it works
Short pitches, forensic work, and any thesis that depends on reported figures being false.
When it may fail
Short reports are advocacy from a party with a position, and they have been wrong. The method is sound; each claim still needs checking by the reader.
How to use it
For a short idea, find one physical quantity the reported numbers imply, trucks, stores, employees, acreage, and check it against a source the company does not produce. The short thesis guide has the structure.
Where it came from
Letter Muddy Waters' initiating report on Sino-Forest · Muddy Waters Research
What the source says. The report alleged that sales routed through unnamed authorised intermediaries were a structure for fabricating revenue, cited claimed Yunnan sales above the company's holdings and harvesting quotas that would have needed over 50,000 truckloads, and valued the shares at under $1.
Connected ideas
Supports
A short seller does fieldwork because the filings are the thing in doubtWhen the filings are what is in doubt, the evidence has to come from outside them.
Says something similar
The warning was usually in a footnote, years earlyRead the notes before the numbers; the disclosure that matters is usually there and usually ignored.
Concepts
Put it to work on L3VLUP
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