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Season 2, Episode 18, Transcribed: The Methods of a Short Activist, With Gabriel Grego

Moderator 0:02
Welcome to Contrarian Investor Podcast. We give voice to those who challenge the prevailing sentiment in global financial markets. This podcast is for informational purposes only. Nothing on this podcast should be taken as investment advice. guests were not compensated for a period, nor day supply payment in order to appear. Individuals on this podcast may hold positions in the securities that are discussed. This is our urge to educate themselves and make their own decisions. Now, here’s your host, Mr. Nathaniel E. Baker,

Nathaniel E. Baker 0:36
Gabriel Grego, Quintessential Capital Management. Thank you so much for joining this podcast. You are a short activist investor. There are probably few things more contrarian than being a short, especially nowadays when markets are rallying like crazy. You have a very specific process. And you only do a couple of trades a year, I think about three or four of these very high conviction trades. And you find these companies to short. And a lot of these have turned out to be outright frauds. And obviously, this approach has worked very well for you, as these stocks have traded down, in many cases to zero. So for you and your investors, obviously, this has worked out and so I’m very grateful that you have taken the time to come on this podcast.

Gabriel Grego 1:36
Thank you very much for having me. It’s a pleasure.

Nathaniel E. Baker 1:39
So yeah, so maybe start from the beginning. How does this — How does it start? Like, how do you go about locating these ideas?

Gabriel Grego 1:47
Well, I think the locating is one of the most important parts. And I think one of the reasons why I believe I have a high percentage of success as defined in terms of shorting companies that then end up going to zero within days or weeks is as much a matter of the selecting the right targets, as all doing the right type of research on the company. So it’s very important to find the right target, which inevitably entails rejecting a lot of a lot of good ideas, which for some reason or another are not good enough. So, what I chose to do at the beginning of this activity was basically to focus myself on what I called extreme corporate catastrophic situations, which typically means only looking at companies where there is total or almost total accounting fraud and/or where management is committing some kind of serious crime. And of course, this this situation must must be somehow hidden to the public and to the market. Otherwise, there is nothing to bet on. So the important thing is looking for this situation, which are by definition not easy to find, obviously, because management wants it wants to keep the situation hidden. And the key word here is flexibility and open mindedness. So you cannot stick to only one strategy or procedure to look for these kind of ideas because they’re very rare. And unless you have an open mind, you’re gonna have a very hard time finding them. So you need to use a combination of approaches. The most obvious approach is to come up with some kind of screening mechanism, like an automatic software say, that looks for companies which have certain red flags, that in my experience, and other investors’ experience have turned out more likely to have a risk of fraud.

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Season 2, Episode 18: The Methods of a Short Activist Hedge Fund

With Gabriel Grego, Quintessential Capital Management

Gabriel Grego of Quintessential Capital joins the podcast to discuss his short activist strategy.

Grego finds three or four “high conviction” ideas to trade a year. His process is exhaustive but straightforward, though few managers have the stomach to replicate it. The reasons for this are discussed in the second half of the podcast.

Content:

  • How it all starts. Finding the right target is crucial. Grego’s focus on “extreme corporate catastrophic situations” (1:39);
  • Some of the typical “red flags” to look for (3:43);
  • Trendy industries are often clusters for fraudulent behavior. COVID-19 is the most recent example (6:01);
  • Narrowing the target list and creating a thesis (10:37);
  • The final step: “boots on the ground” research (16:46);
  • Background on the guest (21:57);
  • Activist shorting is “scary stuff” (25:38);
  • More terrifying than being a paratrooper? (27:29);
  • Background on QCM’s fund and current exposure (30:28);
  • How QCM has dealt with the events of 2020, including a rare (and successful) attempt to time markets in March (34:05);
  • Chinese companies traded in the U.S. look “very very interesting,” though Chinese fraud is “a different beast” (42:14).

More Information on the Guest:

Not intended as investment advice.

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