• Jeff Matthews

These Are The Patsies

One of the best pieces of advice Warren Buffett gives about the market is, when investing in a stock, know everything you possibly can about it so you have the advantage over everybody else playing in that stock–otherwise don’t invest. He says: “if you can’t figure out after a couple of hands who’s the patsy at the poker table, then you’re the patsy.”

I think we know who the patsies are in Overstock.com.

Reading the responses to “When CEOs Obsess” from the individuals for whom Overstock.com CEO Patrick Byrne is a hero and the imagined short-selling cabal a dastardly, criminal conspiracy has been enlightening in the same manner that hearing sleep-deprived, sports-obsessed shut-ins call up Mike & The Mad Dog on WFAN to rant about whatever team of theirs recently lost a game: it helps one understand why Yankee manager Joe Torre pays no attention to the drunken sods in the bleacher section yelling pointers in between throwing up on their friends; and it makes one wonder why on earth Overstock CEO Patrick Byrne allowed an ill-informed misfit, Bob “X-Files” O’Brien, to hijack Bryne’s last earnings call for the sake of an error-laden rant against imaginary foes.

Both constituencies–whining, ignorant sports fans and whining, ignorant Short-Seller-Conspiracy Theorists–are grossly ill-informed about the way things work in the real world, but I think the Patrick Byrne acolytes are more delusional, in that they have spun a richly imaginary fantasy to explain movements in a particular stock which have hardly, to use Patrick Byrne’s words, forced grandmothers to “be eating dog food so a couple hundred guys on Wall Street can be driving Mercedeses”–unless the grandmothers were short Overstock.com on its way from $10 bucks a share to $70, and the Wall Street guys were long. Sports fans, on the other hand, always blame the coach.

Let’s review the basic, fundamental case of the Bryne Acolytes: despite the fact that far more money has been made in Overstock.com stock from the long side in the last two years than from the short side in the last two months, “X-Files” O’Brien has stated that Overstock.com’s problems are the result of millions of shares of stock routinely traded which supposedly far exceed the 6.9 million shares float–never mind that hot NASDAQ stocks such as Sirius routinely draw day traders who inflate the average daily volume.

These millions of mysterious excess shares are supposedly caused by “naked” short sales from the evil Short Selling Cabal, which in effect creates “counterfeit” stock, according to “Peanut”…er, “Pistachio.”

And somehow–even though Overstock’s share price has increased from $10 to a recent $55–this “counterfeit” stock is driving down the price of Overstock.com. Or at least keeping the stock from reaching its true value.

One would think if Overstock.com is indeed trading millions of shares beyond its actual available shares, and if a “massive” short-selling conspiracy does exist, then the failure to deliver would amount to–I’m only stating what the conspiracy theorists have reflected in their posts–millions of shares.

According to “Peanut,” however, the amount of Overstock. com shares failing to deliver amount to less than 100,000. This is hardly “millions.” Nor is it enough to influence Overstock’s share price, given that almost 30 million shares traded in January alone.

I think I’ve figured out who the patsies are here: X-Files O’Brien heads the list, followed closely by Peanut and their fellow poster named Jake, for they have hitched their stars to a CEO who appears paranoid about a threat from a Short-Seller’s Cabal which does not exist.

Oh, sure, there are short-sellers out there who think Bryne is full of it, and that Overstock.com will go the way of other overly-hyped, low-margin internet models. That’s their opinion and they’re entitled to it–surely as the legitimate long-term investors in Overstock.com have their own, differing opinion and are entitled to it.

And the shorts have shorted Bryne’s stock, and they even talk to one another about what they’ve heard out in the field and what they learned on the conference calls, and they even discuss with reporters–there’s a thing called “free speech,” is there not?–how bizarre it is that this CEO spends so much time engrossed in a vain effort to stamp out the skeptics surrounding his company when, in reality, running his company well, delivering good numbers, and creating true economic value, are the truly the best revenge.

And guess what: there are even shorts who sell naked even though it’s illegal. And they are stupid amateurs who deserve to be caught and get whatever’s coming to them.

But the “conspiracy” among professional shortsellers does not exist. And by creating the spector of one, in order to explain losses in their own portfolios in a stock that has risen from $10 to $55, X-Files and his crew reveal themselves to be the patsies at this table.

As for me, I wouldn’t trust Patrick Byrne to run a successful company over the long haul. He’s too obsessed with the shorts, and his conference calls always raise interesting issues that the analysts covering the stock don’t get into.

For exmple, “Its strange” raised a good point in response to “When CEO’s Obsess” when he asked how Overstock got “the steal of a lifetime” in a $7 million diamond purchase against all the other, larger competitors out there. (I wonder if it’s going to be as successful as Patrick’s big watch buy a year or two ago.)

If anybody out there has the answer to “Its strange”–and I mean anybody real, not X-Filian Conspiracy Theorists or Amateur Naked Short-Sellers–then I’d like to hear about it.

Furthermore, I’d love to know what vendor received stock options to sell product to Overstock, resulting in a “vendor comp charge” of almost $1 million last quarter.

Also, Byrne claimed on the call that “we just marked down, promoted, did whatever we had to do to blow out the older inventory.” He said Overstock lost $1.5 million on that inventory. I’d like to know what the old inventory was, what his actual cost was, and how he went about blowing it out.

If the patsies here–that is, the Conspiracy Theorists–really know their stuff, they’ll have the correct answers. If they don’t know their stuff, they’ll just go back to their Conspiracy Theory.

I strongly suspect we will not be hearing anything from them in the factual realm.

P.S. For a good example of how not to behave like Patrick Byrne, read Google’s S-1, earnings and analyst presentations carefully. You will not see or hear the word “short-seller” in any of their material or any of their calls, despite a substantial short position in Google shares. That is because the Google guys are hell-bent on doing what they do well, and letting success in the business take care of the stock, which will, over time, take care of the shorts.

Overstock.com is no Google.

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The content contained in this blog represents only the opinions of Mr. Matthews. This commentary in no way constitutes investment advice. It should never be relied on in making an investment decision, ever. The content herein is intended solely for the entertainment of the reader, and the author.

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