One of the joys of the blog is that I have several readers who are WAY smarter than me. One pointed out that I did NOT get it wrong in my Peet’s short. [To get the background you simply must read this post first.]
I thought that Peet’s was overpaying for a license to put their coffee in k-cups. I was wrong.
But my smart reader thought that either
(a). the license to put coffee in k-cups was written as expected (favourable to Green Mountain but unfavourable to Diedrich) – in which case Peet’s was overpaying for Diedrich or
(b). the license was favourable to Diedrich – in which case you could bet that Green Mountain – a much richer company than Peet’s – would simply and massively overbid Peet’s to own Diedrich.
If Peet’s was overpaying for Diedrich then I was going to win on my short.
If Peet’s was not overpaying for Diedrich then they would wind up in a bidding war with Green Mountain – in which case I could cover at a profit anyway.
Now tell me why I did not short Peet’s big time when they bid for Diedrich? Stupidity I guess.
John
Ok, so lets say you were wrong intially about Peets overpaying for Diedrich. You short Peets (under the assumption Peets was overpaying) with a lot of other investors who think the same way. GMCR comes in and over bids. But instead of a bidding war, Peets drops out. The short thesis is gone and everyone covers, and you lose on the short. That's why it wasn't stupidity to not be massively short when you don't fully understand the situation(and since I know nothing about these companies, I am leaving out the really bad outcome - as long as GMCR is going to have to pay up to buy Diedrich anyway, maybe they decide it might be a good idea to by a coffee chain as well).
ReplyDeleteNicely put.
ReplyDeleteBut if GMCR just overbids and Peets drops out I get hurt - but not super-bad.
It was not a bad bet - probably a better bet than I thought - but there were ways I could lose.
J
So, presumably the short seller also likes the situations were a firm takes a run at buying a key supplier to a larger competitor.
ReplyDelete