Bronte Capital: Investor Letter, December 2020

Monday 25 January 2021

2020 was a great year for growth stocks. Hot technology companies, headlined by Tesla, enjoyed big run ups since the market lows in March. 

On the other hand, 2020 was a terrible year for short sellers. Low quality stocks seemed impervious to market forces (anyone watching GameStop recently?). Australia’s most famous short seller, John Hempton, is one such short seller that’s done it tough. In his latest investor letter he shares his thoughts on his 2020 performance and his view on the market for 2021. 

In short, Hempton thinks the market is at the late stages of a bull market that started back in 2009. The volume of low quality new offerings, highlighted by SPACs where investors buy in without knowing of what they’re buying, reminds him of the late stages of the 2000 tech bubble. He also writes about the valuations companies are trading at and the absurdity of valuing a company at 10x, 20x or even 80x revenue. At some point, Hempton believes, this house of cards will collapse and short sellers and value investors will once again have their day. 

This is an important perspective and an important reminder for any new investor. The crazy valuations we’re seeing can’t last forever (or companies will need to see some astounding growth throughout the 2020’s to justify them) and at some point the quality of companies and valuations will matter once again. 

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