Whitney Tilson’s T2 Partners has been underperforming the market by a large margin due to its short positions in high growth companies such as Netflix (NFLX) and OpenTable (OPEN). His Netflix position was his worst performing one last year. Tilson lost another 2.8% during January as Netflix increased 21.8% and St Joe gained 25.4% (See Tilson’s 2010 returns and investor letter). Tilson has been shorting St Joe following David Einhorn’s assessment. Unfortunately for them, Bruce Berkowitz was red hot last year, busting Steve Eisman’s AIG short. Berkowitz has a large long position in St Joe and he has been a formidable rival for other hedge fund managers.
Whitney Tilson regrets shorting well managed companies such as Netflix and OpenTable. Here is what Tilson said:
“Over time we’ve been quite successful shorting fads, frauds, promotions, declining businesses, and bad balance sheets. Where we have had much less success, however, especially in recent months, is shorting good businesses that are growing rapidly, even when their valuations appear extreme. Such open-ended situations, regardless of valuation, are very dangerous, so going forward we will avoid them entirely unless we have a high degree of conviction about a specific, near-term catalyst.”
Tilson acknowledges that shorting is a terrible business and he is not a great short seller. He notified his investors of the decision to run a smaller short book, in the 25-40% range. “While our outlook today is cautious, for reasons we outlined in our annual letter, we do not think that we are currently on the brink of a major market and economic decline. Rather, we think the most likely scenario is that the U.S. economy will muddle through and slowly get better over the next few years. If so, it will likely not be a good time for short selling and hence we have reduced our short exposure, ” Tilson said.
In January, Tilson bought additional shares of Microsoft (MSFT) and Berkshire Hathaway (BRK-B). He is extremely bullish about these two stocks.