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What is meant by a structural short in this context:

"First lesson: Valuation shorts are pretty difficult. Look for structural shorts instead."

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  • A "Valuation Short" is a short idea based solely on valuation (fundamentals). This is presumably a "bad" idea and one of the quickest ways of loosing all your money.

  • A "Structural Short" is said of shorting a company with a mature business model in decline, or shorting a stock that is becoming obsolete or significantly less competitive due to some major changes in the industry.

A good example of a structural short is shorting a "newspaper" stock. The case of the newspaper industry is a good illustration of structural decline: due to the proliferation of online news sources, expensive news priting has become obsolete and has lost its competitive advantage.

So, here is my interpretation of the quote "First lesson: Valuation shorts are pretty difficult. Look for structural shorts instead.":

  • When relying on fundamentals alone to support a "short" idea, one can be misled. For example, some would rush to short a stock based on a small earnings miss. This wouldn't be a good idea unless supported by a catalyst. Earnings miss, slower growth or low margins can easily revert. For example, if a company is hitting a rough patch due to mismanagement, the situation could quickly reverse back with a change of management. Should you have shorted that stock based on fundamentals alone, you would certainly be in trouble. However, if the poor fundamentals were supported by the fact that the company is facing structural disadvantages or loosing competitive edge, then your short could end up being profitable.
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