The Art of Short Selling

Staley, an analyst who worked in short-oriented research, wrote a practical guide to identifying companies whose reported results misrepresent their condition.

The analytical content is the strongest part. She catalogues the accounting signals that precede trouble: receivables growing faster than sales, which indicates revenue recognised before collection or channel stuffing; inventory growing faster than sales, indicating unsold product or obsolescence not written down; capitalisation of costs that should be expensed, particularly software development and customer acquisition; changes in depreciation schedules or in revenue recognition policy that raise reported earnings; growth by acquisition that obscures organic performance; and the persistent gap between reported earnings and operating cash flow.

She also identifies non-accounting signals: auditor changes, chief financial officer departures, insider selling, related-party transactions, aggressive promotional behaviour by management, and business models that depend on continued access to capital.

The case studies work through specific companies of the late 1980s and early 1990s where these signals appeared before the collapse, and Staley walks through what an analyst could have seen in the filings.

The practical sections address what makes short selling difficult: borrowing availability, the unbounded loss, position sizing, the tendency for a correct thesis to take years to be recognised, and the psychological difficulty of holding a position when the price moves against you and the company attacks you publicly.

The book is from 1997 and the specific cases are dated. Accounting standards have changed, and some of the signals she describes are now routinely screened for. The method of reading filings for inconsistency between reported earnings and cash generation has not changed and remains the core of the discipline.