Friends,

One of the scariest things for newer investors to navigate is a short-attack. This happens when a firm publishes a report detailing how a company is either overvalued, about to be disrupted, or an outright fraud -- or some combination thereof. Because that firm is almost always shorting the stock, they stand to profit from the stock's subsequent decline.

This happened over the past week with Transmedics stock -- which we all follow and Stoffel owns.

But we aren't here to dive into the nitty gritty of Transmedics. Instead, we think there are certain steps every investor should take when deciding what to do after a short-report is published.

1. Tactics: Remember, the goal of the short-report is to cause fear, uncertainty, and doubt ("FUD"). Incendiary language, leaps in logic, and extreme bias are often used -- because they are effective. You must be able to see past this.
2. The core argument: There might also be falsehoods in a short-report. Simply don't pay attention to them. However, you can't blow it all off entirely. You need to be able to identify the core argument. In essence, you must separate the signal from the noise.
3. Is it thesis-breaking? Once you've identified this core argument, it's time to revisit your thesis for investing in the first place. Ask yourself: "If these allegations are true, would this break my thesis?"
4. Is it verifiable? Finally, if the allegations are thesis-breaking, you need to ask yourself: "Is there any way I can know for sure whether or not these are true?" Many times, your trust in a management team will help guide you to your answer.

There's no doubt there are many nefarious players out there. I (Stoffel, here) remember well when Citron Research put a short-report out about Shopify. While the allegations might have been true, they were not thesis breaking. That led me to buying more shares are a result.

But there are other situations where short-sellers were on to something:

• In 2001, short-seller Jim Chanos was one of the first to raise alarm bells about Enron's accounting.
• In 2015, Valeant Pharmaceuticals was brought down by a team of short-sellers who proved the company's sales weren't what they appeared to be.
• In 2020, Hindenburg Research exposed misleading claims by electric car maker Nikola -- leading the stock to crater and the CEO to be thrown in jail.

They are rough seas to sail -- as there's no one-size-fits-all solution to a short report.

Over the long run, however, we firmly believe that following these four steps will go a long way to producing clear thinking and better investment decisions.

Wishing you continued investing success,