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“What we’ve learned over the past year is just how powerful reaching out and connecting with someone can be,” USAA’s president said. “We’ve heard stories of those who’ve connected with old friends, battle buddies, and loved ones; they’re building a sense of community and purpose — and actively breaking the stigma that asking for help is a weakness.”

Today, we’re sharing our fascinating interview with Edwin Dorsey, who writes The Bear Cave, in just 6 minutes to read.

— Matthew

Quote of the Day

“As you make big choices, while it may be tempting to do the thing others expect you to do, I challenge you to listen carefully to your gut, to follow your passion and heart, and to pursue what you really love.

The best decisions I’ve made in my life have almost always stemmed from listening to my gut, which is at least as smart as my other brain and has always guided me as a reliable compass.”

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Trivia

Edwin Dorsey: Exposing Corporate Misconduct

Exposing bad behavior in markets

When Edwin Dorsey published a deep dive about The Joint Corp., a nationwide network of chiropractors, the company was valued at $1.39 billion. Its shares had recently run up about 3,500%, trading at roughly 80x profit. But Dorsey uncovered dozens of complaints concerning its overbilling, forged transactions, and other misconduct. 

Less than a year after his October 2021 report, the company’s shares fell from over $80 to around $15 — an 80% decline.

Dorsey’s analysis of The Joint Corp. in The Bear Cave newsletter exemplifies what he’s done: expose corporate misconduct to over 64,000 newsletter subscribers. He mostly writes about $1 billion to $10 billion U.S.-listed public companies he believes are misleading investors or harming consumers. Over the past four years, he’s made a name for himself in corporate scrutiny.

In 2020, Dorsey graduated from Stanford University with a degree in economics. By age 25, he’d established a newsletter business that generates north of $500,000 in annual revenue. Dorsey's eye for uncovering questionable business practices and his ability to communicate complex financial issues have made The Bear Cave a must-read for investors, journalists, and hedge fund professionals.  

Today, The Bear Cave offers both free and paid content. The free newsletter is published every Sunday, summarizing new activist short campaigns, notable resignations, and interesting tidbits. Paid subscribers receive bi-monthly in-depth investigations, released on the first and third Thursday of each month. 

In this conversation, Dorsey explains his process, why his work matters, the value of short selling in a free market, and more. This interview has been edited lightly for brevity and clarity. 

Where did you grow up? How did you become interested in markets?

I was born in Philly and moved around a lot as a kid. I was always interested in statistics, and math was my strong subject. In second grade, we ran a post office in school, and I was the guy selling stamps because I was inclined to do so. In high school, my grandmother gave me the login info for her E*trade account, and I got hooked on investing. My uncle let me manage some money for him, and I eventually came across short selling. 

How did The Bear Cave come about?

I interned for a hedge fund throughout college and thought I’d work there after graduating from Stanford, but the main guy was winding down and retiring. I started talking to New York City hedge funds but didn’t think it’d be a good fit. They were model-focused, suit-and-tie formal, and you had to work set hours on the ideas they give you. It’s also very hierarchical.

I started The Bear Cave in February 2020 to show that them I’m smart and useful. I thought I’d use it to get hired at a hedge fund.

But the pandemic hit a month later, which was a blessing in disguise. I went home and started growing the newsletter. My eyes started to hurt because I was working on it so much, but people found it useful, and they were willing to pay for it. Within a few weeks, I was already on pace for $100,000 in annual recurring revenue. 

At the time, stocks were going up and up. Kids were trading in their basements. Was it challenging to find short ideas during such euphoria? 

It’s counterintuitive, but those times mean there’s a lot of low-hanging fruit. There were SPACs. There was so much easy money flowing around, so you get tons of inflated valuations and opportunities for shorts. Easy money makes good people do bad things and bad people do worse things. It's not good.

What are some examples of pieces you’ve done that highlight the work you’re trying to do and the desired impact?

Planet Fitness comes to mind. In January 2023, I showed that they were illegally billing people, making it very hard to cancel. They just keep billing people. The CEO and CFO ultimately departed, and I think it’ll continue to be an issue for them. In the 18 months since I published that, the stock has been down while the market has been up about 50%. 

More recently, I wrote about Globe Life, the insurance company. They do all the scheming possible. They sign up people who didn’t intend to be signed up. They delay payouts. They have terrible customer service, overbill, and they use independent agents accused of fraud. They’re the quintessential bad guy. 

Globe Life sponsors an MLB stadium in Texas!

Yes. And that’s a thing. One red flag short sellers like to look for are companies that sponsor stadiums, like FTX Arena. There was an Enron Field in Houston. It’s seen as an arrogant way to spend money. It’s not very shareholder-friendly. 

What kind of return do readers expect on their shorts from Bear Cave ideas? Does they take months to play out?

It varies. First, I don’t intend for this to be investment advice. I never say to short a stock or give price targets. I’m not even shorting these names. The way to properly use The Bear Cave is to use it as idea generation and inspiration during early-stage research if you're a long-short analyst. 

My reports often move the stock. It could be as small as 1% move the moment the report comes out at 10:30 a.m. on the first and third Thursday, or it can be a 10% move. I’ve seen 20% moves in smaller names. Some names might fall around 80% in the one or two years after my report.

In simple terms, can you explain what short selling is?

Short selling is a way to bet against a company. What you're essentially doing is instead of buying low and selling high, you're reversing that: You're selling high, when you don't have the shares and buying low at a later date. The way it mechanically works is, let's say you see a stock that's $100 and you think it's going to go down, you borrow a share from somebody at $100.

A month later, you say, I'll give you your share back, and if the share falls to $80 you profit the difference because you sold for $100 and you bought for $80. But if the share rises to $120, you lose the difference if you sold for $100. And now you need to pay $120 to get it back.

One caveat is that losses are unlimited. They can go to infinity, and you need to buy them back, but they can only go down to zero. 

How can short selling be a healthy, positive part of the free market?

I love this question. What people don't realize is that oftentimes, behind a big journalistic expose of a company are short sellers. They are the tipsters telling journalists these things very frequently. They're short sellers, and they have a big financial incentive. They’re basically the only people with the financial incentive to police the market.

If a regulator starts an investigation, it often comes from whistleblower tips, and some of the biggest filers of whistleblower tips are active as short sellers.

Are you a one-person band? How hard do you work on these investigations?

Totally. I want to keep it that way. The biggest risk in what I do is litigation risk. If I had an employee or intern, I would expose them to that risk, which isn't great for them.

Every other week is an “on” week, where I’m in deep work Monday, Tuesday, and Wednesday for the Thursday report. I might work nonstop from 10 a.m. until about 2 a.m. The following week, I’ll try to enjoy life a little bit.

Have you received a lot of backlash from the companies you’ve written about or any personal threats? 

The most bizarre one was in college when Care.com called my college and sent a letter to my house. A private investigator came to the door. But I’ve never been sued. Once, there was a forum for an Israeli company where people were like, we have to go after Edwin; he's attacking our company. Occasionally, you get a nasty email. 

Have you considered analyzing big companies, like Boeing and all its issues, or do you prefer finding and exposing bad behavior in smaller firms?

Boeing is an exception because serious issues exist there, but I much prefer to pursue companies that are more off the beaten path. With Carvana or Tesla, 100 people have written about them, so I can’t bring anything new to the table. When you have that many people looking at a stock like Tesla and finding all the possible negative strings, you miss the big picture. I look for company issues in firms that might be overvalued by 90% or 80%. 

You find those more often in the small to mid-caps. It’s harder to do this work in companies in the S&P 500 because if you’re that big, many people have looked at you and haven’t found many problems, and you usually have a very substantive business without glaring issues. 

It seems there will always be companies to write about — there have always been firms harming employees or customers or doing things the wrong way. You might just be at the tip of the iceberg.

It is very much the tip of the iceberg. I’m mostly focused on U.S. companies because English is my native language. I understand the FOIA system, and U.S. companies are much less likely to sue you. 

One of my big frustrations is that I don’t want regulators to fine the company. I want to see them go after individual executives and people. In the Wells Fargo case, regulators went after the executives who lost their jobs and paid fines. Some were banned from the industry. That’s the right approach. The wrong approach is to keep fining Boeing. No. Fine the executives and demand they change. 

What kind of tools do you use to find issues in companies?

You can read the SEC filings. Many people don’t look there. I also like InsiderScore, social media, and sites like Trustpilot and Better Business Bureau. I’ll read Glassdoor. I use Twitter and Reddit, and I use the Freedom of Information Act. It’s simple.

Do you get a lot of tips?

Yes. Someone emails or DMs me daily with ideas.

Is your newsletter service at $1 million in annual revenue yet?

It's under a million. I don’t want to give exact numbers, but it’s very healthy, and I’m very grateful. 

How do you invest personally, and has that changed since you launched the newsletter in 2020?

I don’t trade any names I write about. I basically have just two holdings: Apple, which I’ve owned forever, and a small pizza franchise. I don’t spend much time on the long side because I spend my time on The Bear Cave, which has made me more skeptical about companies overall. 

Has your work made you more selective, too? Has it aided in your research, investment decision-making, and patience? 

Yes. I’m totally of the philosophy where I want to make an investment decision every two years. It’s more tax advantageous, too. You don’t want to be too active.

Is corporate bad behavior more common now, or is it just more visible and in the news? 

It's tough to say. It's definitely better than 100 years ago, and more things are out in the open now. People are a lot more aware. They’re demanding accountability.

Dive deeper

Subscribe to The Bear Cave or follow Edwin on X (formerly Twitter). 

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