Russ, we met briefly at the London Investors Show at Olympia last year. I subsequently subscribed to Shares Magazine, having been impressed with your delivery. I followed Shares’ analysis of Quindell (QPP:AIM) over several issues and decided to take a punt, ostensibly, it appeared you and yours had done their due diligence on the company before sticking their neck out. As far as I can see, which won’t be as far as you I am sure, Gotham City Research LLC might well be akin to an impoverished but nonetheless deadly band of Somali pirates. It seems likely ‘they’ (whoever they are) quietly went about setting up a bevy of massive short positions in Quindell and then released their hatchet job.

Whatever the case, I’ve lost a lot of money on paper and am trusting that keeping calm and carrying on is the best approach at this stage. Obviously this sort of debacle makes Shares look pretty silly so I’m hoping you are in the midst of framing an update on the company and its prospects as they continue to spend inordinate amounts of time on damage control. Clearly FTSE 100 entry in the summer is now a pipe dream and FTSE 250 entry, even, could be a long way off now. What say you?

Nick Fairrie, via email

Russ Mould replies:

A fresh update on Quindell can be found in the Plays Updates section and it is clear this story is one that will run and run. In response to the initial events we published a story on our website, which is reproduced to the left and can be found in full here. In the end, the company will have to turn its acquisitions and contracts and potential customer wins into cash if it is to thwart the bears. If it fails to do so, the sceptics could win out as cashflow is the ultimate arbiter of valuation, as per the 10-part Ultimate Investment Guide which we kicked off last autumn (see Cover, Shares 12 Sept’13), followed by features in the subsequent nine issues. It will be fascinating to see which view prevails over the coming years.

On the emotive subject of short selling, I understand your irritation, not to say financial discomfort, but it may be worth bearing the following points in mind.

1. Short sellers have an opinion. That is what makes a market. They are not guaranteed to be correct. A company’s cashflow will ultimately determine its market valuation, not short-term noise or newsflow.

2. Short sellers’ research tends to be very thorough because they are taking on a naturally bullish consensus and markets tend to rise over time. Their downside is unlimited as a share price has no upside cap, at least in theory. While shareholders can face a squeeze as a share price falls and stop losses are triggered, the same can and does happen to the shorts when a security rises.

3. Short sellers challenge the consensus and defy group-think. A debate, so long as it is framed properly, can be constructive and in some cases management can learn from a discussion with the hedge fund in question, providing it does not become an undue strain on boardroom resource.

4. Many will find Gotham City’s tactics of quietly building a position and then noisily shouting about it distasteful. But is there a big difference between this and a company which uses press releases or other forms of investor communication to puff its share price higher? It might do this in order to raise cash against more highly-rated paper, use the same to acquire and buy growth, or simply towards the goal of triggering stock options to enrich management. It can be argued some of the largest corporate failures ever, such as Enron and WorldCom in the USA, followed these tactics to the ultimate detriment of shareholders who enjoyed the ride up but were wiped out when the smash came as the market realised cashflow was not sufficient to justify huge market valuations.