Earlie,
In the heat of the spring-1983 tech mania, a good friend who was running a hedge fund told me that the disk drive companies were particularly overvalued. When I asked him why he didn't short them, his response was that he only shorted stocks when he could see the train coming.
If there is no "truth or dare" event in sight, anything can and will occur in a mania to drive valuations past ridiculous levels. Money flows coming into funds will allow the fund managers to play a short squeeze game with their favorite stocks simply by buying more. Their fire power is immense.
Shorting on valuation in an overall rational market may work, but unless you time the top perfectly in a mania, it's a prescription for disaster. That train, be it a looming interest payment, deadline for a contract award, or some other known event, must be seen to short a stock on valuation in a mania. Otherwise, there's always "the future looks bright."
BTW, your comment about institutional ownership pushing out the day of reckoning is an apt one. For years I was amazed at the price performance of a certain financial services company. I couldn't believe the reported EPS and the assumptions used to book revenues on existing contracts made me nauseous (didn't anyone run the prepayment possibilities?). But, the company kept being funded and the day of reckoning kept being pushed back (no train in sight), until one day . . . a bigger idiot bought them!
Of course, the day of reckoning wasn't too long in coming and the execs who masterminded the purchase no longer have their heads attached, but that's another story. There is a laundry list of short sellers who bet and lost on both companies over the past decade . . . until the train (vast prepayments with lower substantially lower interest rates) left the station and started coming at them. Ultimately, the shorts were right, but precious few got the timing right.
About the only justice served in this instance was the use of margin by one of the players. As you can guess, he believed in the reasonableness of his own accounting. |
