Bob,
Clarifying my statement about 25% return on mutual funds being competitive with shorting DDIM, even if the shorts are 100% correct:
1. This was partly rhetorical, just pointing out that if everything goes right for the shorts except the timing (and let's face it, I think the peak of the hype may be another year away), the return would be relatively moderate.
2. I didn't mean that I could count on a return of 25%, just that it was quite possible.
3. You guys in the US are luckier than I am, with lots of great tech stocks on your doorstep. But I have one advantage being in Australia: our share market is much less efficient than the US market. This means that skilled investors in our market CAN consistently beat the market. One mutual fund manager that I have funds with has exceeded the index by between 10 and 15% for each of the past 6 years. "Is this statistically significant?" I hear you ask. Yes it is. Last year their information ratio (excess return / tracking error) was 2.7, implying a probability exceeding 99% that the result in that year was due to skill not chance. You simply don't find information ratios like that in the US.
4. I agree that long term returns from equities are inflation + between 6 and 9%. I agree that you should not count on more than this in the long run.
Having said all of this, given that the Australian market has significantly underperformed the US market, and given the excess returns that a good manager can get in the Australian market, I think there's a better than 50% chance that my mutual funds will outperform a DDIM short. And its undeniable that shorting DDIM is pretty risky. I think we might see $40 before $20, even though I still believe DDIM is only worth $5 on the fundamentals.
Leaving aside the bit about mutual funds, my point about shorting DDIM is that 25% per year is almost the best case for the shorts even if they are proven completely right. Meanwhile the risk is huge. But if you go long on a good company, the best case is better and the odds are that the risk will be lower.
To put it bluntly, even if the shorts are 100% correct about the long-term value of this company (I think they are), timimg issues might reduce the profit to a very moderate level. Moderate returns with high risk ... not an ideal investment. |
