A comment about short selling...
Your right that shorts can get wiped out when there is a speculative surge or squeeze in a stock - even a stock in a company which may have severe fundamental problems.
I've found that the trick to short selling is to treat it like any other investment. It requires patience; and since it may also require the deposit of additional collateral to mainatain a margin position - it's also important not to overextend yourself. I always collateralize 100% of my short positions with cash, that way - even if the stock doubles overnight - I never receive a margin call.
I noticed some mention of Borland in this thread. I was also a short seller in Borland. In fact, at the time I shorted it (about 5 years ago) - many of my friends were advising shorting Microsoft (it's too high!!) and buying Borland (better technology!!!). I tried to point out that Borland had lousy earnings, a lousy balance sheet, and lousy management - but to no avail. My initial position was 300 shares short at 52 a share, so it cost me about $15,000 in collateral.
One week after I shorted the company, Borland announced the acquisition of Ashton-Tate for about $400 mil. in stock. A few analysts hailed this decision and the stock zoomed to 89. I didn't cover though; if Borland was a bad company, I had even less respect for Ashton-Tate. The deal sucked. I kept depositing money to collaterlize my original short and shorted another 200 shares at 85.
By the time I covered 4 years later, my short position had grown to over 22,000 shares. One of the nice things about shorting is that while a stock declines, margin gets released which you can then use to short more stock - creating a "cascading" effect. I covered my entire position at 11 a share...my gross profits (before all commissions and taxes) came to over $400,000. This turned out to be a mistake though. If I hung on for another year I could've covered at 5.
The point I'm trying to make is that the market will always reflect the true value of a company. It may happen sooner...it may happen later, but it always happens. I am convinced there is no value in these Y2K plays - and I'm willing to wait it out until I'm either proven correct - or forced to cover when the massive profits these companies make sends their stock prices to levels above which I'm no longer able to collateralize my positions.
Right now I'm not losing any sleep. |
