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Strategies & Market Trends : The Epic American Credit and Bond Bubble Laboratory -- Ignore unavailable to you. Want to Upgrade?

To: Tommaso who wrote (48334)	12/29/2005 10:48:28 AM
From: Wyätt Gwyön	Read Replies (3) \| Respond to of 110194

i do believe there is a fundamental difference between going short and going long, and LEND is a fine case in point. it is not surprising that companies which deserve to be shorted from a fundamental viewpoint have high levels of short interest. but this very short interest can lead to explosive rises in the stock because of the leverage inherent in shorting. i think this is exacerbated as short-worthy companies approach their natural home (zero)--they of course pass through the single digits, at which time it is easy for them to have gaps of 100% or more. look at American Airlines--it was supposedly a sure short to zero but it is up more than 1000% since the lows of a few years ago. of course it has claimed a lot of bear carcasses. t certain junctures, insanity becomes too obvious to ignore and is easily quantified by looking at P/E ratios, i think shorting an index is less dangerous because you don't expect an index to have a huge gap. however, i'd say it is not so easy to quantify these things. once something is overpriced, it is trading on momentum, not fundamentals. so if something can have a PE of 50, why not 100, or 200? those are the things that happened during the bubble years time and again, and of course many bears were bankrupted before the bubble burst. i think Juniper was trading at a PE of 1800 or so for awhile. conversely, on the long side, once something becomes cheap, why can't it become 50% cheaper? Buffett had this experience when he invested in the Washington Post at a PE of 6 or so, only to see the price drop by 50%. but he didn't have a margin call, so he was able to stay with his position and actually buy more, resulting in a long-term win. did not seem to me that going short tech stocks and the Nasdaq (shorting XLK and QQQQ) in 2000-2001 was gambling, i think that's because you were shorting at a very fortuitous time as this was a fantastic bear market--you might have felt differently if you had put the shorts on in early 1999 (the year the Nasdung rose 85% and QCOM went up 2500%, and 10-baggers were a dime a dozen). it also did not seem to me that i was gambling when i made 100x my capital in 1999 on QCOM (well, that actually did feel like gambling :). the point is, you can become convinced of anything when the trade goes your way. but what about when it doesn't go your way? if you are unleveraged long some company, the margin clerk cannot force you out of your position, so you can hold on until short-term market noise is overcome by the inexorable gravity of intrinsic value (if you are right). with shorting, you might be right in the long run but go bankrupt or be blown out by the margin clerk in the short run. so, in that sense, i think it is gambling.