Downside
Get Short(y)
July 07, 1998
By David Futrelle
If the stock market has become the new American religion, then short sellers are our whacked-out fundamentalists. They rant endlessly about the coming apocalypse and not-so-secretly hope it'll come soon, very soon--and that Amazon.com will somehow get the worst of it when it does.
Sure, few short sellers actually think of themselves as true believers. They pose as rationalist skeptics, the ultimate unbelievers, sacred-cow tippers, cultivating reputations as Nietzschean opportunists. They profit off the failures and misfortunes of others and gloat with malicious glee when a puffed-up stock begins, at last, to deflate. "I guess I am a cynic by nature, so it is a natural fit," explains Chad Hudson, an analyst for David W. Tice & Associates, which manages the "net short" Prudent Bear Fund. "There are too many others looking at only the good news."
But scratch the surface of any devoted short seller and you're likely to find a raging moralist lurking within--someone convinced that the market has stepped from the path of virtue. That our so-called hot stocks are nothing but cheap harlots, hiking up their price/earnings ratios like hookers hiking up their short-short shorts. That the world has thrown itself wholeheartedly into the depths of financial depravity--and that somehow, someday, it will have to pay for its sins. (More specifically, that it'll have to pay you for its sins.)
"STOCKS ARE OVERPRICED! THEY ARE NOT GOOD BUYS RIGHT NOW! THIS IS A MANIA!" shouts the current issue of The Stock Market Advantage, an Internet tip sheet for the paranoid investor. The newsletter rants, "Why have I turned into a shouting bear? The majority of stocks are not worth what the market is pricing them at. The historical average for PE ratios in the U.S. market is 14. We are around 25 now." According to these naysayers, we've lost sight of "fundamental value"--and we're long overdue for a knockdown. "[E]xcesses ... are building," the newsletter warns, "which will eventually lead this boom to a stunning bust."
Repent now--and avoid the rush!
Actually, the rush is already on. Even as the market roars endlessly upward, with only occasional pauses for breath, the number of short sellers in the market has hit record levels--and tech stocks rank high on the short list. Cruise around the Net and you're sure to find some specific recommendations. Short Infoseek! Short Intel! Short Amazon.com!
But follow such recommendations at your own peril. Most who've studied the matter have concluded that short sellers--like market timers of all sorts--tend to do far less well than good-old-fashioned buy-and-holders. Any idiot can make money in the stock market these days; it takes a special kind of genius to screw it up. Looking through the archives at The Bear Tracker, a Web site devoted to picking stocks about to tank, offers a good deal of insightful and often quite prescient analysis--and if you take a look at the histories of many of the stocks they've warned us about, from Alydaar to Zulu-Tek, you'll notice many of them started a downward slide at just about the time the Bear Tracker wrote them up. If they handled their trades with proper finesse, short sellers in these stocks could have made a bundle.
Alongside these prescient picks, alas, one finds as well the albatrosses of the short-selling community: Yahoo, which the Bear Tracker suggested was ripe for shorting back in February, when it was selling for what now looks like the bargain price of $65 (at the close of last week it was more than $170 a share) and Amazon.com, also a February recommendation, when it was at $63 (now about twice that). "Shorting Internet stocks based on traditional valuation methods is a good way to end up with a small fortune ... if you started with a large fortune," warns one misc.invest.stocks poster calling himself Bucko. He's right.
Amazon.com is a case study in the perils of the short life--illustrating what happens when those who "refuse to follow the herd," as it were, themselves become something of a herd. It almost doesn't matter any more if Amazon.com stock is overvalued or not. So many people have taken a short position on it--perhaps a quarter of all Amazon.com's stock has been sold short--that it's been pushed even higher by those who want its price to fall, "short squeezed" by a herd of bears forced to cover their positions.
Bill Petrie, a sometime-short-seller I ran across in misc.invest.stocks, is eternally grateful his broker couldn't track down any shares of Amazon.com for him to short. "About six months ago, Amazon was at about 33 (split adjusted)," he explained in a recent newsgroup posting. "I tried to short it twice, but Schwab didn't have any to short. Three months later, the thing doubled again, so I thought shorting it now was a no-brainer. Again Schwab had no shares available. I'd be out about $6,000 if the shares had been available."
It's a good bet that many of those who've shorted Amazon.com big time are also investing heavily in sleep aids. "It's ridiculous, but short sellers are being forced to buy [Amazon] back because either they can't sleep at night or they are getting margin calls," Petrie tells me. "I know what it feels like. 'I'll just wait one more day, it has to correct sooner or later.' Oops ... up another $5 a share."
It's one thing to secretly hope a stock will fall--to pray at night that the nefariously mediocre AOL will collapse in a heap, to giggle maliciously when the Titan Ticker on this very site reveals that Bill Gates has lost a cool billion or two due to some strange fluctuation in Microsoft stock. But it's another thing entirely to bet money on the proposition.
Because the losses from shorting a stock that refuses to fall can be, at least theoretically, infinite, the agony of the short seller is unlike that of any other kind of trader. Ken Kurson, a financial columnist for Esquire, decided to throw one short into the otherwise long portfolio he monitors in his monthly column--electronics retailer Best Buy. So far, it's caused him nothing but sorrow--nudging itself ever higher while he frets on the sideline. "Believing in a company everyone hates takes its own type of courage," he wrote in his column in May, "but hating a company everyone loves takes a different sort of constitution. ... Best Buy is killing me. I drive past its stores and mutter its name the way Seinfeld greets Newman."
The next step for Kurson, I fear, is to degenerate from "Seinfeld" to "Taxi Driver"--cruising the mall parking lots like Travis Bickle on a bad day, raving about the day a "real rain" will come down to wash scum like Best Buy off the streets.
Still, I have to admire the sheer chutzpah of the short sellers. And I have to admit that for all the apocalypse-mongering the more enthusiastic of the shorters sometimes indulge in, for all the psycho-economic sadomasochism that comes along with the territory, the short sellers often *do* have logic (if not history) on their sides. The stocks they pick tend to be overvalued by any rational standard. But hey, what's rationality got to do with it? Forget the "rational expectations" the economists like to talk about; irrational expectations will get you a whole heck of a lot further--at least between now and doomsday.
David Futrelle writes regularly on culture, media and technology for Salon, Newsday and numerous other publications.
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