Shorting observation

[eastbay]

I have never traded a stock in my life so this may be a deeply foolish or maybe cliched comment, but here goes anyway:

It seems to me it ought to be easier for a casual investor to make money shorting individual stocks than buying long.

The reason for this is that stocks' overvaluation often correlates to peaks in media coverage: once everybody knows about company A in the headlines, it gets overhyped, driven up, and is ripe for shorting when reality sets in. By the time Joe Schmoe - that is, me - knows about it it's probably too late to ride it up.

On the other hand, in order to get in before a big run-up, you'd have to know about the company that's about to be all the new rage. This is hard because it's not getting much media exposure - yet.

I understand that shorting is wrong in an averaged sense because the market goes up on average, but for individual picks it seems to me that good shorts are much easier to identify due to the exposure that stocks get when they are high-flying, and usually over-hyped, and over-priced.

eastbay

[ctv1116]

A few comments:

1. Who says that once you think its a good stock, it can't do even better? I think a stock that'd fit in your shorting criteria is Starbucks; I mean isn't it briliant that you can charge an exhorbitant amount for the same coffee as you'll find at McDonalds? Starbucks has been known to be a very good business idea for years, yet it continues to go up up up, tripling in the last 18 months.

2. Some would argue that it is easier to find bottoms; I subscribe to the theory that if the stock market is the first story of the nightly news, you've probably reached a bottom. This only happens after a steep decline and there is enough panic to make Wall Street newsworthy.

I don't say that you can't make money going short, but its not for the reason you stated.

[eastbay]

[ QUOTE ]
A few comments:

1. Who says that once you think its a good stock, it can't do even better? I think a stock that'd fit in your shorting criteria is Starbucks; I mean isn't it briliant that you can charge an exhorbitant amount for the same coffee as you'll find at McDonalds? Starbucks has been known to be a very good business idea for years, yet it continues to go up up up, tripling in the last 18 months.


[/ QUOTE ]

Well obviously you wouldn't just short every high profile stock. That would be stupid and of course I didn't mean that. You'd have to make judgments about which high-profile stocks are high-profile because they're legitimate or because they're a bunch of hype. It's simply easier to identify the pool of potentially overhyped stocks because they're in print everywhere. Starbucks is making tons of money selling a 10 cent product for $3 or $4 a pop, and people love it. That's a legitimate business. But there's plent of examples of high-profile stock that left reasonable people scratching their heads about how they plan to make any money.

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2. Some would argue that it is easier to find bottoms; I subscribe to the theory that if the stock market is the first story of the nightly news, you've probably reached a bottom.

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That's something entirely different, though. You're talking about the market as a whole and a low of the market as a whole is newsworthy.

By contrast, most stocks which are currently low and are going high in the future are not in the news, they're not anywhere in the media. On the other hand, most stocks which are currently high and are going low probably are already in the media.

eastbay

[ctv1116]

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By contrast, most stocks which are currently low and are going high in the future are not in the news, they're not anywhere in the media. On the other hand, most stocks which are currently high and are going low probably are already in the media.

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What about Starbucks? It starts high and just goes higher. While I agree that its easier to see overhyped stocks than underhyped ones, even IF you are "right", its a question of WHEN you will be proven correct, and how much you will lose before the stock crashes. I assume your OP is motivated by the recent Internet bubble; you saw all the steaming crap which was selling like hotcakes. You could just short that and make a killing no? However, how do you know the stock won't double, triple or worse before the stock finally falls as it is supposed to? As a common saying regarding the efficient market hypothesis states, "A market (or stock) can be inefficient far longer than you can be solvent."

You might have an uncanny ability to detect what is just overhyped crap, but who says that the hype won't push the stock up another 30, 40, 50 points before it crashes as you had predicted?

[eastbay]

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By contrast, most stocks which are currently low and are going high in the future are not in the news, they're not anywhere in the media. On the other hand, most stocks which are currently high and are going low probably are already in the media.

[/ QUOTE ]

What about Starbucks? It starts high and just goes higher. While I agree that its easier to see overhyped stocks than underhyped ones, even IF you are "right", its a question of WHEN you will be proven correct, and how much you will lose before the stock crashes. I assume your OP is motivated by the recent Internet bubble; you saw all the steaming crap which was selling like hotcakes. You could just short that and make a killing no? However, how do you know the stock won't double, triple or worse before the stock finally falls as it is supposed to? As a common saying regarding the efficient market hypothesis states, "A market (or stock) can be inefficient far longer than you can be solvent."

You might have an uncanny ability to detect what is just overhyped crap, but who says that the hype won't push the stock up another 30, 40, 50 points before it crashes as you had predicted?

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Agree with you on all counts. Yes, it is mostly internet/technology stocks that my bullshit detectors are pretty decent for. You also correctly point out that even though I - and many people - did strongly suspect a lot of the crap-outs that did finally occur, it did persist and climb for quite some time anyway.

In any case, I know there are no easy rules or guidelines, just throwing out some thoughts. Thanks for your insights.

eastbay

[gvibes]

I agree with CTV here. My bet is that a lot of people would have agreed in 1999 that technology stocks were overvalued. However, if you had shorted technology stocks, you would have lost your shirt.

Just because something is overvalued doesn't mean that it won't become more overvalued.