tag:blogger.com,1999:blog-9003076573972458673.post4288131980230523775..comments2024-03-28T10:02:12.828+05:30Comments on Catalign Innovation Consulting: Game of shorting: Is it really easier to figure out losers?Vinay Dabholkarhttp://www.blogger.com/profile/02007011866370283276noreply@blogger.comBlogger2125tag:blogger.com,1999:blog-9003076573972458673.post-63745907651496615932009-04-05T21:58:00.000+05:302009-04-05T21:58:00.000+05:30Thanks, Ravi. This was really useful.Thanks, Ravi. This was really useful.Vinay Dabholkarhttps://www.blogger.com/profile/02007011866370283276noreply@blogger.comtag:blogger.com,1999:blog-9003076573972458673.post-87001969989141861522009-04-05T15:52:00.000+05:302009-04-05T15:52:00.000+05:30Vinay,Shorting involves getting 2 things right:1) ...Vinay,<BR/><BR/>Shorting involves getting 2 things right:<BR/>1) identifying the short candidate <BR/>2) the timing of the short sale<BR/><BR/>Identifying the right short candidate does not necessarily mean predicting which company will be a loser. It just means finding companies where current market price is unlikely to be justified except in most optimistic scenarios. The high price along with broken business model makes a good short bet. <BR/><BR/>So finding the short candidates is not that hard. What is hard is timing the short right.<BR/><BR/>When you short a stock, your potential losses are unlimited. If the stock you shorted starts rising in price, you have to keep pumping new money in to meet margin requirements. Sometimes the sudden upswing in price causes so much pain that a mad rush to close out the short trade take place - a situation known as short squeeze. <BR/><BR/>The danger of short squeeze is ever present even in developed markets and blue chip stocks. Recently a short squeeze in Volkswagon stock wiped out some well known hedge funds.<BR/>http://www.economist.com/business/displaystory.cfm?story_id=12501847<BR/><BR/>During the internet bubble, many smart investors got burned shorting the dot-com companies - even when their analysis was correct and the companies they shorted went burst eventually. The key phrase here is 'eventually'. <BR/><BR/>As John Maynard Keynes said: "The market can remain irrational longer than you can remain solvent."Ravi Arankehttps://www.blogger.com/profile/08706098376170260290noreply@blogger.com