To me, shorting a single equity seems really risky. Even if you think the current Facebook product and business is overvalued, Mark Zuckerberg and company have an incredible track record of making smart pivots and growing the company.
Betting against the current business might be somewhat smart, but betting against that team? That sounds really risky to me. They could take the company anywhere and are clearly committed to doing just that. I'd put them in the same league as Jobs, Bezos, et cetera. And shorting Amazon or Apple anytime in the past decade would have proved disastrous.
I'm going to make an argument why, though I'm not entirely sold on it.
I think that many people believe that the current valuation isn't based on fundamentals as much as survivor (or Greater Fool) investing. These valuations are based not on revenues but how much the current investors will be able to sell their shares to some later investor. The issue becomes that once Facebook goes public investing tends to skew much more towards fundamental, which may cause a dip in the stock price. Facebook's current P/E somewhere between 70-110? (I'll source these numbers in a sec). This would indicate an extremely high growth company ie in the front of the hockey stick. I think many would start to argue that Facebooks growth is going to start to flatten out. They already say about 500M active users so thats 1/12 the worlds population their user base doesn't have much more room to grow (though increasing revenue per user still still probably has some room to move).
Personally as a small investor I'm staying away from Facebook when it goes public its too volatile (unless I can get pre IPO shares ;-) But at least an argument could be made that a short isn't a horrible play. There's a really good chance of Facebook's IPO starting extremely high and then seeing a significant dip a few months out of the gate as people start taking their money out.
I'm a value investor but my investment philosophy when it comes to tech stocks is slightly different. When it comes to tech stocks I look at the fundamentals, but most importantly I look at the leadership. If the founders are still the leaders, and if I believe that the founders will be there until they die or get really old, and if I believe the founders care about building timeless, excellent products above all else, then I'm willing to invest as long as the P/E isn't above 100.
This is my strategy because I believe the best tech companies will keep growing over the long term until technology completely transforms the world.
Ah, very cool. Thanks for answering. I'm kind of curious how you would do it. If you could post your idea or privately email it I'd be interested.
I'm not dying to know and have no interest in actually doing it but I'm just intellectually curious to hear your idea because it sounds like you know what you're talking about and I bet it's neat.
Also, that interview link you posted with the GSV CEO was really good, thanks.
Shorting an equity != Betting against the team.
Also,
Shorting an equity != Really risky.
Shorting a vector of spots is just taking their dot product with a set of negative weights. After a time increment has elapsed, you switch the sign of the weights and do it all over again. Purely arithmetic operation, has nothing to do with team, company, risk etc etc.
In plain English - there are tons of securities whose short interest is quite high, every single day. You short cause you believe the spot is high. Once the spot is at a reasonable level you go long. If the trade sours you close out & eat your loss.
Heh heh. Quite hilarious to see my premise voted down to minus one when its math ( two nodes below ) is voted up two points! If the premise is wrong, so is the supporting math. If the latter is right, then so is the premise.
If the premise & the math are both wrong, I spent 2 years and 50k on a useless quant masters at the university of chicago where the above premise and math is gospel. Mommy where's my refund...
I have no idea what any of this means. To me, if you short a stock, and the price goes up, you lose money. And there's no limit to your potential losses, so you could lose a whole ton of money.
um... ok.
Mathematically it helps if you don't think in naive terms as stock, company, team, risk, price etc.
First of all, there are no stocks. A stock is just a call at zero strike with infinite maturity. So you short a stock, you're just going short an instrument at some weight. The weight is the number of stocks you short. So you short 5 shares of google, the spot right now is 497 and the weight is minus five. So you do this with a bunch of equities ( google, apple, linkedin etc ). Then you obviously get a vector of spots and a vector of negative weights. The money you make is simply the inverse of the dot product of both vectors. What do you do with that money ? Obviously you don't sit on it. You buy protection on upside and speculate on downside simultaneously. ie. You buy X OTM calls on goog, say at 550 strike the OTM call is 70 cents so you buy that. Then you speculate on the downside ie buy say Y 485 weekly put at 70 cents.
So if your bet is right, the Y puts make money, the X calls lose money, and overall you come out winner. You wait until google is say 487 and then buy back your shares making 10 buck per share plus the money off your Y puts minus the money from the X calls. So thats just another dot product ie. C = 5 times 10 + Y times a - X times b.
Now say the trade goes south. Then you lose on the put, lose on the short, but make money on the X calls, so the dot product looks like above but with different weights.
In either case, you can only lose a fixed sum worstcase ( so you statement " there's no limit to your potential losses" is definitely false ). So maximizing the money is then a constrained linear optimization problem. In a polynomial vector space, you can find X & Y quite easily using Dantzig.
( http://en.wikipedia.org/wiki/Simplex_algorithm )
Embarrassingly enough, I'm not smart enough to parse your comment for correctness. If I were, I would be building a product to model that exact understanding of the market if it is, indeed, accurate.
To me, shorting a single equity seems really risky. Even if you think the current Facebook product and business is overvalued, Mark Zuckerberg and company have an incredible track record of making smart pivots and growing the company.
Betting against the current business might be somewhat smart, but betting against that team? That sounds really risky to me. They could take the company anywhere and are clearly committed to doing just that. I'd put them in the same league as Jobs, Bezos, et cetera. And shorting Amazon or Apple anytime in the past decade would have proved disastrous.