Here is some food for thought for anyone contemplating the idea of profiting from stocks that may fall.
A hedge-fund manager named Mohnish Pabrai once told me that he doesn’t short stock for a variety of reasons.
As he put it in a Barrons.com interview in 2005, corporate managers have both the incentive and the means -- through share buybacks, putting the company up for sale, or employing other financial tools -- to get the price up.
Those managers lack the will to make their stocks go down, added Pabrai, a Warren-Buffett styled investor.
To be sure, all the management tricks in the world can’t save a stock from cratering if the company has fundamental problems, such as mounting debt that it can’t cover with cash.
But finding those true losers ahead of the investing crowd is harder than finding winning stocks ahead of the pack. After all, stocks have an upward bias that any long-term stock chart spells out as plain as day.
Barron’s is aware of that positive tilt which is one of the reasons why the percentage of stocks we pan is dwarfed by the number we write favorably about.
I was reminded of Pabrai’s comments as I read a piece that ran Monday on the CNNMoney Website that discussed how large short positions taken by U.S. hedge funds were faring.
The piece, based on analysis of first quarter activity by Goldman Sachs, shows results that are hardly surprising: Some of the shorted stocks indeed have fallen in value while others would have performed well in a long-only portfolio....MORE
“One other problem people aren’t paying enough attention to — and that is the asset-liability mismatch,” he said. “And if we learned anything ... during our crisis, it was you shouldn’t finance hard-to-value long-term esoteric real-estate-related derivatives or securities with overnight money, which is what a lot of the investment banks ended up doing by ‘07/’08. They couldn’t move a bunch of the gunk on their balance sheet and increasingly they were financing themselves in the repo market.”See also:
There's A Transcript For The "Jim Chanos: The Art Of Short Selling" Podcast