Smarter Money

Return to Article

Shorting Requires Solid Facts, Not Anger

Jim Cramer

Editor's note: This is a special bonus column for TheStreet.com readers. This piece originally appeared on RealMoney, and we're giving it to you free in its entirety. Jim Cramer's commentary regularly appears on RealMoney. To sign up for RealMoney, where you can read Cramer's commentary every day, please click here for a free trial.

You want to short Amazon(AMZN Quote - Cramer on AMZN - Stock Picks). You want to short eBay(EBAY Quote - Cramer on EBAY - Stock Picks). You want to bet against Electronic Arts(ERTS Quote - Cramer on ERTS - Stock Picks) and Omnvision(OVTI Quote - Cramer on OVTI - Stock Picks). But do you know why you want to do it?

I know why. Not because I have interviewed dozens of hedge fund managers and I have the skinny on those companies. I know why because as a hedge fund manager, I had stocks I hated. I hated them because they could be counted on to go up, boosted by their endless backers who refused to care about valuation.

I hated those stocks because I played by the rules and the owners of them didn't. I hated those stocks because when my investors called, they wanted to know why I didn't own them. They wanted to know why because the stocks were going up and were readily accessible to all, including hedge fund managers, and it bothered them I wasn't in them.

Funny thing, though; that's not enough of a reason to short stocks. You have to have the goods.

Let me discuss two of my favorite shorts of the old days: Applied Micro Circuits(AMCC Quote - Cramer on AMCC - Stock Picks) and PMC-Sierra(PMCS Quote - Cramer on PMCS - Stock Picks). During the heyday, I was one of those people who would look every day to see what time Kevin Landis would come on CNBC. I knew that people would be shorting these stocks because they hated them. I knew of an actual cartel that would buy these stocks and keep them higher. (Don't worry, the government knew, too, but who was hurt? Who had standing to be aggrieved by stocks going higher?)

Anyway, I would wait until an hour before Landis was due to come on and load the boat up with those shares. Then I would peel them off slowly after he had talked about them and they had jumped.

But you know what? I didn't get rid of them. I didn't short them. Because the stories were intact. I just kept some on, and I knew Landis would be back on CNBC in a couple of days, when I would just do the same.

Then, on a couple of days in the spring and summer of 2000, Nortel(NT Quote - Cramer on NT - Stock Picks) and Lucent(LU Quote - Cramer on LU - Stock Picks) said their customers were slowing down purchases.

Then you could short them. And we did, every time Landis was on. And we didn't cover them all when Landis was done because we knew he would be back on, and it kept us fresh to keep the names on the sheets so we could short them again when the mustachioed wonder was back on the set.

You had to have more than hatred to bring down a stock. You needed facts.

If you know that auctions are slowing down on eBay, you should have your whole fund short it. If you heard that Barnes & Noble.com(BNBN Quote - Cramer on BNBN - Stock Picks) was going to pay you for buying books on line, you should short Amazon. If you knew that the government was going to ban Electronic Arts' games, you should short ERTS. If you knew that Yahoo!(YHOO Quote - Cramer on YHOO - Stock Picks) had decided to ban advertising, you should short Yahoo!.

But if you know nothing more than what I know, which is that these stocks are as expensive as all get-out, then even during this seasonally weak period they will be unrewarding shorts.

Sorry to let you down. Sorry not to give what many of you want.

But that has never been my style.

Random musings: Why is the press so suspicious of the situation in Iraq? It's because it wasn't suspicious enough about Vietnam. If you think that's not the case, go read David Maraniss' They Walked into Sunlight. Real good read. ... My television partner Larry Kudlow wants to know why the Democrats were so gloomy about the economy. I think it is because they want to be elected and don't want to see George W. Bush elected, but then again, I always had a keen eye for the obvious.