Shorting Requires Solid Facts, Not Anger

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You want to short Amazon(AMZN Quote). You want to short eBay(EBAY Quote). You want to bet against Electronic Arts(ERTS Quote) and Omnvision(OVTI Quote). 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) and PMC-Sierra(PMCS Quote). 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.