Why the heck are people shorting
? What kind risk takers are they?
Those were the thoughts that went through my head when I saw the letters in response to my query about trading experiences in this new name.
First, let me say, I don't care one way or another whether you think that the fundamentals justify or don't justify the price of this company.
My experience is that you should NEVER short a stock until it is "seasoned." Shorting, first of all, is much harder than being long. The world is rooting against you when you are shorting. Every banker, broker, TV personality and company official wants to nail you. You are the enemy of capitalism. You are a scourge.
Which is why you have to pick your spots when you go short. I NEVER short anything that's a hard trade, that is too thin or is a small dollar amount. (One of the things I thought was so laughable about the
incident was that I would never short a little stock like that, ever. It is too easily susceptible to a short squeeze. And short squeezes can put people out of business. Often I
to short something, but I don't because the hazards are way too great. The mechanics of shorting, borrowing a stock and hoping it goes down after you sell it are much more difficult than the mechanics of going long where there is no borrow involved.)
That's also, by the way, why I rarely talk about my shorts except in the past tense. Given the state of the world we are in I would be a moron to short a stock and talk about it on the site. In fifteen minutes I would see the
boards come alive with "Get Cramer, he's short
." I think a short squeeze would develop in a drop of a hat if I picked a small name to go against. I have enough enemies on the boards to know that I would get burned at the short stake pronto.
That said, I go short all of the time. But I never short a newly issued security. That's because newly issued securities don't trade in any pattern. A newly issued security is like an unbroken horse. You don't try to ride one unless you have mucho experience, and even then, you prefer if someone else takes a crack at it first.
What can go wrong? You just don't know how a big order could affect the darn thing. Again, let's say you are shorting National Gift Wrap and Web Co., a recent IPO. The stock is trading at $50. Someone comes in to buy 300,000 shares of National Gift all at once, using electronic ordering. How do you know the specialist won't put the trade on at $70, ruining you and your short? How do you know that it won't get stopped for an order imbalance because the specialist is short National Gift and wants to try to stay in business? How do you know others aren't gang tackling the short and you all have to cover at once because National Gift's gonna be on Squawk Box tomorrow?
So, sure, you can make money shorting the National Gifts, but at some point you will give it all back because the pattern of the stock, the groove in which it operates, simply hasn't been established yet. Usually about a month into the trading of a new stock, it's time to test the waters with a short if you are so inclined. So let's say three brokers bring National Gift public. After 30 days they can talk about it, so 30 days later they start with a super-de-duper strong buy. (As my eldest always says, "Duh.") The stock then jumps, habitually, from the push. Then you can slam on the short. Then it can make sense and you know what the stock will do on a big volume move.
Before that point, you are on your own. But then again, you are on your own all of the time anyway, so good luck. Don't complain to me when you get squeezed like a sardine in a King Oscar can.
: Many thanks to those of you who liked my blow-by-blow of the selloff last Thursday and Friday. Usually I am too jammed to write that much stuff, but sometimes you get into a mode where you can rattle pieces off. Comes from the days when I covered crime and you would have to write the story in your head and dictate it to your editor. Now, I never thought that particular non-skill would come in handy.Venturing to the Goldman Sachs tech conference for lunch. Always a fave ...
James J. Cramer is manager of a hedge fund and co-founder of TheStreet.com. At the time of publication, the fund had no positions in any of the stocks mentioned in this story. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Cramer's writings provide insights into the dynamics of money management and are not a solicitation for transactions. While he cannot provide investment advice or recommendations, he invites you to comment on his column by sending an email to email@example.com.