The more I write about shorting, the more people seem to want to know about it. I thought I had answered most questions with last night's primer, but shorting has a sort of mystical, almost conspiratorial hold on some readers, so I think that the demystification of this age-old process makes a ton of sense.
In particular, people want to know when they can spot short squeezes. Yesterday, for example, when I
said that Linux-related stocks couldn't be borrowed, people immediately wanted to know, well heck, if they can't be borrowed, why not participate in the short squeeze? Why not join the gang-tackle and go up with them? Why not pile on and get rich?
Oh boy, is that
One of the more amazing things about this business is that it is actually based on something. There is a core set of beliefs out there that professionals virtually
to believe in if they are going to do their jobs with any longevity. And one of them is not buying stocks because you think they are overly shorted.
I can't tell you how many times people told me to own
, for instance, for this very reason. That stock at times would have short-squeeze spikes, but its path down seems quite obvious now. I was told to go long
because it was a "hard borrow," slang for a potential short squeeze. I probably get pitched potential short-squeeze ideas a couple of times a week.
I won't do them. I won't do them because
some things cannot be gamed
. I don't know when the stock will suddenly come in for sale, from real sellers, and the whole ball of wax comes melting down. Much of what happened to the highest-flying stocks this spring was the unwinding of a great short squeeze. Some of these stocks had been kept up for months, but when real sellers, like Soros'
, came in, and insiders joined in the fray, you had stocks that lost 80% of their value overnight. That's too risky for me.
As usual, it might not be too risky for you. Some of you might be able to buy 100 shares of
and sell it up 10 the same day because you think there is a short squeeze going on. But I have to buy 10,000 shares of something to make it worthwhile for our fund and I am not going to buy 10,000 shares of something I don't believe in because I think that maybe it will "get going" as part of a short squeeze. That's just too stupid for words.
So now let's revisit that infamous incident that got me in so much trouble for speaking my mind on television, because it has everything to do with short squeezes. I want to revisit it because in the last couple of months
and now the
New York Daily News
have pilloried me for what they think happened, and they both got it wrong and had to correct their stories -- as will every reporter who gets this wrong, because it is inexcusable to make mistakes that continually tarnish someone's reputation.
Two years ago, as part of my regular gig on
, I was presented with a list of companies' execs that I would be interviewing that morning on the program Squawk Box. I take this kind of job very seriously because it can impact a lot of people, and I like to get my facts straight. (I get asked to go on TV a lot because I am a professional with a good, long-term record, not because I am funny or entertaining. There are a ton of those people around too, but they don't get asked to be regulars on rigorous shows like Squawk.)
On the list of people to be interviewed was the executive from a company called
. I had heard of the company, in part because of my Web work with
, and I knew they had some sort of interesting intranet product that
seemed to like. That morning I read through all of the
notes on WavePhore -- something I always do when I start my research -- and I looked at the most recent quarterly reports. My office can put these things together in a flash and they always did before I went on Squawk.
What I saw was a pretty checkered operating history and a lack of profitability. That didn't jive, though, with the stock, which had virtually tripled overnight to 15. As soon as I saw what the stock had done, I went back over the research reports and news to see what I was missing.
I couldn't find anything. Sure there were some bullish press releases about future products, but, duh, so what?
When I can't find anything that has driven a stock up other than a press release or two, my antennae go up. I start thinking, "Hmm, what could this be, a not-so-hot company coupled with a very hot stock price? Well, that smells like a short squeeze." A short squeeze can move a stock up violently as people who are short the stock scramble to find something to give the buyers of the company. (See the primer yesterday if you are confused about this.)
Now, there is no "list" of current short squeezes available. There is no Web site. There is no chat room. There is no central directory. The only way to find out if there is a squeeze going on is to inquire with the stock loan department at your brokerage. You have to check with stock loan before you can short anything. As we short a lot of stocks, this is a pretty typical call for our office.
So as part of my regular due diligence in preparation for Squawk, I asked Clarke Longwell, who handles these things, to check to see if Wavephore could be borrowed. I usually like to check to see if 25,000 shares can be borrowed, because if they can't get a "locate" on 25,000 shares, then I know it is too tight to short sell.
The answer came back as I expected: "Don't even think about it."
was adamant that I not short the stock because so many people were short it already that I might be subject to a "buy-in" -- where the moment I fail to deliver the shares, Goldman just buys the stock back and I take the loss, as it would almost certainly be higher. They told Clarke that WavePhore was up on a classic short squeeze and that it was way too dangerous to pile on.
I went and repeated that statement on the air. As it is a conversation I have daily with stock loan at Goldman, I was shocked that there was such a furor. Clearly, in retrospect there were many bulls "playing" the squeeze, and when I revealed it for what it was the stock rapidly deflated as real sellers rushed to take advantage of the artificially high prices. The $15 stock now stands at 2.
I was never short WavePhore. I have never traded WavePhore. I have never profited from WavePhore. But I did say negative things about it. I did that because I don't like to see people lose money getting caught up in hype. What I didn't count on, of course in retrospect, is that there are a lot of people who benefit from the hype.
These people tried to lynch me for what I did. Initially, I had no idea what I had stepped into. As you now know, from reading me, I never short stocks that I can't get a borrow on. And I would not go on TV short a stock and bang it down.
I just ain't that stupid.
Nevertheless the stories persist that this, or some variant, is what I did. Last week in a vicious hatchet job, the
New York Daily News'
Phyllis Furman mentioned the WavePhore incident, saying that I bought the stock and then went on
and trashed it!! Hello? Ms. Furman, why the heck would I buy a stock and then trash it? How dumb would that be? Where are the editors when you need them? ("Last week Jim Cramer went on TV and set hundreds of thousands of his own dollars on fire!!??)
Anyway, all of this gets back to one simple concept: I don't short stocks that can't be borrowed and I don't buy them for that reason either.
I buy stocks cause I like them and think they will go higher. I short stocks, if I can borrow them, because I dislike them and think they will go lower.
I never mix and match.
James J. Cramer is manager of a hedge fund and co-founder of TheStreet.com. At time of publication, both Cramer and his fund were long TheStreet.com. His fund often buys and sells securities that are the subject of his columns, both before and after the columns are published, and the positions that his fund takes may change at any time. 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 at