Infinite danger of shorting

Tue, Dec 11, 2012, 00:00

STOCKTAKE:WARREN Buffett isn’t impressed by today’s hot-shot investors. Asked by the New York Times last week if there were any private equity investors that he admired, his reply was: “No”. He struggled to name any hedge fund managers he followed, saying the field had gotten “swamped” and was now built around marketing.

Buffett is also not keen on short selling, where traders bet on share price declines. About 95 per cent of his short ideas would eventually work out, he said. However, short selling losses are potentially infinite, so timing is crucial. “It’s too difficult,” said Buffett. With ordinary investments, “if you know you’re right, you can just keep buying, and the lower it goes, the better you like it, and you can’t do that with shorts”, he cautioned.

When hedge funds go wrong

ONE such hedge fund manager, John Paulson, made $15 billion in 2007 after shorting the US housing bubble, a bet described in the book The Greatest Trade Ever. Last year, however, Paulson’s Advantage Plus fund fell by 53 per cent after he bet big on an economic and banking rebound. This year, it’s down another 19 per cent, due mainly to bets against Europe, Paulson told investors last week.

That equates to a total loss of 62 per cent, and a 165 per cent gain is now needed just to break even, notes Pragmatic Capitalism blogger Cullen Roche. He reminds Paulson of Buffett’s two rules of investing: 1, Don’t lose money. 2, Don’t forget rule number 1.

Paulson’s predicament reminds us of another Buffettism. “You dont have to swing at everything – you can wait for your pitch. The problem when you’re a money manager is that your fans keep yelling, ‘Swing, you bum!’.”

Falling Apple hard to call

APPLE suffered its biggest one-day decline in four years last Wednesday, a 6.4 per cent slump erasing $36 billion in market value.

The question is: why? Nothing really happened that day. Some cited a report from market research firm IDC stating that Apple’s share of the global tablet market would fall next year, but that’s hardly news. Ditto concerns over possible profit margin declines. Countless other suggestions – margin requirements, China concerns, misinterpretation of a news report – were offered, with the daftest one being “the absence of the next big thing”.

Trying to explain every market move is a mug’s game, but Apple’s technicals are worth noting. It tumbled 28 per cent recently, from $705 to $505.

An oversold bounce occurred, retracing almost 50 per cent of the prior decline before stalling at $595. This happened to be just shy of both the stock’s 200-day and down-trending 50-day moving average.

Having failed to overcome resistance, the downtrend resumed with a vengeance.

Facebook takes place of Infosys on Nasdaq

Facebook joins the Nasdaq 100 tomorrow, replacing India-based Infosys on the index just seven months after last May’s flotation debacle.

Previously, companies had to be listed on a major exchange for two years before being eligible for inclusion on the Nasdaq 100. That move was designed to prevent potential gate-crashers such as Groupon, which has fallen from a peak market value of almost $20 billion (€15 billion) since going public in November 2011 to $2.5 billion today. The rules were changed in April, and are thought to have been a key factor in Facebook choosing to float on the Nasdaq rather than the New York Stock Exchange.

Many predict a decent pop for the stock, as index-tracking funds will have to buy the shares.

However, the announcement was expected and may already be baked into the cake, so to speak. Facebook has risen by more than 50 per cent since last month, and is now valued at $60 billion.

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