It’s midnight & feeling a little 1999-ish right now. It's a different flavor today of course but when it starts looking easy on the long side that usually means it's actually pretty treacherous out there ✈️📰📈☠️ (1/x)
That being said, shorting clearly over-valued/over-hyped small to medium sized companies can be deadly as well. Timing can make all the difference in the world
This brings me to Skymall. It used to be a publicly traded small cap HQ'd in Phoenix. It was a quirky mail order catalogue that sat in the back seat pocket of airline seats
Flyers would browse, rip out a page of something they wanted (or keep the whole thing) and order when they landed - there was no wifi on board back then!!
The shares were very cheap on the numbers and after I met the CEO I starting buying at something like $6/$7 a share sometime in late 1998/early 1999
The stock traded up and I started selling at $9/$10. It was a fairly mundane business with limited opportunities for growth so as it rallied to $12 I started shorting a bit. It kept going higher so I sold some more at $15 and $20
There came a point in 1999 when press releases that mentioned the word 'internet' would move company shares much like words such as 'exclusive sports content' or 'electric vehicles' or 'EV SPAC' are doing right now
Skymall had figured out this phenomenon earlier than most companies and certainly way earlier than me
I kept the short position fairly small but when Skymall's 'internet' press release came out the shares absolutely ripped. The business was sporting an insane valuation that made absolutely no sense but that didn't matter
After the shares more than tripled, the position was no longer so small. I stuck with it hoping for a break in the market's fever. Well of course the shares more then doubled from there reaching over $100 which was about 7x my cost
As the valuation went vertical and became ever more untethered to reality, other short sellers were attracted to the situation. What was easy to borrow suddenly became hard to borrow and of course suddenly my prime broker was scrambling to maintain the short
Several times I got the call to cover at the highs. I managed to stave the calls off for a period while I waited for the market to break which it finally did for a period before the big crash in March of 2000
I ended up covering at around $30 which was a lot better than $100 but it was a nasty hit for such a small commitment
It's difficult to understand this kind of pain. It's the kind of lesson that can't really be taught in the classroom. It has to be experienced to be fully understood and Skymall was my MBA in watching your back when shorting
In the end, Skymall went private at something like $2/$3 a share. I was scarred for life but in a way that has served me well ever since
There's lots of craziness out there right now and perhaps we're getting close to the next real correction but remember that shorting at insane valuations can still get you killed even if you are 100% right about the ultimate value of the business
(fin)
(fin)
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