Indulge me for a moment, dear reader — I’m going to wander around thinking about valuation and about short selling, then get into talking about a current situation that closely mirrors some of the long/short pairs trades I’ve done in the past year or so. Then we’ll talk some about gold, since that seems to be “breaking out” as the chart lovers like to say, as the gold bugs dare to dream about the end of the long, sad gold investing story over the past three years. If you don’t care about shorting, and want to make this a shorter read, just skip down to the first ****
People always wonder what’s happening behind the curtain on Wall Street…. Is the price of your favorite stock being driven by the people (and machines) who are watching the charts and trading momentum, by the novice investors and desperate fund managers in lusty pursuit of a cool story to help them “catch up,” or by the people who are looking at the financials and trying to decide what the company is worth in the real world? It’s almost never the latter, until it is — people seem to care what a company is worth in some objective sense only when a stock is declining, when the stock is soaring to new highs every day we’re just giddy with excitement and reassured that, yes, we must be not just wise but exceptionally wise.
That’s most obviously true with ludicrous early-stage growth stocks like Beyond Meat (BYND), and the constant temptation is to short those kinds of stories…. but, of course, since those stocks are trading on sentiment and scarcity value and “story,” you can’t really do any math to figure out when, exactly, they’re going to stop going up and when they will start to trade as if they are real businesses that should be valued based on their potential sales and profits.
Which makes shorting not just expensive, since everyone else already sees that overvaluation and is competing to borrow a limited number of shares to sell them short (or paying huge premiums for put options), but also exceedingly dangerous — if the market doesn’t object to a company trading at 100X sales, why would it object to a company trading at 150X sales? If the numbers don’t really matter, then slightly different numbers won’t matter, either.
Even if you’re right ...