Saturday 15, April 2023

When you see a bandwagon forming, just jump on!

The Tidal Wave substack writes beautifully about the challenges of shorting a bubble: On NVIDIA, Fading the Hype, and a Look Back at the Dot-Com Bubble.

As the post makes clear, it’s damn tough, because a bubble can keep inflating long after your shorts have driven you to bankruptcy. Bubbles eventually pop, but while other markets remain calm they tend to just keep going up, becoming more overvalued, but generating more FOMO all the while.

The post gives an account of how Druckenmiller tried to short the NASDAQ just before the Dot Com crash, but pivoted at the last minute to make a lot of money, before eventually losing quite a bit of it when he overstayed his welcome.

As bubbles get more extreme, the market depth presumably gets shallower and shallower. Nobody is selling, because the shorts have long gone and the longs have become convinced that their stocks never go down in value. That is, until everyone is selling, and nobody is buying.

We seem to have been in this state since March 2020. There has been some equity market weakness, but we haven’t had what might be called a proper crash. By the time we get it, I may be dead, but I’ll almost certainly have no capital to take advantage of it.

I can’t find the exact quote, but Kuppy (@hkuppy on Twitter) used to argue that you should jump on a bubble (or Ponzi scheme etc.) as soon as you spot it. Of course, we all think we can get out in time, but buying some out of the money puts helps one sleep at night.