Eric Boughton_

Why Shorting Amazon Is a Bad Idea

Richard, I am short Amazon, and I fully respect your decision not to short Amazon. However, I will take issue with one of your basic points: "Betting against richly valued stocks is very seductive, because they are so easy to find..."

Richly valued large-cap stocks are absolutely not easy to find. Let me run a question by you: How many $3 bln mkt cap US-domiciled companies have both a PE above 30 (not a really high bar) and a price-to-book multiple above 3? Answer: 29. How many $30 bln mkt cap companies have both of these characteristics? Answer: precisely 2, namely Apple and Amazon.

Why does it matter that they are large-caps? For a short in richly-valued stocks to work, the law of large numbers must come into play before, in your words, the earnings have "time to grow into the stock price". Those, like me, who short ridiculously valued large-caps have the odds overwhelmingly stacked in our favor, because the odds of the company significantly increasing its earnings BEFORE the market assigns a fair DCF value to the stock are quite low.

And a return to fair value just creates your garden variety successful short; the real 'juice' happens when the company stumbles, like so many well-regarded companies eventually do.