Fool.com: The Most Dangerous Short [Fribble] February 29, 2000

Fribble The Most Dangerous Short

By WonderPup
February 29, 2000

In Greek mythology, an oracle was a mystical force with the ability to foretell the future. The oracle was all-knowing, all-seeing, and was renown for its uncannily accurate predictions.

This was certainly an impressive billing and served as an interesting anecdote for me last fall as I studied some new investment opportunities. I had recently left my employer and had a substantial sum of money to roll over from a 401(k) to an IRA. I knew that such a large sum of money is rarely made available for the sole purpose of investment and I wanted to make the most of the opportunity. I performed my research, and was led to an oracle of my own; or, in this case, an Oracle (Nasdaq: ORCL) I wanted to own.

I loved what I saw in Oracle Corporation. Good product, strong position in its sector, solid management. In fact, I had worked with some of their products and felt good about what I saw. I made the decision to buy Oracle as one of the stocks in my rollover portfolio.

Now, back to the Greeks. Another aspect of the Oracle was its notoriety for self-fulfilling prophecy. Its predictions were often dire, and so its visitors often went to great lengths to avoid putting themselves in a situation where the prophecy could come true. In doing so, these visitors placed themselves directly into the situation they thought they were avoiding, thus meeting their fate.

If only this lesson had occurred to me last fall. At the time, Oracle was sitting in the mid-$40s. I felt pretty good about its long-term prospects, but I did happen to notice that it had had some bumps earlier in the year. With such a sum of money, I certainly didn't want to make a foolish (little f) choice and end up losing money. I concluded that Oracle was a good buy, but only once it dipped to $42.

I don't know what Douglas Adams-inspired evidence I had that $42 was the answer to my great question of life, the universe, and Oracle pricing, but that was the number I picked. After all, I only needed it to drop a few points to hit $42, and since a given stock can fluctuate on any given day, I figured it was only a matter of waiting a few days. I was feeling pretty smart the day it dipped into the $43s and I knew my purchase would happen soon.

In a twist of fate that would have made Homer (the Greek poet, not Simpson) proud, Oracle decided to make a run last fall. The problem is, I hadn't boarded the train since my magical $42 had not been reached. As Oracle soared into the $60s, I knew it was just an overly enthusiastic run, and waited for the pullback. A few days later, I waited for the pullback from the $70s to bring Oracle back to the $60s for me. When it hit the $90s, I was sure that the pullback would be all the greater. I looked on in disbelief as it hit $120. It has since split, and today sits at a pre-split price of about $125. I had missed a triple in a stock I had wanted to buy all along. (Rather Homer Simpson-esque, after all.)

Many would have you believe that the most dangerous investment is a short. After all, a short has "unlimited upside risk" -- if you short a stock at $60 and it goes to $80, you have to cover the 20-point loss. I felt sorry for anyone who shorted Oracle at $40 and had to cover it at $120. Then it occurred to me -- that is exactly what I had done. I didn't actually short the stock, but by failing to purchase, I ended up with the same result. In fact, what I did was worse than shorting it, for even if I purchase it now, I could only buy a third of the shares I could have last fall. Twenty years from now, I would still own only a third of what I could have owned. Even if I buy now and it turns into a zillion dollars, I lost the opportunity for two zillion more. With a short, at least you have an end point, but this decision will go on forever.

And thus, my self-fulfilling prophecy was complete. I had been afraid of losing a little bit of money and I turned into a market-timer. As a result, I missed out on a lot of money and turned into a shorter. This, my Foolish friends, is the lesson I learned: Once you have made a decision to buy, not buying is truly the most dangerous short.