How to Short the Bubbliest Firms(economist.com)
economist.com
How to Short the Bubbliest Firms
https://www.economist.com/finance-and-economics/2025/11/26/how-to-short-the-bubbliest-firms
46 comments
The market can stay irrational longer than you can stay solvent.
Said another way: “being too early is the same as being wrong”
I’d change to “can be the same as being wrong” and agree. All these people out there thinking their being oh so clever with bubble this short that etc. Everyone knows.
One of the idiosyncrasies of modern human society is that we’re pretty good at knowing how things we create or initiate can go wrong, particularly with the economy. We’re just not great at perfectly understanding the degree of risk or the probability or at what point/level it goes wrong. That’s why I’ve never really got all the chat of “economists have predicted xx of the last x recessions yadda yadda”. I’m fine with that, I’d be more concerned if they predicted 0 of the last x recessions.
One of the idiosyncrasies of modern human society is that we’re pretty good at knowing how things we create or initiate can go wrong, particularly with the economy. We’re just not great at perfectly understanding the degree of risk or the probability or at what point/level it goes wrong. That’s why I’ve never really got all the chat of “economists have predicted xx of the last x recessions yadda yadda”. I’m fine with that, I’d be more concerned if they predicted 0 of the last x recessions.
Your quote is something that AI mania speculators often like to reassure themselves with, but consider the fact that it took 17 years for the NASDAQ to recover from the dotcom bubble when adjusting for inflation. What's being early by a year or two when the consequences take decades to heal over?
You are misunderstanding the quote.
If you want to sell all your tech stocks because you think that it's irrational then take your neutral position. You won't profit from stonks going up but you won't get anything from them going down either. You've isolated yourself from them.
What the quote is advising against isn't neutral positions or pulling out early during an upturn. It's about trying to time downturns.
If you want to profit from a stock going down, you need to hold inverses like shorts or selling call options / buying puts. These inverses are always short term positions, there is no such thing as a cheap long term asset that profits when stocks go down.
Basically if you want to profit from a predicted downturns, becuase you think some asset is irrationally overvalued, then you don't just need to be right, you need to be right and time it. Because it doesn't take long before you go bankrupt holding these sorts of inverses. Aka market stays irrational longer than you can solvently hold these risky positions.
The 17 year recovery time literally has nothing to do with this btw. It's all about short term.
If you want to sell all your tech stocks because you think that it's irrational then take your neutral position. You won't profit from stonks going up but you won't get anything from them going down either. You've isolated yourself from them.
What the quote is advising against isn't neutral positions or pulling out early during an upturn. It's about trying to time downturns.
If you want to profit from a stock going down, you need to hold inverses like shorts or selling call options / buying puts. These inverses are always short term positions, there is no such thing as a cheap long term asset that profits when stocks go down.
Basically if you want to profit from a predicted downturns, becuase you think some asset is irrationally overvalued, then you don't just need to be right, you need to be right and time it. Because it doesn't take long before you go bankrupt holding these sorts of inverses. Aka market stays irrational longer than you can solvently hold these risky positions.
The 17 year recovery time literally has nothing to do with this btw. It's all about short term.
If you short a bubble before it goes vertical you lose everything.
See the other posts in this thread discussing Nassim Taleb's strategy of small bets spread over time with highly asymmetric rewards. You can afford to lose it all on small bets nine times in a row, if on the tenth bet you achieve a 100x payout.
Yea but where can I play that kind of game?
Just get a job as a principal in a VC firm. Upskill or gtfo
Derivatives! more popularly known as options (“calls” and “puts”)
The Nasdaq 17 year figure is only true from the peakiest peak of ~4800 in March 2000. Two years earlier, in March 1998, it was at 1750. It had hit 1750 again by August 2023.
All this to say... shorting 1-2 years early doesn't work. You don't have the patience or capital to actually maintain a short position for two years while the market goes from 1750 to 4800. You can cheaply sit out in cash, if you want, but that's not a short position. And the S&P500 hasn't seen the kind of 300% run-up over an 18 month period that Nasdaq did in the dotcom boom.
All this to say... shorting 1-2 years early doesn't work. You don't have the patience or capital to actually maintain a short position for two years while the market goes from 1750 to 4800. You can cheaply sit out in cash, if you want, but that's not a short position. And the S&P500 hasn't seen the kind of 300% run-up over an 18 month period that Nasdaq did in the dotcom boom.
typo: by August 2003, of course.
and shorting something priced in a currency is effectively going long on the currency as well. If the USD takes a dive due to, idk, increasing populism from both major parties, stocks will do quite well in nominal terms. Your shorts will burn and you'll end up far worse than just staying in cash.
For most people, the best way to short is to just hold cash equivalents like short-term treasuries.
For most people, the best way to short is to just hold cash equivalents like short-term treasuries.
You can use the cash you get from shorting to invest in other assets. Shorting doesn’t require you to hold cash.
What is an example of shorting something not priced in a currency?
Short the stock, go long the appropriate index.
eg: If you think NVDA is overvalued relative to the overall tech sector, you could short NVDA, go long QQQ.
And if you have a more opinionated trade in the same currency, eg: you think AAPL will be fine if the AI trade pops, you can do short NVDA, long AAPL.
Finally, an even more advanced version would be to go long on something else in the same sector, but which is less overvalued in your opinion. eg: Short ORCL, long NVDA.
eg: If you think NVDA is overvalued relative to the overall tech sector, you could short NVDA, go long QQQ.
And if you have a more opinionated trade in the same currency, eg: you think AAPL will be fine if the AI trade pops, you can do short NVDA, long AAPL.
Finally, an even more advanced version would be to go long on something else in the same sector, but which is less overvalued in your opinion. eg: Short ORCL, long NVDA.
Positions are not necessary to be single transaction. They can be multi-step trade.
For global currency risk (meaning on USD), You will have to hedge your shorts with a non currency long position which historically hold value during defaults/ runs etc. Assets like gold (ETFs/Gold bars) or real estate (REITs or physical land holdings) or rights to commodity revenue like oil, copper etc [1].
If the currency risk is not for USD, then mix of other currencies particularly USD would work well as as hedge.
Currency risk is independent of shorting, i.e. it is risk in Long positions as well, current may inflate faster than your position increases in value etc.
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[1] Commodity come with additional shorter term market volatility and risks - due their own supply/demand volatility and depend performance of economy.
However after assets like Gold, they will have highest correlation of returns against inflation as long the economy doesn't completely crash, because the demand for them is foundational
For global currency risk (meaning on USD), You will have to hedge your shorts with a non currency long position which historically hold value during defaults/ runs etc. Assets like gold (ETFs/Gold bars) or real estate (REITs or physical land holdings) or rights to commodity revenue like oil, copper etc [1].
If the currency risk is not for USD, then mix of other currencies particularly USD would work well as as hedge.
Currency risk is independent of shorting, i.e. it is risk in Long positions as well, current may inflate faster than your position increases in value etc.
---
[1] Commodity come with additional shorter term market volatility and risks - due their own supply/demand volatility and depend performance of economy.
However after assets like Gold, they will have highest correlation of returns against inflation as long the economy doesn't completely crash, because the demand for them is foundational
I don't think GP is suggesting any particular bet isn't priced in some currency, just that you're also taking currency risk you might not be aware of.
also you may have to pay interest on shorted shares. Better to take a Burry/Taleb approach of extreme option bets with small money.
My understanding is that an extremely OTM put on a clear, strongly held thesis would be Burry-like, and many people would be able to do so.
But Taleb's point is that (non-insiders) cannot accurately predict regarding individual securities (hence derivatives), but can identify over-/under-priced OTM options — and that, trading these systematically, one can suffer many repeated "small" losses that become outweighed by the Big One that eventually (yet unpredictably) hits, thus generating overall positive expected value. But, as I further understand Taleb, most people don't have the huge capital that enables such a strategy, and that doctors, lawyers, dentists, etc., are better off making money by plying their professional services and perhaps investing in index funds and the like.
But Taleb's point is that (non-insiders) cannot accurately predict regarding individual securities (hence derivatives), but can identify over-/under-priced OTM options — and that, trading these systematically, one can suffer many repeated "small" losses that become outweighed by the Big One that eventually (yet unpredictably) hits, thus generating overall positive expected value. But, as I further understand Taleb, most people don't have the huge capital that enables such a strategy, and that doctors, lawyers, dentists, etc., are better off making money by plying their professional services and perhaps investing in index funds and the like.
How do you take advantage of these options without getting screwed by the bid/ask spread? Whenever I think I see one, the spread kills it for me.
it's not 100% real, I bought a call last week at a deep discount to the ASK.
Do you remember the stock market a few decades ago? Stocks once had large bid/ask spreads. Now the hft/dark pools eat it all, with 99% profit on trades. High speed, lasers and fiber optics front-running..
Do you remember the stock market a few decades ago? Stocks once had large bid/ask spreads. Now the hft/dark pools eat it all, with 99% profit on trades. High speed, lasers and fiber optics front-running..
Buy the options with the intention of them either hugely appreciating in value or expiring worthless. Under Taleb's system, your bet sizes should be small enough that it doesn't matter if individual options tranches expire worthless. The bid/ask spread only matters when you try to cut losses on a large bet, which is outside the scope of this strategy.
look at strikes where higher OI is. everything will be arbd out by bots on anything that isn't thin though. i trade futures for this reason though, because they are actually centralized unlike us equities. selling calls for a credit or spreading into free long entry is a better strategy in every way though.
You will end up paying that "interest" on long put positions. The advantage of options is an ability to make more granular bets.
You also have to pay dividends on the shorted shares.
Thought terminating cliches only terminate thoughts if you allow them to.
The market is rational. If it's is not doing what you expect, then you are the irrational one.
When pets.com is selling dog food for less than it costs, but the stock price keeps going up, that is rational?
[deleted]
https://archive.is/TJAfs
It's pretty clearly not a "how to" that ordinary people can practically use. More like "How someone else might do it."
It's pretty clearly not a "how to" that ordinary people can practically use. More like "How someone else might do it."
I got in on 4 of the big quantum computing stocks ~a month ago. I haven't felt this good about a short since Nikola; one of the few times I will use "money left on the table".
I miss Hindenburg.
Unfortunately, most of the scammiest companies (e.g. ones you hear about on HN) are not IPOed, so you can't short them using traditional methods. I'm glad the article points out some non-traditional ones, but I'm not clear on how to actually do it.
I miss Hindenburg.
Unfortunately, most of the scammiest companies (e.g. ones you hear about on HN) are not IPOed, so you can't short them using traditional methods. I'm glad the article points out some non-traditional ones, but I'm not clear on how to actually do it.
I just use $QTUM
I hope you lose a lot of money on at least one of those positions. I want to be in a timeline where quantum and AI computing grow up together.
What do you want quantum to do? I thought it's good for medicine discovery and material discovery, where you might simulate physical quantum processes, but it's quite theoretical that we actually get an outcome from that isn't there? Is there any drug/protein/molecule simulation that people are trying to do but classical hardware is too slow to bother?
Qubits are neat and all I just won't be places bets.
Qubits are neat and all I just won't be places bets.
So you want all the humans replaced then?
Automation is inevitable, has happened non-stop since the industrial revolution. Imo we should never "protect jobs" when in the end they will hurt the vast majority of other people.
Do you ever pair trade or hedge your shorts by buying indices? For example, short the quantum stocks but buy NASDAQ index (or call options) in case everything keeps going up?
Hard to say, because most of what I own is indexes. I do explicitly do an inversion of this: Counter my index positions of certain stocks I don't want to own by shorting them in small amounts. So, these shorts are a hedge, vs a stock I think is worthless/fraud like the QC ones.
That’s awesome, thanks!
do you have a stop loss?
"how to take a mom from a toddler" when nobody is around?
I bet there's an entry in some dude's journal from the 1100s
I bet there's an entry in some dude's journal from the 1100s