Wie der 88-jährige Hans den Leerverkauf seines Lebens machte

verfasst von kingsolomon, 12.02.2004, 18:12

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by Porter Stansberry

John was 88 years old. He'd been active in the stock market his entire life.

But now he thought it was time to sell.

At first glance, there was nothing unusual about his
desire. Most 88-year olds don't own too many stocks. And,
at the time John decided to sell, in January 2000, stocks
were obviously expensive and therefore risky for conservative investors.

Selling a few stocks was only prudent. But it wasn't
prudence that motivated John. It was profit.

John believed he could make as much money on the way down
as other, more foolish investors had made on the way up. Of course, unlike the bullish speculators, if John was right, he'd walk away with his gains in cash instead of watching them disappear on an electronic quote screen.

It's one thing to have an idea about where the market ought to be heading. It's another thing altogether to bet an entire $180 million fortune on your hypothesis. But, that's exactly what John did, beginning in January 2000. John sold short 84 different Nasdaq stocks, putting an even amount of his fortune against each position - roughly $2.2 million on each stock.

He told his brokers:"This is the only time in my 88 years
I've seen technology stocks go to 100 times earnings; or,
when there were no earnings, 20 times sales. It is insane,
and I am going to take advantage of the temporary insanity."

By"shorting" these stocks, John borrowed shares of stock
from brokers who held large inventories of shares on behalf of their clients. These shares were then sold in the market. The money from each sale was put into John's margin account. John was now on the hook for the shares that he'd borrowed and sold. If the shares rose in price, he'd lose money - perhaps all of his money - because he'd have to buy the stock back at a higher price to repay the brokers from whom he'd originally borrowed the stock. On the other hand, if the shares fell in price... John would never have to repay the full value of his loans, earning him a profit.

He told his brokers to sell short every new technology IPO
that came to the market in 2000 - every single one. He told them to establish his position 11 days before the stock's IPO lock-up expired, which was typically six months after the IPO took place. In this way, John was selling just before all the company's insiders were allowed to dump their shares.

In about half of these positions, the stocks fell 95% or
more before he"covered" his short position, repaying only
about 5% of the value he'd borrowed. In other stocks, he
covered when share prices retreated to more reasonable
multiples of earnings (30 times earnings). On average, he
made over $1 million per position, increasing his fortune
by 50% in just a few months.

Even for Sir John Templeton - the"John" in our story -
this stock market operation was the trade of a lifetime. As you probably know, Sir Templeton is one of the world's all-time best investors. He is famous - and was knighted in 1987 - because he made fortunes for long-term holders of his emerging market mutual funds, which profited by
investing in dirt cheap foreign growth markets, like Japan
in the 1970s and Peru in the 1980s.

Sir Templeton grew up in rural Tennessee. He attended Yale, but was only a mediocre student until the crash of '29. The crash wiped out his father, who could no longer pay for Sir Templeton's education. To stay in school he had to earn a scholarship. Only the top students were awarded such grants... so he became the top student in his class and, in addition to his Yale tuition, was awarded a Rhodes scholarship to study economics at Oxford.

Today Sir John Templeton is a British citizen and lives on
Lyford Cay, in the Bahamas. He's still - even at 91 -
active in the markets. He granted an interview to Forbes
magazine earlier this year. He offered a warning to
investors, telling them it's difficult to find reasonably
priced stocks anywhere in the world."You can always find
bargains somewhere but it's difficult now. My advice is to
own government bonds." He's not recommending U.S. bonds,
but bonds from countries that don't have huge fiscal and
trade deficits - like Hong Kong, Singapore and South Korea.

I found Sir Templeton's recent remarks significant because, for the first time since January 2000, when he began his now famous short selling operation, you will find Nasdaq 100 stocks trading at the same kind of absurd valuations as they did at the top of the bubble.

Personally, I think the craziness started back in September of last year. That was the month when Prudential, which is the only major Wall Street brokerage that doesn't also conduct investment banking operations, altered its rating system. Instead of having its analysts decide objectively if a stock offered good value, Prudential instructed its analysts to offer only"relative" valuations. In other words, nobody was willing to tell investors that things were getting out of hand. Instead, as long as all stocks were getting equally overvalued, Prudential could still find something to recommend to you. Great.

And so today The Wall Street Journal is once again
reporting on the lives of 20-something financial whiz kids
who have been mistaken for geniuses in the midst of a
raging bull market.

Featured last week was Mr. Bret Grebow, the 28-year old
manager of HMC International - a hedge fund. Bret is so
confident that he'll be able to maintain the 40% annual
gain his fund scored last year that he recently purchased a $160,000 Lamborghini Gallardo. Bret's big winnings allow
him to keep a residence in Highland Beach, Florida and an
office in New York City. He charters a $10,000 per flight
jet for the round trip. In reference to the jet, Bret told
Wall Street Journal reporter Gregory Zuckerman,"It's
fantastic. They've got my favorite cereal, Cookie Crisp,
waiting for me, and Jack Daniels on ice."

Another hedge fund manager rented Versailles for his
wedding last summer.

And broker Grant Morgan, who says"We're comfortable the
market won't take a new downturn," was confident enough in
his future earnings to spend a week at the Breakers in Palm Beach... after buying a $150,000 Ferrari 360 and spending $600,000 to remodel his home.

Once, not too long ago, I was a part of the hotshot crowd,
piling into growth stocks without a care. Well, at least in a small way. For a short time, I posted gaudy performance numbers. My picks were up 134% in 1999. And I heard people tell others that I was a"genius." I remember squiring my girlfriend around New York City, staying in hotels that cost more than a month's rent just for the night. As your editor, Bill Bonner, wrote of me, I was living as though God whispered in my ear.

But, having been a part of that once, I remember all too
clearly how it ends.

In November of 2000, I hosted a lavish conference for high-
tech, growth-stock investors at the Ritz-Carleton in
Montego Bay, Jamaica. In the days leading up to the
conference, my portfolio collapsed. As I hit my stops, I
sold, sometimes at a loss.

One of the speakers at the conference was a director of VA
Linux, a company that was attempting to compete directly
against Microsoft by selling desktop computers with a
version of the free Linux operating system installed on the hard drive, instead of Microsoft's Windows. In other words, its business plan was the Charge of the Light Brigade. On the day of his presentation in Jamaica, VA Linux's stock dropped 20%, reducing this director's net worth substantially - probably by more than a million dollars. He flew home the next day. VA Linux had become the largest loss ever recorded in my model portfolio.

The conference attendees - my best customers - were stunned when, in my closing presentation, I warned them about the impact of the Fed's interest rate tightening, which had produced an inverted yield curve, making it prohibitively expensive for speculative companies to get additional financing. I wrote the same message in my newsletter, to all my subscribers: get out, it's a bear market and it's going to last a while.

People were angry. In less than a year I'd gone from a
genius to a fool. As the market began to spiral lower, I
lost most of my subscribers, who had largely ignored their
stop losses and my warnings of an impending bear market.

I lost my bull market girlfriend, too.

But I learned a very valuable lesson: what you put at risk
in the market is far more important than what you might
gain.

Given this background, the run-up of 2003 looks
suspiciously like the party year of 1999 to me - and the
risk of stock investing in 2004 akin to investing in the
year 2000. As Templeton told Forbes, there are almost no
cheap stocks, anywhere in the world. Within the S&P 500
there are only 10 stocks that have P/E ratios below 10.
That's the lowest tally of cheap stocks ever, according to
Barron's.

What should we do when all of the signs, not least the
crumbling dollar, point to higher interest rates? What
should we do when the world's best, most experienced
investors issue public warnings about worldwide stock
market prices? What should we do when there are literally
no reasonably priced stocks trading in the entire U.S.
market? What should we do when individual investors are
wildly bullish, but insiders are selling at a record
setting pace?

It's simple. We sell the market.

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• Wie der 88-jährige Hans den Leerverkauf seines Lebens machte - kingsolomon, 12.02.2004, 18:12