I was having dinner with a friend last night and we spoke about shorting stocks like Netflix and Salesforce.com. I have little doubt what the ultimate fate of these stocks will be. However, the chances of being left standing as a short seller when these stocks ultimately go down is not very high. I have had very bad experiences with these types of shorts.
In 2006 I came off of two very successful short selling campaigns. When GM was trading close to $50 I purchased leap Puts at the 30 strike. There was a bankruptcy scare that year that allowed me to cash out of those Puts at many times my purchase price. That summer I also caught the top in Toll Brothers, which made me dangerously confident.
Commercial real estate busts tend to follow residential busts by about six months and the residential market had clearly rolled over. I aggressively started shorting CB Richard Ellis' stock and buying puts. The company was trading at a high multiple of earnings that were dependent on a real estate bubble.
Despite the fact that I was ultimately correct, the stock tore me a new one and major damage was done to my account. I was forced to turn tail and puke up my position. Ultimately, the stock traded to $3 but I was not there to collect.
That feeling of knowing I was right but having no choice but to take a huge loss is still etched in my mind and I try to avoid putting myself in that situation again at all costs. So when I look at Salesforce.com trading at 100 times 2012 earnings I think about selling it short and then the flashbacks kick in.