Posted on: Sunday, April 8, 2001
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High Performance From Shorting Stock
Comstock's Skeptics, Bruised in Bull Market, Expect to Profit From a Long Decline

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The $55 million Comstock Value Fund was one of the top-performing actively managed funds for the quarter, with a gain of 21.67 percent. The fund, started in 1987, both owns stock and shorts stock -- that is, it sells borrowed stock, hoping the price will fall. (Shorts make money if they can buy shares later at a lower price when they have to return the stocks they borrowed.) Believing the market was in "the greatest bubble ever in history," the fund has not owned stock since 1996. It missed the entire bull market. That skepticism cost its once-famous managers, Charles Minter and Martin Weiner, a great deal of money, as well as credibility. Following are edited excerpts from Minter and Weiner's interview with Washington Post staff writer Carol Vinzant. QWhat were you investing in last quarter? AMINTER: We had no long positions over the last quarter. We had puts [bearish option contracts] on the S&P 500. We were short S&P futures contracts and we shorted up to the maximum amount of common stock that we have the ability to short. That's 25 percent. What particular stocks did you short? MINTER: Everything that was in the absolute froth of the market in the first quarter of 2000 -- the Oracles and Ciscos and Dells. WEINER: We were short a lot of the well-known names. We started in March, when the Nasdaq looked like it was falling out. . . . We've shorted stocks over $200 that have gone to $20. What will be the important factors in the market in the next quarter? WEINER: When people realize the market is not coming right back, we think there is going to be massive selling. We think there are going to be negative earnings and revenue warnings that are going to be very disappointing to investors who think the market is coming back anytime soon. In the last 18 years, if you bought every dip, you would have made money. They always think the market is going to make money. The '29 peak was not reached till 25 years later. The '66 peak was not surpassed until 1982. How do you evaluate the market now? MINTER: The main thing we are concentrating on is the fact that this stock market is, without any question in our minds, the greatest bubble ever in history. Textbooks will be talking about the massive public participation. They were valuing stocks by the number of eyeballs looking at a Web site. The metrics were not anything in Graham and Dodd [authors of "Securities Analysis," the bible of fundamental investors]. When something like this breaks, it's not going to stop at normal valuations. When this happened, it set unprecedented peaks in every area -- in terms of price-to-earnings, price-to-sales, price-to-cash-flow, price-to-book-value. As we say on our Web site,, we measured these metrics at the peak of the bull market and also identified where these same metrics troughed in the bear market that followed. In order to determine how low this stock market can go, all you have to do is to determine if this is a normal bear market. If you do, you might want to use historical averages. How low do you think this market is going? MINTER: This would probably have to drop to 10 times earnings. You could come up with a number that we don't think is outrageous of 500 for the S&P 500. WEINER: And you don't even need that. If you knew the market was going to the 700s, that would be reason enough to sell. When would you start buying stocks again? WEINER: In order to get back in, we would like to see some sort of capitulation on the part of investors. We'd like to see averages go back to more normalized rates, like 15 times earnings. MINTER: That would be the absolute maximum we would be thinking of. When you break a bubble like we've just broken, we think it would go to the trough valuation, not the normalized valuation. © 2001 The Washington Post Company

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