Newton’s laws of gravity may well be applied to stock markets, and the statement “What goes up must come down” is definitely applicable to Google’s stock market performance in recent times.
It appears that the present bull market may be sustainable with supportive economic conditions made possible by healthy, strong reads on housing, consumer prices, payroll and employment levels as well as retail prices. However, not too long ago market conditions for U.S. search giant: Google Inc. seemed bearish.
Wiz-kids Larry Page and Sergey Brin filed IPO for their star-child, global search giant on July 26th, 2004. With a string of innovative Google services, such as, Google e-mail: Gmail, satellite based 3D mapping product: Google Earth and Google IM, share price inclined by 140% in a span of nine months (March 2005 – January 2006) outperforming the S&P 500 Index and Dow Jones Industrials (see chart below).
Soon after, however, Google share prices plummeted by over thirty seven percent (mid-January to mid-March to be precise). Were Google’s innovations and products ground-breaking to inflate share prices to record levels after their IPO? What was the market-sentiment and investor belief behind Google’s bullish stock-price drive? At present, whether stock prices will incline or decline well into the long run (future forecast and predictions) still remains a debatable topic, as financial and stock market analysts have different opinions, based on various financial and technical tools of analysis.
I strongly feel that Google Inc. reached its peak (and also tip-off) point with respect to stock prices, and considering stock markets are more rational on a long term basis, Google stock prices will pick up and rise, but will not reach past record levels, after which they will continue to stay at a certain level. Undoubtedly, Google shares were hyper-inflated and their past highly inflated growth rate is not sustainable.
How then could Google investors maintain their portfolios and increase their value during Google’s bearish environment and poor, stock market performance? Through an advanced investment technique called short-selling (Going short is when an investor anticipates a decrease in stock price and profits when stock prices actually decline).
So what exactly is short-selling and how does it work? When investors sell short stocks, their brokers lend them the security. Basically, stocks come from their brokerage firm. Once the investors sell the borrowed shares the proceeds are credited to their account. When stock prices decline (based on the investor’s willingness to test market conditions, risk tolerance level and experience with respect to selling short) investors will close the short by purchasing back the same number of shares and then returning the shares to their brokerage firm. When investors repurchase the stocks at a lower price, they make a profit on the difference. Most investors may employ the short-selling strategy as an advanced hedging tool to protect their long positions with offsetting short positions. George Soros practiced short-selling in 1992 when he risked $10 billion that the British pound would fall and profited $1 billion through his risky, speculative investment.
However, the extent to which short-selling may be an effective investment tool depends on the extent to which the potential risks and limitations of short-selling are evaluated. For instance, I personally feel that stock markets are more rational in the long run, and consequently, also feel that generally, over time, stocks have an upward drift, thus, making the short-selling strategy a risky investment option to adopt. Furthermore, investors should also weigh and add in the costs of inflation that would also somewhat drive stock prices up. Moreover, shorting stocks is involved on margin trading, which may mean that brokerage firms request that stocks lent be returned, referred to as calling away. Furthermore, if at one particular time many investors practice short selling, all things being equal, investors may have a higher possibility and risk of incurring a loss, since as stock prices start to rise, a large number of short sellers will try to cover their positions and so drive up prices even further. This phenomenon is known as a short squeeze.
Thus, had Google investors in January analyzed Google Inc.’s intrinsic value, cash value of their products, and evaluated the company’s then record-high stock price, they could have employed the shorting strategy, in which case, they would have made a profitable return of above thirty seven percent on their investment. In conclusion, short selling may not be every investor’s investment tool. However, if investors possess the risk tolerance, short selling may well be a profitable investing style, particularly when economic and market conditions are bearish and unfavorable.
University of Bridgeport
Monday, July 14, 2025