Can value investors short stocks?

I was not sure whether I shocked anyone yesterday by saying short sell Treasuries which not a prudent investor will or should do. It is very uncharacteristic of me preaching about conservative investment but suggesting aggressive approach. My purpose was simple - inspire what is the highest level skills of a value investor can possess(I am still not there yet but hoping to be there!). Perhaps this story about Sir John Templeton short the dot com bubble will make my points clear.

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.

Source: http://www.dailyreckoning.co.uk/stockmarket-trading/sir-john-templeton-sell-the-market.html