[im3w1l]

In addition to the margin call concern, just because a stock is overvalued doesn't mean it will reach its fair value before an adverse event (let's say the company makes a gamble with positive expectation, but it doesn't work out) happens that lowers its fair value. If that were to happen, he could be a few hundreds of millions in debt.

[nickff]

>"In addition to the margin call concern, just because a stock is overvalued doesn't mean it will reach its fair value before an adverse event (let's say the company makes a gamble with positive expectation, but it doesn't work out) happens that lowers its fair value. "

I'll assume that you meant the opposite of this quote (, that the stocks being short-sold beat expectations, and their fair value went up,) as what you said would benefit the short seller.

You are right that the stock could take longer than expected to reach its eventual (lower) value, but this is why you would bet on a large number of stocks (i.e. S&P500), to reduce the risk of a single or few adverse events cancelling out the strategy. In addition, by purchasing the S&P501-750, with the money from short-selling, you would be fairly well protected against market upside risk (as it is unlikely that the S&P500 will be the only stocks to do well in a bull market). You could also purchase options to reduce the risk of the short, but a (simpler) alternative would be to take out a put option on the S&P500, which the better believes will go down; this is obviously somewhere between the portfolio bias approach, and the short approach in terms of risk (and reward if you believe in EMH).