I learned the truth of the saying "the market can stay irrational longer than you can stay solvent" recently through my CAPS portfolio. When I started up the portfolio I added a few stocks that I actually liked, but then went about putting big, fat underperforms on all of the stocks that I think have no business trading at the multiples that they do.
The high profile guys like HANS, AMZN, BIDU, SIRI, YHOO, and GOOG (among others) were my initial targets. The outcome? I got slaughtered for the most part. Trying to go against the tide on these stocks was like stepping in front of a Mack truck, or, 'scuse my French, pissing on the proverbial electric fence. Painful.
I'm not and never have been a short seller with my real money so I was approaching the whole thing from a pretty simple angle - if the valuation is too high, short it. My lesson? Stocks with no real business and just trying to grab enough cash to keep the lights on are typically pretty safe shorts. For the other guys - good businesses like AMZN that just have valuations that are too steep, well, those are best avoided until there's already blood in the water. Good examples of when to hop in the mix - YHOO, HANS, and SIRI. All got nicked and the sharks started circling. BIDU, AMZN, and a bunch of the others are still staying safe for now.
Waiting until the stock already starts it's downward slide does miss you a few points at the beginning, but it also keeps you from getting killed if it keeps running up (picking tops and bottoms is a suckers' game anyway).