A Reason Behind the Inefficient Market?

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In my experience, market typically overshoot their valuations which lead to inefficiencies over a short period of time. However, these periods of inefficiencies can last longer than those that bet against it can remain solvent. I have learned this the hard way in the past mostly via large costs of opportunities in my investment portfolios. I continue to look at changes in trends to try to signal more clear indication of these turning points which could add to individual performance over time despite missing opportunities.

I also look to find reasons as to why and how long these trends of market inefficiencies can continue. I believe I have found one given one of the largest trends being seen in the markets today. Special Purpose Acquisition Companies or SPACs as they have been popularized continue to drive the largest influx of capital to markets than seen in years. The last I read, there have been over $80 billion in SPAC IPOs in 2021 already leading to the addition of dozens of new companies listed in Stock exchanges.

This recent trend really seems to be contrarian for me as I believe that a sign of a market top or high valuations is the willingness for owners of private companies to sell their stakes into the public markets. However, given the amount of capital and liquidity in the markets and the risk-off approach of many investors, it is easily being consumed and has actually grown to be a speculative area until just recently. I recently did some research of some of these companies that eventually were merged into these SPACs and have seen even more inefficient pricing in terms of valuations.

Unfortunately, the means to bet against them are limited. I made a list of about half a dozen of these and tried to short sell their stocks. I was unsuccessful as my broker noted that there were insufficient shares available to borrow in order to short. I also tried to make the bets by way of options but saw that the implied volatility of them were extremely high which made them also highly priced. I believe these are causing inefficiencies in markets in the short term. While it could also be due to the increasing awareness of the risks of shorting given the market fluctuations around stocks like GameStop and other, it clearly shows the lack of balance in the markets.

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