The Perils of Shorting: A Real Life Example

[Sarenco]

...can you help us to compare like with like and disclose how your share investments have done over the last 5 years?

To what end?

Colm has never claimed to be a better stock picker than any professional or to be able the beat the market and is not trying to improve the risk-adjusted return on his portfolio or to limit his risk of bombing out completely.

Colm has told us (I'm paraphrasing) that he derives a significant degree of comfort or reassurance from having a more direct connection and understanding of the highly concentrated portfolio of publicly traded companies in which he holds (or shorts) shares.

I struggle to understand why anybody would voluntarily expose themselves to such a high degree of idiosyncratic, diversifiable investment risk. But I do understand that psychology (however irrational) plays a huge role in investing success.

To be fair, Colm has been at pains to emphasise that he doesn't advocate that anybody follows his approach.

 

[Colm Fagan]

disclose how your share investments have done over the last 5 years?

This is ridiculous. Total return is all that matters. Do you want me to split it into its component parts just to please you? I've better things to do with my life.

 

[Gordon Gekko]

This is ridiculous. Total return is all that matters. Do you want me to split it into its component parts just to please you? I've better things to do with my life.

I am talking about total return. My question is pretty simple; what has the total return on your share investments been since you commenced this approach (which I think from memory was 5 years ago)?

But never mind.

 

[Colm Fagan]

Are you sure you're not looking for the total return on the shares in my portfolio which have factories in Indonesia making widgets for midgets? This is getting more ridiculous by the minute.

 

[Gordon Gekko]

Are you sure you're not looking for the total return on the shares in my portfolio which have factories in Indonesia making widgets for midgets? This is getting more ridiculous by the minute.

Sorry Colm, but I am exiting this conversation. I am surprised and disappointed at the tone of your post. You are courting publicity in relation to your strategy but you won’t subject it to any meaningful analysis. You claim that you’re not advocating that others follow your approach but the problem is that people will. Vague innuendo is thrown out about the cost of giving money to professionals to manage versus your own approach. The problem is that the real cost (i.e. the opportunity cost) of the self-managed approach is typically gargantuan...underperformance and loss of wealth. You would be wise to remember the old adage, “if you thought professionals are expensive, try hiring an amateur”. The disdain for professional money managers that is being fed by this thread is preposterous. Yes, there are bad managers out there and guys like Woodford who lose their way and do silly things. As is the case in any walk of life. I would simply urge others not to follow Colm’s lead; you will probably lose.

 

[Sunny]

This whole thread has gone ridiculous. People are openly discussing taking long and short positions on one share which I didn't think we were allowed to discuss.

What does it matter what Colm does? It is interesting to read and I enjoy his posts but anyone who takes his advice or anyone elses advice about following a particular investment strategy from this site needs their head examined....

 

[elacsaplau]

To be fair, Colm has been at pains to emphasise that he doesn't advocate that anybody follows his approach.

At a general level, my take-aways from Colm's diaries and his posts on AAM are:

1. He prefers a very concentrated equity portfolio; and
2. He argues that individual retirees currently (i.e. forgetting about his pooling proposals) should invest, pretty much, all of their ARF in equities.

Colm is perfectly capable of managing his affairs as he sees fit. However, frequently, I have tried to point out to Colm that both of the above approaches are not suitable to the majority of investors. Regrettably, all too often, when I attempt to challenge Colm, the thread degenerates into the type of exchange in the above few posts. In the latest exchange, it is quite clear to me what Gordon was asking. Arguably, to ask as Sarenco did "to what end" is legitimate...…..but it is completely bogus and disappointing to repeatably try to misinterpret what Gordon was asking.

A few days ago, I saw that Colm had acknowledged that his advice to others would be to invest in a low cost world passive index. I was pleased by this as I do not recall Colm making such an admission previously. Yesterday, when I went to quote this admission (in my post #172), I couldn't find the relevant statement. In post #177, Sarenco quoted what I had missed and subsequently I corrected, without prompting, my wayward post.

So personally, I think that it's a bit of a stretch to say that Colm has been at pains to advocate that others don't follow his approach.

Nonetheless, I am very happy that the message goes out that investing one's equity allocation in an appropriate low cost passive all equity fund is the way to go for the over-whelming majority.

In relation to the make-up of one's equity allocation, if Colm believes that the great unwashed should "do what I say, not what I do", one wonders what (again as I have asked before to no avail) is the point of the investment diaries? I share Gordon's fear that certain will be led by what they believe is a thought leader and that there is a reasonable likelihood that they will get mushed, at least to some extent, as a result.

Colm's advocacy of almost total allocation to equities in one's ARF is similarly dangerous. Ordinary folk who follow this advice are taking on excessive risk. This, however, is beyond the scope of this thread.

This whole thread has gone ridiculous. People are openly discussing taking long and short positions on one share which I didn't think we were allowed to discuss.

What does it matter what Colm does? It is interesting to read and I enjoy his posts but anyone who takes his advice or anyone else's advice about following a particular investment strategy from this site needs their head examined....

Fair comments, Sunny.

Colm has been afforded a special status on AAM which allows him - uniquely - to discuss shares of particular interest to him. With such privileges comes certain responsibilities. Colm is an intelligent and very experienced businessman and an awful lot of what he writes makes sense. Regrettably, in my experience, Colm tends to take my robust criticism of his views, very personally - which is not my attention. [It is true that when I am at the receiving end of the type of deliberate obfuscation apparent in the above posts that I have, on occasion, reacted in kind!]

It is because so much of what he writes makes sense that I believe that certain folk will not be able to distinguish the wheat from the chaff in his posts. Getting back to what I have understood as his two central themes -it is great that Colm himself has acknowledged that point 1 is inappropriate to the majority. Someday, hopefully soon, the word will clearly emanate from this site that all-in equity with your ARF is not that smart for most people!

 

[Duke of Marmalade]

I note that the thread has become highly personalized at times. Colm is at an unfair disadvantage in that his challengers are anonymous. There is no disclosure of potential conflicts for example.

 

[elacsaplau]

Duke,

Chances are that your post is directed at me - at least in part?!

If you believe that anything that I said is unfair, I am sorry. That said, I took great care in making sure my comments were measured. If there is anything in particular that you feel is inaccurate or unfair, I will correct the record if your feedback is appropriate - in the same way as I corrected, without prompting, the mistake that I made yesterday in post #172. [Just to note, I'll be heading on a flight shortly so I may be a little while in responding].

I strongly disagree with Colm's strategy - I am not worried for him personally but just deeply concerned about the messaging. All I have ever tried to do is to point this out and also.....to point out the difficulties that I have experienced in pointing this out - i.e. in many other threads, I am Gordon...........and, in my opinion, my words were not afforded appropriate respect in various ways. The bottom line is that I don't want the ordinary man to try out Colm's approach at home!

I get it that people can greatly attach to their views. Ultimately, my primary concern is what's right - not who's right. Shouldn't we all be of this view? So again, if anything that I said is ad hominem, I apologise.

The attachment between one's views and one's being invariably poses challenges because it is often very difficult for us mortals to distinguish between the two. I am guilty of it myself and need, in the words of DeMelo, to be careful of my attachments. And these attachments seem to particularly thrive on internet forums! My favourite reminder of the overlap between the person and the thought/action comes from, arguably, our greatest poet.....

O chestnut tree, great rooted blossomer,
Are you the leaf, the blossom or the bole?
O body swayed to music, O brightening glance,
How can we know the dancer from the dance?

As my tendency is to answer questions asked of me, I am happy to disclose that I believe that I do not have any conflicts of interest in this regard. In any event, irrespective of my personal circumstances or interests, real debate of the issues should be what ultimately matters.

Finally, separate from the investment discussions, the use of the term "midget" is now generally viewed as pejorative, if not outright offensive and is, in my opinion, highly inappropriate.

 

[Fella]

@Fella You should have done your long trade with me, since I increased my short position at the open today. It would have saved us both a few bob in brokerage costs and bid-offer spreads!
In answer to @Andrew365 , my plan at the moment is to ignore price movements - in either direction - between now and when the full year results are published, probably at the end of January. In the meantime, I won't get too excited or depressed by moves in either direction. Massive short-term volatility is par for the course with Tesla.

When I bought Tesla less than a month ago it was 332 its 376 as I type , you shorted the same day . My position is not enough for me to become emotionally involved its just a bit of fun , I wouldn't like to see you lose a lot of money on this as its not winning me a lot . How much is this Tesla rise costing you? Do you just stay in and keep taking the hit , I really feel your making a mistake shortening this company , I genuinely like your posts and you seem like a good guy I'm always fearful when I hear of been doubling down I've seen many a shrewd gambler chasing big value bets that had a positive EV but ending up bust because of staking strategy.

 

[Colm Fagan]

Hi @Fella. Yes indeed, you're doing very well at the moment! Well done!

I still stand by what I wrote in #140 above:

my plan at the moment is to ignore price movements - in either direction - between now and when the full year results are published, probably at the end of January. In the meantime, I won't get too excited or depressed by moves in either direction. Massive short-term volatility is par for the course with Tesla.

I've seen nothing since the Q3 results were announced to cause me to change my assessment of the stock. Yes, Musk won the 'pedo' court case, but that has nothing to do with the company's business prospects. Therefore, since my view on the company's prospects haven't changed, I've retained my short position. In fact, I increased it again last week!

As you surmise, the price rise is proving costly, and each 5% rise costs more than the last 5%. That's a sobering thought.

Of course, I can't let my belief that Tesla is ridiculously overvalued cause me to lose my shirt. I assure you that I'm aware of that risk. It helps that the long positions in my portfolio are rising in value at the same time, and the increase in the value of my long positions is significantly more than the loss I'm suffering on my short positions. (I have one other short position, which I plan to write about in my next update. I had hoped to publish it this week but it will probably be delayed until the new year for domestic reasons. I'm also losing on that short position, but it's a different type of loss to the Tesla one, for reasons that will become clear when I write the update.)

It's important to qualify my statement above that the gains on my long positions are greater than the losses on my short positions. That's true, but the gains are mostly unrealised, while the losses have immediate cash consequences, both in terms of there being less cash available in my spread bet account and also an increase in margin requirements. It's important to have contingency plans to deal with the resulting cash flow challenges.

The time may come when I will have to throw in the towel, if either (a) the value of my short position in Tesla comes to represent an unacceptably large proportion of my overall risk exposure, or (b) I see hard evidence that the company really is worth much more than I think it's worth. In relation to (a), I haven't yet reached my risk limit with Tesla, although it's getting closer. In relation to (b), I haven't seen any hard evidence that it's worth anything close to what the market values it at.

It will be humiliating if I have to concede defeat, but I've bitten the bullet on losing positions before and lived to tell the tale. This time will be no different, though a bit more high profile!

PS: I should have asked if you (or any other contributors) have seen anything since the Q3 results were announced that would cause the company's market value to increase.

 

[Fella]

Hi @Fella. Yes indeed, you're doing very well at the moment! Well done!

I still stand by what I wrote in #140 above:



I've seen nothing since the Q3 results were announced to cause me to change my assessment of the stock. Yes, Musk won the 'pedo' court case, but that has nothing to do with the company's business prospects. Therefore, since my view on the company's prospects haven't changed, I've retained my short position. In fact, I increased it again last week!

As you surmise, the price rise is proving costly, and each 5% rise costs more than the last 5%. That's a sobering thought.

Of course, I can't let my belief that Tesla is ridiculously overvalued cause me to lose my shirt. I assure you that I'm aware of that risk. It helps that the long positions in my portfolio are rising in value at the same time, and the increase in the value of my long positions is significantly more than the loss I'm suffering on my short positions. (I have one other short position, which I plan to write about in my next update. I had hoped to publish it this week but it will probably be delayed until the new year for domestic reasons. I'm also losing on that short position, but it's a different type of loss to the Tesla one, for reasons that will become clear when I write the update.)

It's important to qualify my statement above that the gains on my long positions are greater than the losses on my short positions. That's true, but the gains are mostly unrealised, while the losses have immediate cash consequences, both in terms of there being less cash available in my spread bet account and also an increase in margin requirements. It's important to have contingency plans to deal with the resulting cash flow challenges.

The time may come when I will have to throw in the towel, if either (a) the value of my short position in Tesla comes to represent an unacceptably large proportion of my overall risk exposure, or (b) I see hard evidence that the company really is worth much more than I think it's worth. In relation to (a), I haven't yet reached my risk limit with Tesla, although it's getting closer. In relation to (b), I haven't seen any hard evidence that it's worth anything close to what the market values it at.

It will be humiliating if I have to concede defeat, but I've bitten the bullet on losing positions before and lived to tell the tale. This time will be no different, though a bit more high profile!

PS: I should have asked if you (or any other contributors) have seen anything since the Q3 results were announced that would cause the company's market value to increase.

Ah Colm I didn't want to hear you increased your short position last week .
I think I'll close out my position as when I check it I just think poor Colm hope he ain't lost his whole lifes work over this .
Best of luck , please don't short it anymore be happy with been right if company goes to the wall in a few years , you called it .

 

[Brendan Burgess]

When I bought Tesla less than a month ago it was 332 its 376 as I type ,

I hadn't been following the price since I closed out my position. I had sold it at 376 so I would be losing now.

Brendan

 

[Fella]

Tesla 402 this thread could become famous , I wonder how long Colm can hold on . Maybe this thread will open peoples eyes to the fact no matter what you think you know your guessing as much as the next guy .

 

[Colm Fagan]

Hi @Fella. I never cease to be amazed at people who claim to be long-term investors but who nevertheless worry about (or celebrate) short-term moves in the market values of stocks in their portfolios. In fairness, that criticism doesn't apply to you. As I recall, you see yourself as a trader rather than an investor, and I'd say you're a good one too.
As I think you know by now, that's not my style. I try to take a long-term (five years plus) perspective for all my investments. There is no doubt that my timing with Tesla hasn't been ideal - and that's an understatement - but I'm not particularly worried, as I believe the fundamentals haven't changed, so my assessment of the company hasn't changed either. In overall terms, the cost of the Tesla short hasn't been a major drag on the return on my portfolio. I checked yesterday (in response to another correspondent) and the overall value of the portfolio had risen more than 8% in the period from 31 October to close of business yesterday. And that's after allowing for the impact of the Tesla short.
As I said much earlier in this thread, my first real decision point is likely to be when the financial results for 2019 are announced. I think they're due in early February. I don't envisage having any problem keeping my short position open until then. I doubt if I'll be adding any more to it in the meantime though!

 

[Fella]

Hi @Fella. I never cease to be amazed at people who claim to be long-term investors but who nevertheless worry about (or celebrate) short-term moves in the market values of stocks in their portfolios. In fairness, that criticism doesn't apply to you. As I recall, you see yourself as a trader rather than an investor, and I'd say you're a good one too.
As I think you know by now, that's not my style. I try to take a long-term (five years plus) perspective for all my investments. There is no doubt that my timing with Tesla hasn't been ideal - and that's an understatement - but I'm not particularly worried, as I believe the fundamentals haven't changed, so my assessment of the company hasn't changed either. In overall terms, the cost of the Tesla short hasn't been a major drag on the return on my portfolio. I checked yesterday (in response to another correspondent) and the overall value of the portfolio had risen more than 8% in the period from 31 October to close of business yesterday. And that's after allowing for the impact of the Tesla short.
As I said much earlier in this thread, my first real decision point is likely to be when the financial results for 2019 are announced. I think they're due in early February. I don't envisage having any problem keeping my short position open until then. I doubt if I'll be adding any more to it in the meantime though!

I generally wouldn't care about short term movements in fact I almost never look at my portfolio. I had an email from degiro telling me that IRES had dropped more than 10% and they where obliged to tell me , I didn't bat an eyelid and it's a large enough paper loss if I want to think about it , but I dont have to make a decision I'm still in my 30's so ill likely make it back someday.

With the short the loss is unlimited , my IRES can only go to zero . I admire you for putting yourself out there , I'm honestly not trying to remind you constantly of your position , it's interesting for me to watch a seemingly very intelligent man engage in what I would call grown up gambling . It's interesting to me as an ex gambler , I'm trying to think what I would do , there was a time I found a huge value bet but had to stop myself after taking more and more , I stopped at a certain % of my bankroll even though I was getting 3/1 on a 1/2 shot it lost but meh . I overstaked that bet , going forward I remember I had to have a better plan and not double down , so I would just look for 5 companies like tesla's and short them all and spread the variance .

Sorry for off topic ramble ! I promise not to check tesla price for 6 months.

 

[Colm Fagan]

there was a time I found a huge value bet but had to stop myself after taking more and more , I stopped at a certain % of my bankroll even though I was getting 3/1 on a 1/2 shot it lost but meh . I overstaked that bet ,

We are all influenced by our backgrounds. Your background as a gambler influences your thinking. My background (over 50 years of it!) in risk management influences mine.
I'm comfortable with my exposure to the risk of a (further) significant upward movement in the Tesla share price: it is less than a third of my exposure to the risk of a similar downward movement in my largest long holding.
The nature of the risk is also an important consideration. I had a much smaller short position in another stock, which I closed at a loss even though the fundamentals were in my favour, because I reckoned that, in this bull market, there was a non-trivial risk of the company being taken over at a significant premium to the prevailing share price. I believe there is no such risk for Tesla.
Of course, if the share price keeps rising, to the extent that Tesla represents a dangerously high proportion of my total risk exposure, I will have to bite the bullet and bring my exposure back within my risk appetite. That's still some distance away. I'll also have to concede defeat - and possibly close the position entirely - if I conclude that the company really is worth anything remotely close to what the market says it's worth. I can't envisage how that will happen.

 

[Brendan Burgess]

With the short the loss is unlimited

Hi Fella

I used to think this but I don't anymore. I probably thought that because that is what everyone said and I didn't really think about it. Or maybe because it's the way I actually have used the shorting.

I have a short position in Bitcoin. I sold it at $14,400

In theory I have the potential for an unlimited loss. But IG Index does not allow that. I had to set a stop loss. From memory, I set the stop loss at $24,400. In other words, I was prepared to lose $10,000 and set my limit at that. If the price suddenly spiked while I was not watching it, it would have been automatically closed out. I would be disciplined. If it had hit $24,400 I would have admitted defeat.

So I look at this as an investment of $10,000 in exactly the same way as if I had bought $10,000 worth of Ryanair shares. Either can go to zero.

Of course, my potential gain on Ryanair would be unlimited, whereas my potential gain on Bitcoin is limited to $14,400.

My approach to spread betting might be unusual. $10,000 gives me exposure to one Bitcoin. Of course, I could have short sold 5 Bitcoin instead and set the limit at $16,400. I would have made 5 times as much, there would have been a much higher risk that I would have been wiped out.

And my Bitcoin and Tesla exposure were a much smaller percentage of my portfolio than Colm's.


Brendan

 

[joe sod]

@Fella interesting that you revealed a position in Ires, also interesting that this stock has been targeted by shorters , it's fundamentals are great yet it has been targeted by shorters because they think it will be targeted by big government in Ireland . Tesla is in the opposite situation, it's fundamentals are terrible as colm Fagan has pointed out yet it is not been shorted but it's share price has been driven up. Even though it's fundamentals are terrible it is being talked up by big government and sentiment as the future. I made a reference to ethical investing in an earlier post being responsible for the rise in price, that Tesla is seen as a "good" stock.
It begs an interesting question is "big government" now more important than fundamentals , it seems that the markets are now buying this theme judging by the performance of these two shares. Of course everything could all correct again in a recession and that this new theme confined to the dustbin like many others in the past

 

[Colm Fagan]

If it had hit $24,400 I would have admitted defeat.

Brendan, would you really have admitted defeat? If, at that point, you still thought that Bitcoin would eventually be worth zero (or practically zero), surely the right course of action would be to part close your position, so that you still had (somewhat lower) exposure to the (in your view higher) probability of the price falling from that elevated level? That's what I envisage doing if Tesla gets to the point where it represents too high a proportion of my total risk exposure.