The Perils of Shorting: A Real Life Example

[joe sod]

Okay, it's not quite what LT3000 said.
Sorry, I'm sure I made a hash of that explanation. But there is sort of common sense behind it.

well i dont understand some of the maths but i get the gist of it , a stock can only fall at most by 100% whereas there is no limit on how much it can rise by maybe many multiples potentially , therefore on balance shorting is dangerous because you only have a 100% to play with on the downside whereas you could have many multiples of 100% theoretically on the upside , therefore potentially you could need an infinite sum of money to protect that short.
It also shows that over time if you are diversified and dont jump in and out you are going to make money in stocks because maybe the couple of stocks that rise by many multiples will more than cancel out the couple of stocks that go to 0%

 

[Duke of Marmalade]

Yep, that explains it better than moi. The unlimited risk is not really an issue as the Boss has pointed out as you can put in a stop loss, but the asymmetrical nature of the absolute risk does have the other effects you describe.

 

[tosullivan]

Sorry, but I have no idea what this means.

If you are talking about the mumbo jumbo of technical analysis resistance levels, then it would have no part in my investment strategy.

Brendan

If you're investing then resistance & support levels shouldn't really concern you then

 

[Colm Fagan]

What he is saying is that if you maintain the same risk exposure but are ultimately proven right your actual profit will be path dependent. With a short, if that path initially goes against you your final profit will be reduced compared to your initial expectation and vice versa for a long position. But if the path follows your judgement the situation is reversed and the long position delivers less than your initial expectation and again vice versa for the short. One up for the short since presumably on balance you believe the path will follow your initial judgement.

Hi Duke. I've finally got my head around what you're saying. I agree with you in theory but there are a few practical problems. One is that maintaining the same exposure implies adding to the short position as the price falls. That goes against the grain. Adding to your long position when the price falls (averaging down) is more natural. At least that's been my experience. A second practical problem is that there generally isn't a clear end date. Taking my own experience with Tesla, my original plan was to close my short position when the share price fell below $200, but when it got there, I decided that it would go even lower, and failed to grasp the opportunity. The rest is history, as they say.

 

[RichInSpirit]

Hi Colm. Was watching this YouTube about Tesla, https://youtu.be/DPp3309BlpA.
It's probably from a Tesla fan but even if you regard it as rubbish it shows how a lot of their fans and perhaps investors view the company.

 

[Colm Fagan]

Hi @RichInSpirit You're right on all counts. Tesla has attained a sort of cult status in some quarters and certain people are prepared to buy the stock regardless of the fundamentals. That's a genuine concern for people like me, but one has to believe that truth will win out eventually, especially if shareholders are asked to cough up more capital to fund continuing growth (survival?).

Thanks for the link to the YouTube video. I haven't had the time to look at it yet, but I was speaking to someone yesterday who mentioned a youtube video which indicated that Tesla was far ahead of the competition in self-driving cars, battery technology, etc. In answer to that, I refer you to what I wrote earlier in this thread:

First of all, I know nothing about cars, so I must rely on statements from the company and from analysts. In relation to Autopilot and Full Self-Driving (FSD), Tesla's Q2 update letter at the end of July reads: "We are making progress towards stopping at stop signs and traffic lights." You can find it [broken link removed]. That doesn't seem like "years ahead" to me. There was no mention in the Q3 update on whether they had made progress in the quarter in stopping at stop signs and traffic lights. The cut in R&D expenditure doesn't augur well. Instead, this quarter they're talking about a gigafactory in Shanghai that's going to do the devil and all, followed by one in Berlin. Two quarters ago, all the talk was of Robotaxis, whereby your Tesla would be driving around by itself all night, ferrying party-goers home from night-clubs so that you could earn money on your car while you slept (but don't worry about cleaning up the sick in the morning). Would you like to work as a senior executive in an organisation like that, where the strategic narrative kept changing?

The (FT) article says that Waymo, the Google (Alphabet) subsidiary, has a big lead in this area (i.e. self-driving cars). The article includes a chart showing Waymo with 11,018 miles per manual intervention, followed by GM with 5,205. Some of the big players come nowhere. For example, Apple had 1.15 and Uber had 0.35. Tesla didn't appear anywhere. Someone asked in the comments section of the paper why Tesla wasn't shown and someone else replied that their figure was zero, which seems to tally with the extract from the Q2 2019 investor update quoted above. I don't know how that fits with the video you posted, but I'm more prepared to believe the FT (and even Tesla's own Q2 earnings announcement)!
There is the additional consideration, mentioned in my article, that Tesla are scrimping on R&D spend. That's never a recipe for world leadership.

 

[Brendan Burgess]

Wall Street is very divided on Tesla

Wall Street analysts have a consensus price target of $301.83 on Tesla and 11 "buy" ratings, 10 "hold" ratings, and 15 "sell" ratings, according to Bloomberg data.

Maybe that is not too surprising given the odd nature of the company. Losing money but with a great product.

Brendan

 

[Colm Fagan]

Wall Street is very divided on Tesla

Brendan, methinks you're trying to wind me up!
I saw a piece recently from a Morgan Stanley analyst, Adam Jonas, who arrived at a bull case valuation for Tesla of $500 a share, a price target of $250 and a worst case scenario of $10 a share.
There's no doubt, analysts are geniuses, worth every cent they're paid!

 

[Brendan Burgess]

Colm

Not at all. I was just underlying how little they know and how pointless most analysis is. $10 to $500 ? Well he will be right.

From the little bit of bullish analysis I have read, I have not seen anything other than generalisations about deliveries being ahead of expectations. But none of it is crunched down into profit and cash flow projections.

Brendan

 

[elacsaplau]

Losing money....

Brendan - why do you say that in !relation to current earnings?! [The next reported quarter may be negative but I'd happily wager that it won't be...…….like its predecessor!]

 

[Fella]

Colm

Not at all. I was just underlying how little they know and how pointless most analysis is. $10 to $500 ? Well he will be right.

From the little bit of bullish analysis I have read, I have not seen anything other than generalisations about deliveries being ahead of expectations. But none of it is crunched down into profit and cash flow projections.

Brendan

If the analysts know nothnig what hope has your average Joe , people disagree some think its over valued some think its undervalued , so we have short sellers and buyers its a functioning market as I have been saying all along , it should be close enough to par value at any given time on the stock market.
Google algorithms mean that I get lots of tesla stories on my news feed because I googled tesla last month , I try not look at price and I'm half wishing I invested more but poor Colm.

 

[Brendan Burgess]

it should be close enough to par value at any given time on the stock market.

Hi Fella

For most shares, the price reflects their intrinsic value.

But from time to time, a mania grips the market, and a share can be way overvalued. While I don't have Colm's certainty that it's hugely overvalued, I would be fairly sure that Tesla has lost any connection with its intrinsic value. When I next have a bit of cash, I will probably short it again.

Brendan

 

[Fella]

Hi Fella

For most shares, the price reflects their intrinsic value.

But from time to time, a mania grips the market, and a share can be way overvalued. While I don't have Colm's certainty that it's hugely overvalued, I would be fairly sure that Tesla has lost any connection with its intrinsic value. When I next have a bit of cash, I will probably short it again.

Brendan

I would agree with you if the stock wasn't so heavily shorted already. There is a lot of negative press about Tesla but reading about the company there is alot of very good things , for me the price does not seem outrageous , I could argue its undervalued as the potential seems huge , i've read some convincing arguments for it both been under and over valued . I am not sure its clear cut either way.

 

[Colm Fagan]

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.

Yes, I was expecting volatility but this is ridiculous! Tesla alone caused a loss of close to 5% of my total portfolio in 2019 and more than that in the first two working days of 2020. Sore, but the losses must be seen in context: overall portfolio performance in 2019, including the Tesla short, money on deposit, etc. was more than 27%, and I broke even in the first couple of days in 2020 despite the Tesla price rise in the wake of the announcement of strong sales in 2019, thanks mainly to a jump in the Renishaw share price on Thursday (after a fall of around the same amount on the last day of 2019).
Still, there's no escaping the fact that I would be around 10% better off now if I'd closed my Tesla position at the start of 2019. A poster on another forum quoted a stock market proverb to me: "Don't short a story stock in a bull market". Tesla is a story stock and we're in a bull market. Pity I didn't hear - or take - that advice before I decided to hold on to the short position.
I now face a dilemma. My exposure to Tesla is so big that another significant price increase could cause serious damage, especially if the rise comes when other shares are falling in value. At the same time, while I'm not as certain now as I was a few months ago that its "true" value is less than $200 a share, I'm absolutely certain (in my own mind, of course) that it's worth nowhere near its current $440.
So what to do?
I've decided to start implementing the plan I outlined a few weeks ago of closing a portion of my short position at each price rise from here on, so that my (absolute) exposure to the stock remains around its current level. It's now my third largest exposure, having edged ahead of Apple (in which I have a significant long position), and which also rose strongly in recent weeks, so much so that I got a touch of vertigo (again!) at the Apple share price and decided to reduce my exposure, netting a nice profit for myself.

 

[Brendan Burgess]

but the losses must be seen in context: overall portfolio performance in 2019, including the Tesla short, money on deposit, etc. was more than 27%, and I broke even in the first couple of days in 2020 despite the Tesla price rise in the wake of the announcement of strong sales in 2019,

Hi Colm

That is the real point. If Tesla was 1% of your portfolio, you wouldn't worry about it.

But if it's 20% of your portfolio, you do need to be careful.

Brendan

 

[Fella]

Yes, I was expecting volatility but this is ridiculous! Tesla alone caused a loss of close to 5% of my total portfolio in 2019 and more than that in the first two working days of 2020. Sore, but the losses must be seen in context: overall portfolio performance in 2019, including the Tesla short, money on deposit, etc. was more than 27%, and I broke even in the first couple of days in 2020 despite the Tesla price rise in the wake of the announcement of strong sales in 2019, thanks mainly to a jump in the Renishaw share price on Thursday (after a fall of around the same amount on the last day of 2019).
Still, there's no escaping the fact that I would be around 10% better off now if I'd closed my Tesla position at the start of 2019. A poster on another forum quoted a stock market proverb to me: "Don't short a story stock in a bull market". Tesla is a story stock and we're in a bull market. Pity I didn't hear - or take - that advice before I decided to hold on to the short position.
I now face a dilemma. My exposure to Tesla is so big that another significant price increase could cause serious damage, especially if the rise comes when other shares are falling in value. At the same time, while I'm not as certain now as I was a few months ago that its "true" value is less than $200 a share, I'm absolutely certain (in my own mind, of course) that it's worth nowhere near its current $440.
So what to do?
I've decided to start implementing the plan I outlined a few weeks ago of closing a portion of my short position at each price rise from here on, so that my (absolute) exposure to the stock remains around its current level. It's now my third largest exposure, having edged ahead of Apple (in which I have a significant long position), and which also rose strongly in recent weeks, so much so that I got a touch of vertigo (again!) at the Apple share price and decided to reduce my exposure, netting a nice profit for myself.

I admire your posting and your honesty. I genuinely would like to see you do well on Tesla. One thing that I learned the hard way and is that humans are absolutely terrible at making decisions. We can't do it we carry around so much bias with us and we cannot be trusted to make the right financial calls, its why I would always back a computer to outperform a human . When I read that your reducing your exposure to Apple and failing to just close out and admit that Tesla is a loser reminds of certain ex gamblers I used to consult with . Apple could skyrocket now and at the same time so could Tesla , the problem you have with your short on Tesla is its effecting your long positions IMO but you may not see that . If Tesla was a good short at 300 or whatever it was when your shorted it then its an even better short now at 450 .

I don't mean to be harsh , but you put yourself out there posting in the newspaper the diary of a private investor and a people may follow thinking they are investing when in fact they are no better off that going to a roulette wheel . My diary would not make good reading though " if you want to get market returns just by an index tracker " if you want more risk buy individual stocks but you will get more volatility , if you want to lose your money quickly start spread betting .

 

[joe sod]

Just looking at the disaster over in australia with the bushfires, everyone queuing up at the gas stations to fill up with fuel to get them out of the danger zones. Imagine that scenario with electric cars, firstly the electricity network would go down as happened and even if it didnt, imagine the panic of trying to get onto the charging points to get charged before the fires hit.
I would not like to be depending on electric fire trucks or electric helicopters to douse the fires with water. Somehow I still think we are a very long way from electric technology replacing petroleum. I can see the 2030 deadline for the sale of petrol and diesel cars being pushed out as it approaches.
People wonder why we are not having the revolutionary changes in energy technology like we had with communications technology, it was relatively easy to make the big leaps there, it is very difficult with energy. It will be very difficult to "move beyond petroleum"

I would always back a computer to outperform a human

well on appollo 11 the computer was about to crash the moon lander until neil armstrong took over control and landed it manually

 

[Duke of Marmalade]

Sore, but the losses must be seen in context: overall portfolio performance in 2019, including the Tesla short, money on deposit, etc. was more than 27%...

Compared this with my humble ARF which is 100% in Global equities. It grew 12.7%. I better start reading your diary

 

[Colm Fagan]

Guys/gals
Thanks for all your comments. I'm almost a full-time carer at the moment, so it could be a while before I get back to you.

 

[Alkers86]

Just looking at the disaster over in australia with the bushfires, everyone queuing up at the gas stations to fill up with fuel to get them out of the danger zones. Imagine that scenario with electric cars, firstly the electricity network would go down as happened and even if it didnt, imagine the panic of trying to get onto the charging points to get charged before the fires hit.

With home charging, you wake up every day with a full "tank" of electricity.