The Perils of Shorting: A Real Life Example


My point was, Tesla would likely be part of a well diversified strategy. However, on a standalone basis the opinion is it can only decrease in value, in my opinion Brendan is mixing concepts to support his views with no evidence to support.
 

You quoted 20 shares, you realize you would have to borrow the shares and sell them at the market price today? You hope the price decreases so that you can buy them back at a cheaper price and give them back to the person you borrowed from. Your potential losses are uncapped, if you didn't close out before the shares hit 1k, you would hten have to buy the shares at market price (20* 1lk = 20k), you sold them for 10k initially resulting in a loss of 10k plus your daily funding fee.

In my opinion based on your comments you are 100% speculating based on not understanding why the valuation is greater than Ford Motors. Shorting at the best of times is very risky, and general left to large investors with an agenda i.e. they are doing other things to move the share price down.

Tesla is shorted quite a bit by investors, so you are not alone in doing it, but I summarize that they know more than you and if your short was successful it would be nothing more than luck. Case in point, over the last 3 months Tesla has increased 67%, your short would have lost you significant money.

I agree with Fella, in this case your use of Shorting is nothing more than gambling.
 
Anglo was successfully shorted in 2008 because some traders presumably had information about deteriorating asset quality in the loan book.

Shorting is for investors with deep pockets and some level of information about a firm's business model or performance that is not in the public domain.

I don't think @Brendan Burgess has this information, nor is he claiming he has.
 

Anglo was successfully shorted because of Sean Quinn and his use of CFD's to build up a nearly 25% position in the bank. Once the share price started to fall, Quinn basically opened to door to hedge funds to test his ability to fund margin calls. And the hedge funds were correct. The fact that Anglo itself was a complete basket case was an added bonus to them.

I think at this stage, Colm must be ready to admit defeat with Tesla or at least I hope he is. I actually agree with his overall view on the company but I was talking to someone recently who knows this company well and he couldn't decide if the share price was going to double or if we were looking at another Enron where the share price would go to zero overnight. His view was fundamentals were improving but there was so much scepticism on the Street among analysts that was it was very difficult to make a call. And to be honest, if he was unsure, I wouldn't like to make a call one way or another either. Certainly not in the next 6-12 months.

The problem with shorting a stock is that you are usually taking a contrarian view to the market and although you might be right, it is very difficult to go against the masses. They can afford to be wrong for a lot longer than you will be able to afford to be right when you are funding margin calls. We are also in a very strong bull market at the moment so picking a stock to fall in a market like this is very difficult.
 

Did Enron in part not collapse because they were able to get accrual counting treatment for their mark to market positions essentially hiding masses of losses?

"The market can remain irrational longer than you can remain solvent". It is just baffling that Brendan who appears to be risk averse is considering such a risky position, based on a comparison to AIB and Ford.

I do not know Tesla in detail, but they have at least forced every other car manufacturer to switch to electric. Tesla has challenged the incumbents and Elon is clearly a clever guy, albeit a bit irrational. I did have a friend working in Tesla in California and the usual issues arise from a company that is going through rapid growth.
 

Yes that is what brought Enron down. Not saying the same as Tesla but would I be surprised if there were a few hidden bodies???? Eh......
 

And if Anglo hadn't been a complete basket case how do you think the hedge funds would have done?


The Quinn CFD story was just a sidenote. The real story was the awful state of its loanbook, not trading on the secondary market for its shares.
 
im not near smart enough to ever even consider shorting anything for longer than a few days , only ever had one short position in my life ,i shorted VW in 2015 but that was only from 110 down to below a hundred, was in and out from one end of the week to the other

tesla seems like a peculiar company to short , the amount of hope and optimism surrounding that company is pretty large, lots of companies make electric cars but TESLA does something special even mechanically they are not that much better , the brand is pretty unique and brand strength is an important component of success.
 
NoRegretsCoyote said:
And if Anglo hadn't been a complete basket case how do you think the hedge funds would have done?


The Quinn CFD story was just a sidenote. The real story was the awful state of its loanbook, not trading on the secondary market for its shares.
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Hedge funds would have done just fine because they knew who they were facing against on the market. They weren't betting on Anglo failing. They were betting the share price falling enough to force Quinn to unwind his position. Quinn built up a 25% stake through leveraged CFD's. Everyone on the market knew this stake was there and was being built on (except for Anglo executives apparently). Once the financial crisis hit and people started looking at Irish Banks, hedge funds immediately focused on Anglo Irish Bank because they knew that Quinn with such a large leveraged stake would be crippled by margin calls if the stock fell or he would have to unwind the position which would have led to a huge amount of Anglo Stock hitting the market and seeing the stock fall. So even before the market was aware of the magnitude of the actual problems in Ireland, hedge funds had decided to take on Quinn because he was vulnerable. And because the stake was so large, this made Anglo vulnerable hence their ridiculous decision to lend to Quinn to make margin calls and find buyers for some of the stake.

Quinn's CFD's didn't cause the liquidation of Anglo Irish Bank but it brought the bank to the attention of some very smart people who understood what Quinn was doing and took him on by shorting the stock to test his resolve. Quinn of course just continued to believe the share price would rise and that the short sellers could be beaten. To be fair, even the regulator and Government fell for the line that short sellers were to blame. They because an easy target rather than looking at the real reason until it was too late.

Anyway, that is OT and has nothing really to do with Telsa who are a like a shiny new toy in an industry that is facing significant change in the years to come. Personally I don't think they are going the last the pace like many of those lovely internet companies that set up when the internet took off and I agree with everything Colm has said. But I also wouldn't short it. It could just as easily hit the sun at $1000 before burning up at which stage, I would be long gone!
 
Sunny said:
They can afford to be wrong for a lot longer than you will be able to afford to be right when you are funding margin calls.
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This is a key point.

Although I know that Bitcoin will fall to zero, I can't predict its path. So I would only ever put around 1% of my portfolio at risk.

Likewise with Tesla. I would not be treating it as equal to a part of my portfolio.

So if I sell it at $500 I will set aside enough money for it to rise to $750 or $1,000 and then bow out if it hits that amount.

Brendan
 
Sunny said:
Yes that is what brought Enron down. Not saying the same as Tesla but would I be surprised if there were a few hidden bodies???? Eh......
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A few hidden in the trunks! What has interested me is that analysts were valuing the company on their ability to meet production targets. Musk had claimed he would have a fully automated production line that could meet the necessary targets. As I understand it was not the case, and in the end even the software developers were detailing the cars.

It is a sign of the time that we should not rely on traditional valuation metrics to understand the true value of the company. Look at Twitter or Netflix for example, in the early years analysts look at the number of new users etc. Many new companies are loss making, for example of the IPOs last year to sample UBER and Peloton, both are loss making and Uber even said they may never be profitable. However, Uber and Peloton are both disruptors and have offered a top notch product that as an active user of both, I can't see the companies not existing simply because they aren't profitable.
 
Andrew365 said:
Uber even said they may never be profitable. However, Uber and Peloton are both disruptors and have offered a top notch product that as an active user of both, I can't see the companies not existing simply because they aren't profitable.
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You are quite right!

This time it is different.

Profits and cash flow are so 20th Century.

Uber provides a great service. It may never be profitable. But so what?

Brendan

p.s. How do I put in an irony smiley just in case it goes over people's heads?
 

Brendan we need to work on opening your mind a little, your examples always tie back to the financial crisis or things that have happened. Ireland is still somewhat behind some global trends, I was lucky enough to live in a city Uber first launched and saw it constantly evolve and develop their product. Uber as an example has over 100 million users a month taking at least one trip, that is the equivalent of 20 x Irelands population, but sure they aren't profitable so they are going to fail, everyone short it.

p.s. How do I put in an irony smiley just in case it goes over people's heads?

P.p.s my view is that companies should not last forever, they should constantly innovate to the point they aren't needed. There should not be 100 year old incumbents.
 

Plenty of people are shorting it. I think Uber was one of the most popular and lucrative short trades last year. No company can be loss making forever. It doesn't matter how many people use the service. Shareholders demand return. If you are not generating returns for shareholders in the long term then forget about it. Uber are being given time to work out how to make money out of their offering but to be honest I can't see it. They are facing some pretty stuff headwinds with driver terms and conditions, security, regulatory concerns, climate change etc. The IPO was very disappointing. I give it 2 years and 4 months!
 
OK, so I have shorted Tesla at $536.

I have set myself a stop at $1000. In other words, if it doubles in price, I will close my position at a loss. My exposure is in the order of 1% of my portfolio.

I have set myself a limit of $200. In other words, I will close my position if it falls to $200.

What I find interesting is that IG prices go up and down even though the market is actually closed.

Andrew, your post about Uber really explains to me how such manias develop. People lose all sense of logic and reason in the face of a useful product. I must look into shorting Uber. It's the dot.com bubble all over again. But this time it's easier to short it.

Brendan
 

Brendan, I hope your punt pays off.

I notice that you have not been able to state what specifically in Tesla's financials indicates to you that the shareprice will decline, that let you to decide to short. Also you have not indicated a timeline for this investment? With the vagueness provided this allows you to be always right if the share price actually declines, for example if Musk announces tomorrow that he has built a rocket to send him to Mars next month and the shareprice falls would you claim a victory? What I am saying, is if the shareprice falls for whatever reason you will claim a victory but if the share price increases, it is a mania and the market is wrong?

In terms of the floor you have set indicates a 63% price decrease. I want to highlight that is a shock of -63%, this is over double what the Federal Reserve stress Equities under a Severely Adverse (Worse than 2008 Financial Crisis) in stress testing. That shock of 30% can be thought of as a 6 month move in Equity prices. The 63%, I have not done analysis but I would suggest that is 1-2 year move, implying you are going to keep the position open for 2 years. Can you clarify how long you think it will take Tesla to go to $200?

There are two options for a move to $200 / -63%
1. There is a market wide decrease in Equities + Idiosyncratic under performance by Tesla. This would still require a significant decrease in the wider Equity market. If this is your belief then hedge your equity portfolio.
2. This decrease is a purely idiosyncratic event contained to Tesla only and no market contagion. In the case of an event causing a 63% decrease in share price, it is probably going to go to 0.

In summary you might as well set the level to $0 or actually set it to a level that is actually achievable from general price corrections.
 
This is a rare opportunity to short Tesla , there's a lad in a casino somewhere who is jumping all over red because there's been 5 blacks in a row . You's both are as dillusional as each other
 
Fella said:
This is a rare opportunity to short Tesla , there's a lad in a casino somewhere who is jumping all over red because there's been 5 blacks in a row . You's both are as dillusional as each other
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Referring to me? I would not short Tesla, but there are plenty of large investors shorting it for what I am sure is there own well researched reasons and they have hedged accordingly, and have exact profit targets.

I think Brendan's rational for shorting is nothing more than a gamble. Hence why he has set floors at $200 and $1000 randomly.
 
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