The Perils of Shorting: A Real Life Example


I have not looked into Tesla share price in any detail but the 12 month low is 178.97 and the 12 month high is 537.32. That doesn't make Brendan's floor look stupid. You mention the FED stress test but that test is based on the market, not an individual share. Ask the fed what their stress test would be for a bank holding a huge position in a single share and ask them if a 63% price decrease is ludicrous.....
 

I was referring to Brendan
 

I built a model for an idiosyncratic stock event based on a large holding and 63% was not the number .

Tesla has been range bound between ~250 to ~400 through 2017 to mid 2019. It then dropped to a low of 187 and has rebounded to 500. The market has also gone up 30% in that time, so roughly Tesla has outperformed the market by 30%. In order to fall back to 200 it would be viable that the entire market also falls 30%. I did indicate a 67% would be a 1-2 year move.

I really need Brendan to comment on his timeline and whether he thinks the move to back to 200 is a Tesla specific event and the rest of the market remains flat. In that case I standby that for a 67% move on Tesla only the issue would be significant enough that the company is likely done.


Sunny,

As an afterthought, my point 1 in the post was meant to indicate that a 63% move is valid given a wider market decrease plus the idiosyncratic move of Tesla. However, the point I was trying to stress is that Brendan is shorting Tesla as an isolated idiosyncratic move of 67%, that is what I don't believe valid without the company probably going bust.
 
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Exactly. Brendan is not making a falsifiable claim if he's not giving a timeline.

Ultimately the value of every security will fall to zero so if you're not giving a timeline you are not saying anything meaningful.
 
Folks

I cannot provide a timeline as I cannot predict the madness of crowds.

In my opinion, Tesla is way overvalued. I fully accept that it could still double in value. I am prepared to lose 100% of 1% of my portfolio, which is why I put that at risk.

I have no illusion that I might lose all this money.

It's quite possible that I might have to close my position and then the Tesla share price subsequently collapses.

In my opinion the price is driven by mania. Look at the earlier comment here to show how some people can completely lose touch with reality.

Andrew365 said:
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.
Click to expand...

So people who think that profits don't matter are pushing up the price of Tesla because of the hype and those who have looked at the numbers are shorting it.

I think that the odds are in my favour but that is all.

It is not like Bitcoin which is worth zero and will eventually be priced at zero. But it's like Bitcoin in that it is driven by mania, and by any analysis.

And there is an element of luck in it. I considered it way overvalued at the start of November but I had to close out my position as I need the cash to pay my tax bill. I was steeped. I decided to short it about 10 days ago, but as I was on holidays for a week, I decided to wait until I came back so I would not be checking the price all the time. Again I was steeped.

If Tesla falls to $200, I will not be claiming some extraordinary insight.

It is a small part of a diversified portfolio of shares. That is all it is.
 
I don't know enough about Tesla one way or another and I don't have up to date figures. Quick google is showing a
historic implied volatility of between 40-60% and is climbing again this month. I applaud anyone brave enough to make a call one way or another. Like I said previously, I would be very wary of shorting a stock in this market though.
 

Brendan you have taken my comment out of context, which is ok if you need to do that to support your gamble.

I am not an investor in Peloton, Uber or Tesla, but I am an active user of Peloton and Uber. My view is the valuation of companies is changing, this is proven by UBER who have 100 million users a month but have yet to make a profit. These are high growth companies that are not going to be profitable for a period of time, but just because they are not currently profitable does not mean they are going to fail. You also have to remember the largest shareholders in these companies have already likely made multiples on their initial investment, so maintaining not being profitable can run longer.

I am actually just really surprised that you are so certain but have yet to provide one shred of evidence to support your rational.

The first rule of investing is don't invest in what you don't understand. You have taken a gamble and I think you should call it that. Or by all means share your analysis and maybe we will agree.

Note, I have never said what way Tesla is going to go, but if I was in your position I would be setting my profit taking much closer to 25%.
 

How can I say that I took your comments out of context?

You have clearly said that "I can't see the companies not existing simply because they aren't profitable"

Maybe you meant something else, but this is what you said.

Look lads

We had these exact same conversations during the dot.com bubble. People were buying shares in any company that added .com to their name. When those of us using traditional valuation metrics of profitability and cash flow pointed out that this was irrational, we were told that we were old fashioned.

A share price must reflect the company's future profitability and cash-flow or its break-up value.

No wonder how useful Uber is if it never makes a profit, it will close eventually.

Brendan
 
Uber has a large user base. The last time I checked it makes a loss of about $1 per ride.

To me this doesn't seem unreasonable in the context of building market share. Once established and a mature brand that people trust, there is plenty of scope for increasing prices.

Also, when mature it won't invest as much in R&D.
 
Everything said here was said during the dotcom bubble. Everything. Markets don't change. Bubbles happen. Bubbles get forgotten. Bubbles happen again.

By the way, property prices in Bulgaria are currently yielding over 10%...…...
 
You beat me to it. I think if my bank's assets were 100% in Tesla shares I wouldn't be too impressed by the Fed's 30% stress test.
 
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My understanding of the various theories on rational markets is that we assume that all relevant information is available to the market and it is only fresh info that will shift the market price, subject of course to a bit of random supply and demand noise. The persistent daily increase in the Tesla share price over the last few weeks in the absence of a flow of news suggests to me an element of irrationality at play. I won't be shorting though because as folk have remarked the market could stay irrational for longer than my nerves can stand.
 
Have no interest financially in Tesla. However, I do believe EV are the future andTesla are leaders and a long way ahead of the pack and will move up and beyond 1k mark.
 

I am considering taking out a short as well, just in a slightly different way. The day before the next earnings (mid Feb i believe) selling a $0.06 spread bet with a 10% guaranteed stop loss, by my reckoning i'm risking roughly $350 if the share price goes up 10% and the guarantee got triggered.
 
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