The Perils of Shorting: A Real Life Example

[Sunny]

The one thing I hate is how every company is apparently a 'technology' company. I have worked for two US financial institutions. In both places, I heard the same line. 'We are technology companies with a banking licence'. No you are not so stop trying to compare yourself to google and Fintech companies just because you have a large technology budget. You are a bank. You make your money the same way any other bank does at the end of the day and that is how you will be judged.

Its the same with Tesla. They might have a large technology budget and might place large emphasis on technology in cars but at the end of the day, they are a car maker. They need supply lines, they need factories, they need showrooms or other sales channels, they need manufacturing staff, they need commodities and they need people to buy their cars. They are not Amazon or Google or Facebook.

 

[Brendan Burgess]

I would still love to hear, you rational for setting at $200, was it simply because it traded at that last year?

Hi Andrew

Sorry, I had meant to address this very good question.

There is no particular rationale for closing out of Tesla at $200. I thought it important to set a price though when buying in.

Maybe $200 is the "right" price for the stock, in which case I should close out long before e.g. $300.


It's very difficult to price a stock which is not making profits and shows no sign of making sustainable profits any time in the near future. It's easy to say it's not worth $86 billion. It's much more difficult to say that it is worth $20 billion.

I will review it if it falls towards $300.

The last time I shorted it , I hadn't got an exit plan and would have made a much higher profit had I exited earlier.

The only comparison I have is Bitcoin. It's worth zero, but I will close out at $3000. The rationale there is that I will have made a good profit and there is every chance that it might rise again and I would short it again when it rises again.

Brendan

 

[Andrew365]

The one thing I hate is how every company is apparently a 'technology' company. I have worked for two US financial institutions. In both places, I heard the same line. 'We are technology companies with a banking licence'. No you are not so stop trying to compare yourself to google and Fintech companies just because you have a large technology budget.

Sunny 100% my pet hate as well, oh and we are now a Tech company so feel free to wear chinos on a friday.

 

[Gordon Gekko]

Let's be absolutely clear. I think he is a very talented guy and has built a great car and I wish him well.

But that does not make his company worth €86 billion.

Likewise I love using Uber and I wish we had it in Dublin, but it's hard to see how it can make any profit, much less a profit to justify its current valuation.

I hate tobacco companies, but they are very profitable.

Brendan

Hi Brendan,

They have a product that you and I love, a gargantuan amount of users, and access to what is one of the most important resources of the 21st Century, data.

I believe that it is unwise to dismiss that.

It is not analagous to you and I opening, say, a shop where profitability is the key indicator. How many of the tech giants looked like basket-cases financially?

 

[Sunny]

Hi Brendan,

They have a product that you and I love, a gargantuan amount of users, and access to what is one of the most important resources of the 21st Century, data.

I believe that it is unwise to dismiss that.

It is not analagous to you and I opening, say, a shop where profitability is the key indicator. How many of the tech giants looked like basket-cases financially?

Problem being for every facebook, there is a Bebo. For every Google, there is a lycos and it's $12.5 billion valuation. List is endless. Is there a chance that Uber will be the next google or facebook? Maybe. But not based on their current business model. You are seeing legislation in the US because of traffic congestion. London took away it's licence. There are climate change concerns. Uber Eats is loss making and there are no indications about how they will make it profitable. It's a great business idea but a $100 billion business? I just don't see it.

 

[demoivre]

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.

Is there more than a 50/50 chance of success here? If there isn't your expected return is negative here which counters your argument that you are an investor !

 

[Andrew365]

Hi Andrew

Sorry, I had meant to address this very good question.

There is no particular rationale for closing out of Tesla at $200. I thought it important to set a price though when buying in.

Maybe $200 is the "right" price for the stock, in which case I should close out long before e.g. $300.


It's very difficult to price a stock which is not making profits and shows no sign of making sustainable profits any time in the near future. It's easy to say it's not worth $86 billion. It's much more difficult to say that it is worth $20 billion.

I will review it if it falls towards $300.

The last time I shorted it , I hadn't got an exit plan and would have made a much higher profit had I exited earlier.

The only comparison I have is Bitcoin. It's worth zero, but I will close out at $3000. The rationale there is that I will have made a good profit and there is every chance that it might rise again and I would short it again when it rises again.

Brendan

Thank you Brendan, you should operate by a profit target rather than value of the stock. Currently, you are targeting a 67% return, but you should revisit at increments of 10% given you don't have a time limit. For example after a 20% price decrease, there might be market news that changes the outlook, making a further drop unlikely or more likely.

 

[Brendan Burgess]

Is there more than a 50/50 chance of success here?

Absolutely.

It's not like buying a share where the long term upside is unlimited.

So I am risking $500 to earn $300

So if it were only a 50/50 bet it would not be a good bet.

The problem is the timing. I would be fairly confident that Tesla will fall to about $100. The difficulty is that it might rise to over $1,000 before it falls to $100.

I will keep it under continuous review. If there is a material positive change which boosts the underlying value, I will close my position.

Brendan

 

[Duke of Marmalade]

500$ Boss you seem to have an advantage over the rest of us, you can move the market. Just as you did when you shorted bitcoin.

 

[Fella]

The problem is the timing. I would be fairly confident that Tesla will fall to about $100.
Brendan

I can't understand your thinking here ? Even though I didn't agree with you on Bitcoin I could see your rational for saying its a bag of hot air. But Tesla you really think will fall to 100 , Tesla is producing a quality product that is in very high demand , I can only see demand increasing . I don't know where the price is going to go from here but I would be very very surprised if it went that low.

 

[Brendan Burgess]

Tesla is producing a quality product that is in very high demand , I can only see demand increasing .

And I fully agree with you.

But that is not enough.

If the price today were $5,000 you would be very surprised at my forecast of $1,000.

The price has to be related in some way to future profitability.

It's not enough to say "the cars are shinier than anyone else's, therefore the stock price is justified".

Brendan

 

[Fella]

If the price today were $5,000 you would be very surprised at my forecast of $1,000.

Of course because I don't think the market is going to be that wrong , I find it fascinating that you can be fairly confident on this and the same with Bitcoin going to zero its bordering on arrogance dismissing the market as a whole and the intellects on both side of the buy sell line that ultimately have set the line as it is now.

 

[elacsaplau]

The price has to be related in some way to future profitability.

Brendan,

You may be right that Tesla is overpriced. However, I'd really appreciate it if you would answer a few specific questions please?

1. Do you accept that Tesla made a profit in its last reported quarter - Q3 2019?

2. Do you accept that it is likely to report a profit in Q4 2019 - results to be published later this month?

3. Do you accept that it is likely to report a profit for the full year 2020?

 

[Sunny]

Brendan,

You may be right that Tesla is overpriced. However, I'd really appreciate it if you would answer a few specific questions please?

1. Do you accept that Tesla made a profit in its last reported quarter - Q3 2019?

2. Do you accept that it is likely to report a profit in Q4 2019 - results to be published later this month?

3. Do you accept that it is likely to report a profit for the full year 2020?

Not really sure what they are going to answer but my view:

1. Yes. Of about $150m. Telsa have announced profitable quarters before. The last two quarters of 2018 were profitable before they then announced a $700m loss in Q1 of 2019.
2. Probably but see above
3. I don't see it to be honest but it could. Lets see what Q1 results are like.

Tesla is a news driven momentum stock. It also has a lot of investors that want to believe in the company and that makes it difficult for people who are bearish. The shares have risen over 100% in three months which is a multiple of what analysts were expecting. So if analysts, can be so wrong on the bullish side, Brendan's price target of $200 doesn't seem ridiculous. Indeed $200-$300 is the price target for a lot of analysts even after the rally. But of course they could be wrong again and the share could go to $1000 or default overnight. Anyone who claims they can call this stock at the moment is bluffing but a 100% rally in three months is a bubble but it could go up another 100% before bursting and that's the problem with trying to short it

 

[James Kirk]

Although i have been checking into Askaboutmoney from it's birth I have never posted a comment before but this thread has been most interesting and engaging. Before I go any further just to say I am a long time Tesla share holder and will continue to be for years to come.

From the begining of tesla there has been a narrative sold by vested interests that at every turn created fear, uncertainty,and doubt (FUD) about Tesla and Musk. That's to be expected because Musk and Tesla are massive disrupters to two big industries, energy(oil) and auto's. That narrative has been a huge headwind for Tesla but because of the strength of Musk and the absolute determination of his employees they have beaten the odds and are now one of fastest growing auto company in the US and possible the world. Unfortunately there are many that have swallowed the fud and shorted the company with the absolute conviction that they will go bankrupt at any minute. They have last billions between then.

So i was very surprised to see Brendan Burgess, someone I would see as very sensible join the band wagon. This is the line that has me here.

Brendan, you said
"It's very difficult to price a stock which is not making profits and shows no sign of making sustainable profits any time in the near future"

I assume you have read the Tesla accounts and have researched where sales and revenue are going in the future? Have you? Or have you read the figures on Seeking Alpha or such? Tesla WILL be profitable in 2020.

When I read the posts here there is a lack of any hard figures. That is made all the more clear by the short bet you have made. You have left a scope from $100 to $1000 of a share price??? Would the sensible side of you not look at that huge difference and think it's telling you something? What it says to me is "I haven't a clue whats going to happen but it's going to $100 for sure" That's not investing, that just gambling.

I am posting because I am interested in knowing why someone that is not really into shorting and knows there way around money came to this decision on Tesla.

 

[James Kirk]

Not really sure what they are going to answer but my view:

1. Yes. Of about $150m. Telsa have announced profitable quarters before. The last two quarters of 2018 were profitable before they then announced a $700m loss in Q1 of 2019.
2. Probably but see above
3. I don't see it to be honest but it could. Lets see what Q1 results are like.

Good to see numbers getting involved.

1. $150 mil is correct.

2. Yes they will. depending on what was invested in R&D and in G3 but in the region of $220 mil.

3. Touch and go. Coming into Q4 tesla had stock on hand. Mostly in transit to the EU and China. So in Q4 they sold more than they produced. For Q1 they start with almost no inventory. added to that, at the start of the year they have down time to do maintenance and modernise the production lines. Q1 production will be hit. Less sales less revenue. They do have G3 in China this year so that's an unknown for Q1 especially.
So Q1 is hard to call. It could be + or - $150 mil.

4. After that Q2 should be back to normal production and a positive return in every Q after that.

Going back to Q1 20. If that is a positive Q then the prize is big as regards the SP. Q2 will be positive so that would make 4 straight profitable quarters and certain inclusion in the S&P 500. One of the reasons the SP has shot up in the last while is because of shorts. Almost 30% of shares were shorted coming into Q4. Thats down to 20% at year end as shorts got hammered and threw in the towel. That was a lot of share buying to cover positions. With the borrowed shares now burned the actual number of shares active is reduced. When Tesla does make the S&P the demand for shares is going to shoot up instantaneously as every tracker HAS to buy in. If the demand for covering shorts drove the price what will it be like when that happens.

 

[Andrew365]

Although i have been checking into Askaboutmoney from it's birth I have never posted a comment before but this thread has been most interesting and engaging. Before I go any further just to say I am a long time Tesla share holder and will continue to be for years to come.

From the begining of tesla there has been a narrative sold by vested interests that at every turn created fear, uncertainty,and doubt (FUD) about Tesla and Musk. That's to be expected because Musk and Tesla are massive disrupters to two big industries, energy(oil) and auto's. That narrative has been a huge headwind for Tesla but because of the strength of Musk and the absolute determination of his employees they have beaten the odds and are now one of fastest growing auto company in the US and possible the world. Unfortunately there are many that have swallowed the fud and shorted the company with the absolute conviction that they will go bankrupt at any minute. They have last billions between then.

So i was very surprised to see Brendan Burgess, someone I would see as very sensible join the band wagon. This is the line that has me here.

Brendan, you said
"It's very difficult to price a stock which is not making profits and shows no sign of making sustainable profits any time in the near future"

I assume you have read the Tesla accounts and have researched where sales and revenue are going in the future? Have you? Or have you read the figures on Seeking Alpha or such? Tesla WILL be profitable in 2020.

When I read the posts here there is a lack of any hard figures. That is made all the more clear by the short bet you have made. You have left a scope from $100 to $1000 of a share price??? Would the sensible side of you not look at that huge difference and think it's telling you something? What it says to me is "I haven't a clue whats going to happen but it's going to $100 for sure" That's not investing, that just gambling.

I am posting because I am interested in knowing why someone that is not really into shorting and knows there way around money came to this decision on Tesla.

JK, much like the markets can stay irrational longer than you can stay liquid, I feel you will be experiencing the same issue trying to get answers to your questions.

I was equally surprised by the gamble and why I have been probing for evidence of research.

 

[joe sod]

Tesla is a news driven momentum stock. It also has a lot of investors that want to believe in the company and that makes it difficult for people who are bearish. The shares have risen over 100% in three months which is a multiple of what analysts were expecting.

From the posts on this thread that is very true, the emotion and engagement with this stock from both sides is unique. However it is not a facebook where it was more a great idea that people latched onto or a google where it was just great software close to the start of internet search engines. It was easy for these companies to become profitable because they did not have high costs or expensive assembly lines.With Tesla they have to develop very difficult technology and are limited by the laws of physics,its not the same as facebook or even apple the obstacles they have to climb.
Ultimately they have to win against the big car companies that have a long history of producing very complicated products , producing a modern diesel car is still not easy. Therefore I still think that the likes of Toyota or Nissan will still be able to overtake Tesla in electric cars especially if they take them on with pricing. Because electric cars are still a small share of the overall car market they have not needed to take on Tesla yet,they are not going to cannibalise their conventional car sales by competing with Tesla on pricing.

 

[Brendan Burgess]

I find it fascinating that you can be fairly confident on this and the same with Bitcoin going to zero its bordering on arrogance dismissing the market as a whole and the intellects on both side of the buy sell line that ultimately have set the line as it is now.

Hi Fella

First of all I am confident that Bitcoin will go to zero. It is a bag of hot air.

I am fairly sure, but not confident, that Tesla will fall to around $100.

As I think I have said before on this thread, I don't believe that the ordinary punter can outperform the market.

So for shares such as Ryanair, CRH or Bayer (all companies I have shares in) I think that today's price is a fair reflection of their value. But noone is manic about these companies or their shares.

During the dot.com bubble, people were manic. I argued until I was blue in the face that the prices were not justified. You can probably find the discussions online. It's very similar to this discussion. "These companies are the future - forget bricks and mortar." " Profits are irrelevant." "One more share split and I will be a millionaire."

So when a mania happens as there is for Bitcoin and Tesla, it's possible to profit by short selling. There is a risk that the mania may get even worse but I reckon that the odds on a fall far outweigh a continuation of the mania. And, unlike the big shorts, I am allocating only a very small part of my portfolio to both bets. I will not be squeezed. The price may rise and I may have to close my position. But they are small parts of a portfolio.

Brendan

 

[Brendan Burgess]

1. Do you accept that Tesla made a profit in its last reported quarter - Q3 2019?

2. Do you accept that it is likely to report a profit in Q4 2019 - results to be published later this month?

3. Do you accept that it is likely to report a profit for the full year 2020

1. Yes, they reported a profit.

2. I don't know.

3. I don't know.

But short term profits or losses are not very relevant. A company could be losing money for the next 3 years and could still justify a valuation of $86 billion.

But no one, as far as I know, is forecasting profits which would justify that valuation.

Brendan