The Perils of Shorting: A Real Life Example

Sunny said:
For me, I am very interested in the trend where they are announcing great Q4 results as we approach year end and then we revert to loss making quarters in the new year. I am not suspicious by nature but....
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Hi Sunny. Yes, I had noticed the contrast between Q4 2018 and Q1 2019 (Op profit of £0.41 billion falls to Op loss of $0.52 billion) but I didn't know if the same had happened on previous occasions. I gather from you that it has.
Brendan Burgess said:
I am prepared for the fact that I might be wrong and that I might lose money. Or even if I am right, that the market remains wrong for a long time.
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So am I - although I agree that I have far more at stake than you. I should add that reading some of the posts on this thread has helped me understand why the price has reached its current level and why it could take a long time for reality to dawn for some people.
 
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I do wonder when will reality dawn on Colm and Brendan that there is no point in shorting its clear from even reading your own posts that yous agree that even though you could be fundamentally right , short term predictions are impossible and its nothing more than a gamble. Sorry to repeat it ad nauseam
but the truth doesn't change.
 
@Fella It may surprise you, but we're not far apart. In fact, at a younger age, I could have been you (but without your insights from gambling). I believed that the market was always right. I've changed my mind, but not by much.
Fella said:
short term predictions are impossible and its nothing more than a gamble.
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I agree completely, but I don't invest for the short-term. My normal investment horizon is a minimum of five years. An investment horizon that long works fine for long positions, as a trawl through some of my earlier diary entries will show, but I've gained a new insight over the last few months, that an investment horizon this long is fraught with risk for short-selling, partly for the reason alluded to by @declan11 in post #8 on this thread, that prices always tend to rise over the long-term, so you're swimming against the current when shorting. I've learned an expensive lesson.
I would also like you to ponder a second thought in relation to your thesis that 'the market is always right'. Just over three months ago (on 21 October) Tesla's share price was $253.30. It has more than doubled since then. Was the market right on 21 October and is it still right today? What has happened in the intervening period to change the 'right' price from $253 to $565? Not sales. Sales volumes for 2019 were at the low end of expectations, so shouldn't have affected the price. Could it be profits? A small profit was recorded for the third quarter, but that was after sharp reductions in R&D and in Sales and General Expenses compared to a year earlier, hardly reasons for the share price to double. A more telling fact is that the target price for the stock, as per the main analysts covering Tesla, has hardly moved in the period. So why has the share price doubled? I put it down to the 1% of the time (not precise, but of the right order) that the market is wrong. I agree with you for the other 99% of the time.
 
@Colm Fagan I don't believe the market is always right but I do believe that long term going against the market is a losing strategy. Tesla could be well over valued I have no clue , I have no idea what price the stock should be I don't study company finances .
So why do I have a problem with shorting Tesla ?
Someone could tell me they have been to the future and Tesla stock is worth 0 , they ran out of money and the company is bust. But that information alone is not going to make me short the company , I would need to know the time frame . Tesla could rise to 10,000 first and then fall .
Tesla is not trading on the same metrics that where used to value companies before , they are a company that divides opinion , some people believe in the future everyone be driving Tesla's some believe they will be bust . It's hard to value a company like that , I've read alot about Tesla and without getting into the company and battery technology etc it seems to me that the are ahead of the rest .
It confuses me why someone like yourself whom undoubtedly has great financial knowledge and has built up a large portfolio over the years would want to try and value a company like Tesla using the same old metrics . And then risk a large part of your portfolio in shorting it ?
You regularly say your up xx% or whatever even accounting for the Tesla shorts but are they realised gains or paper gains ?
Long term and shorting don't go together and it's a dangerous game , you keep referring to long term but you can't short a volitile company like Tesla long terms without serious risk to financial and mental health , how many times have you to add money to keep your positions , the losses are realised straight away .
At your age where you seem to be withdrawing part of your pension from investments a stock market crash combined with Tesla shorts going wrong could wipe out years of hard work , and for me it's no more than a gamble.
Is there not a better strategy , if I really believed Tesla was going to bust I would look at what companies would benefit without Tesla , is there a leading Chinese equivalent you could buy ?

In regards to why Tesla price has doubled I don't know , was the market right before again I don't know . From looking at market returns in companies that are not as volitile as Tesla I notice that the trend of stocks are rarely linear , good news doesn't necessarily equate to price rises straight away . I would imagine the reasons for this are quite complex and to do with weight of money etc.
You could argue Tesla price was artificially been held back due to the volume of shorting in the market , a sudden rise created a short squeeze and the added publicity etc caused some more buying and the price is inflated now. Again I don't know , and I don't think you or Brendan do either , I don't think there's any financial advantage shorting Tesla , I expect you will making a negative expected value bet due to spread and I'm fine with that , I gamble sometimes but my gambling doesn't form part of my investment portfolio because I recognise it as what it is .
 
Hi Fella

I will try to explain it to you.

If I gave you odds of 11/10 on a coin toss and you were happy that it was a fair coin and that I was good for the bet would you take the bet?

It's short term.
You will either win 11 or lose 10

If you would bet, how much would you bet?

Would that be a gamble or an investment?

Brendan
 
Brendan Burgess said:
Hi Fella

I will try to explain it to you.

If I gave you odds of 11/10 on a coin toss and you were happy that it was a fair coin and that I was good for the bet would you take the bet?

It's short term.
You will either win 11 or lose 10

If you would bet, how much would you bet?

Would that be a gamble or an investment?

Brendan
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I would bet a % of my net worth.
That would be an investment.

My problem is I don't see how you come to the conclusion you have 11/10 in this case of bigger . You are saying it's a value bet but I don't think you have any facts to back it up.
Whatever the outcome is of Tesla is irrelevant to me and this thread .

My fundamental opinion is shorting is gambling , I have read nothing on this thread to make me think otherwise, 76% of IG customers lose money that is not investing.
Your counter argument is Tesla is the rare chance like Bitcoin like the dotcom bubble , but I don't agree , I'm not going to just take your word over the markets .

Even knowing a stock will definitely go to zero you cannot guarantee profits , I am looking at it from a " how can I profit " viewpoint you and Colm are looking at it from " this is over valued " view point , we all might agree Tesla is double the price it should be , but I can't see any gauranteed income from that knowledge, whereas you's two think it's enough to short it as the value has to be on your side . It doesn't , unless you can time the decline .
 
With a fair coin toss , if you win you get paid . Tesla could lose money and the stock price could still rise that's the problem and could keep rising until the coin toss is now 10/11 against you but your still in the market trying to get out .
 
Fella said:
we all might agree Tesla is double the price it should be , but I can't see any gauranteed income from that knowledge
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But you are prepared to invest in a coin toss. There is no guaranteed income. There is an EV.

If you are convinced that Tesla is double the price it should be, then you should be prepared to short sell it in a manner similar to mine.

You stake a % of your portfolio that you are fully prepared to lose in its entirety - like the coin toss.

Some of the time, you will lose your entire stake.

More of the time, you will make a profit.

So let's say I bet €100. I shorted it at 536

I set my stop at 1,000

I might lose my entire €100 just as I could do in the coin toss.

I will repeat that although I believe that shorting Tesla has a positive EV, I don't have Colm's confidence to put 10% of my portfolio on it.

These occasions are very rare. Bitcoin is another example.

I would expect to make money by shorting both. But I could lose on both. And another one might not come along in my lifetime.

Brendan
 
Fella said:
but your still in the market trying to get out .
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I think that people are scared of short selling because they see the losses as unlimited.

IG forces you to set an automatic stop. I would choose to do it anyway.

So I won't be trying to get out. I will close my bet at 1,000 either voluntarily or automatically.

Brendan
 
Brendan Burgess said:
But you are prepared to invest in a coin toss. There is no guaranteed income. There is an EV.

If you are convinced that Tesla is double the price it should be, then you should be prepared to short sell it in a manner similar to mine.

You stake a % of your portfolio that you are fully prepared to lose in its entirety - like the coin toss.

Some of the time, you will lose your entire stake.

More of the time, you will make a profit.

So let's say I bet €100. I shorted it at 536

I set my stop at 1,000

I might lose my entire €100 just as I could do in the coin toss.

I will repeat that although I believe that shorting Tesla has a positive EV, I don't have Colm's confidence to put 10% of my portfolio on it.

These occasions are very rare. Bitcoin is another example.

I would expect to make money by shorting both. But I could lose on both. And another one might not come along in my lifetime.

Brendan
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I am not sure what price Tesla should be , but either are you but lets assume you are correct , you quoted a figure of 100 as a get out.
So if your right and its worth 100 and the market is acting totally irrationally , so you start shorting it the day it passes 100 , it goes to 150-200-250-300-350-400-450-500-550-600-??-?? you are shorting every time it rises .
This is getting really really expensive but its ok you KNOW eventually you are going to be proved right , so even though you are losing your shirt for a couple of years on end you are going to hang on till the market starts to act rationally. You can convince yourself that you made the right call , that you had an advantage but you will learn an expensive lesson that theres a difference between been ultimately proved right and making money.
 
Hi Fella

Let's be clear. I do not short any stock which I think is overvalued. Your analysis would be correct for the vast majority of stocks.

It has to be a rare occasion like Bitcoin where it's maniacally overvalued. It can still rise further and I will lose my money.

So with Bitcoin, when it falls to $3,000 I will close my short position. Not because I think $3,000 is a fair value, but because the mania may cause it to rise again.

Tesla is a bit different because it has some value. I am not sure, but if gets to $300 before it gets to $1,000 I will close my short position.

Brendan
 
I think we have to agree to disagree on this one I respect your opinion on the matter .

My view with Bitcoin and Tesla is that if you cannot understand how the price got to where it is today , I don't know how you think you can predict it's future path .
 
Fella said:
Is there not a better strategy , if I really believed Tesla was going to bust I would look at what companies would benefit without Tesla
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Yes, would a better strategy not be to just go long on the big car makers like Toyata or Volkswagon. I think Tesla overtook Volkswagon last week in market capitalisation, I dont buy that for 1 second. Tesla is a good brand yes but it is not that far ahead in technology.
 
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joe sod said:
would a better strategy not be to just go long on the big car makers like Toyata or Volkswagon,
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Not really.

I hope that Tesla will survive and continue to produce innovative new products. I just happen to think that the share price is too high by a large factor.

But even if Tesla announced tomorrow that it was closing, I am not sure that the other car makers would increase in value.

Brendan
 
Not really because car making is a very unforgiving industry for shareholders. Maybe we will all be driving electric cars in 10 years time but the cost of getting there could claim numerous victims in the industry. We have all seen GM, Ford, Chrysler, Fiat, VW etc etc that have had problems in the past ten years making traditional cars. It's an industry I have never liked.
 
Colm Fagan said:
July 2019: In relation to autopilot and Full Self-Driving (essential for robotaxis): “We are making progress towards stopping at stop signs and traffic lights.” No report since then on whether the monumental challenge of stopping at stop signs has been surmounted.

October 2019: “One accident for every 4.34 million miles driven in which drivers had Autopilot engaged. The national average is one accident for every 0.5 million miles.” Grossly misleading. Autopilot is engaged on motorways. The vast bulk of accidents happen off motorways - probably near stop signs and traffic lights, which are proving such a challenge for Tesla’s autopilot.
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Stop signs and traffic lights are now visible in the car, so there's some progress.

Autopilot is engaged not only on motorways, but also works great on twisty Irish roads in the dark.
 
sabre Man said:
Stop signs and traffic lights are now visible in the car, so there's some progress.

Autopilot is engaged not only on motorways, but also works great on twisty Irish roads in the dark.
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How do we know that? Is it even legal to switch it on in this country?
 
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