The Perils of Shorting: A Real Life Example

Brendan Burgess said:
I set my stop at $1,100 in my head.

I set it at $900 in practice with a view to increasing it if necessary.

Unfortunately, I was distracted by other issues today and it went through that without me noticing and I was closed out automatically.
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Hi Brendan
At least I thought you would hold out until the tide turned, but it wasn't to be. I also threw in the towel. Over the last few months, my efforts at risk management required me to keep trimming my exposure as the price increased. The crazy price increases meant that I had to close part of my position almost every day, each time at a higher price. It got quite dispiriting and eventually started coming between me and my night's sleep. That's an absolute no-no in my book - my ideal is to buy a stock and go to sleep, waking up every 6 months or so to check if the investment thesis is still intact - so I decided to close the last of my shorts earlier this week. Luckily, I got out before yesterday's complete madness, when the price briefly rose above $900 a share.
It has been a chastening experience. Never has Keynes' maxim, which I quoted at the start, about markets staying irrational for longer than you can stay solvent, been more apt. I've also learned the truth of another market maxim: "Don't short a story stock in a bull market." Tesla is the ultimate story stock and it was a bull market, so why did I persist? I don't know. For what it's worth, I believe that my analysis in the article that launched this thread will be proved accurate, but I won't be trying to profit from it.
 
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But why did the stock rise so much in the first place apart from the short covering. I read another good analysis on another site, basically "ethical investing" has alot to do with it. The fact that massive funds like blackrock are divesting from fossil fuel investments and are buying stocks like Tesla not because of fundamentals but because of optics they need to show their "green credentials" therefore they need to have Tesla in their funds.
For what its worth oil stocks which were hammered over the last month are up 4% today and are paying big dividends.
The same thing happened during the dot com bubble alot of the big funds like blackrock were caught with their trousers down after buying alot of expensive dot com crud.
 
Colm Fagan said:
Hi Brendan
At least I thought you would hold out until the tide turned, but it wasn't to be. I also threw in the towel. Over the last few months, my efforts at risk management required me to keep trimming my exposure as the price increased. The crazy price movements meant that I had to close part of my position almost every day, each time at a higher price. It got quite dispiriting and eventually started coming between me and my night's sleep. That's an absolute no-no in my book - my ideal is to buy a stock and go to sleep, waking up every 6 months or so to check if the investment thesis is still intact - so I decided to close the last of my shorts earlier this week. Luckily, I got out before yesterday's complete madness, when the price briefly rose above $900 a share.
It has been a chastening experience. Never has Keynes' maxim, which I quoted at the start, about markets staying irrational for longer than you can stay solvent, been more apt. I've also learned the truth of another market maxim: "Don't short a story stock in a bull market." Tesla is the ultimate story stock and it was a bull market, so why did I persist? I don't know. For what it's worth, I believe that my analysis in the article that launched this thread will be proved accurate, but I won't be trying to profit from it.
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And yet Colm, we have the paradox that you as I must think that Tesla is hugely overpriced now much more than you did back at 300 but you won’t short now while you did at 300. In the technical jargon your decisions are not Markov, they are influenced by your history.

If Tesla goes the way of VW this thread or at least a précis of it will be a textbook example of the “perils of shorting” as the title promised. Anyway judging by your replies to Fella it has been more than compensated for by your long positions, albeit it has sent out a wealth warning to any putative long term shorters.
 
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Hi Duke

A very good point.

I shorted Bitcoin at $ 14.300 . If I had known how to do it, I would have done so at € 1,000 and lost my investment.

I was very comfortable to short Tesla at $375 because I knew the talk of it being bought out at $420 was nonsense. Luckily I was forced to close my position due to needing cash to pay my taxes.

I shorted again at $530 - and was automatically closed at $900 although in my mind my closing position was $1,100

But at $375 it was ridiculously overvalued in relation to the fundamentals.

But at $900 , it has lost its mooring completely.

I am sure that it will drop to the $200 or $300 range, but I don't know if it will got to $5,000 on its way there.

The past is irrelevant and so it makes more sense to short it now. But I have lost the stomach for it.

I suspect that Colm is the same.

Maybe a professional investor would see it differently.

Brendan
 
Brendan Burgess said:
Hi Duke

A very good point.

I shorted Bitcoin at $ 14.300 . If I had known how to do it, I would have done so at € 1,000 and lost my investment.

I was very comfortable to short Tesla at $375 because I knew the talk of it being bought out at $420 was nonsense. Luckily I was forced to close my position due to needing cash to pay my taxes.

I shorted again at $530 - and was automatically closed at $900 although in my mind my closing position was $1,100

But at $375 it was ridiculously overvalued in relation to the fundamentals.

But at $900 , it has lost its mooring completely.

I am sure that it will drop to the $200 or $300 range, but I don't know if it will got to $5,000 on its way there.

The past is irrelevant and so it makes more sense to short it now. But I have lost the stomach for it.

I suspect that Colm is the same.

Maybe a professional investor would see it differently.

Brendan
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Well I think you need more of a plan . I know professionals that used Kelly criterion to decide how much to stake . I had a staking calculator myself which wasn't as agressive as Kelly calculator . But if you set out to make money shorting then I would pre-decide my stake based on the your believed percentage value edge.
Lets say your willing to risk 10,000 on Tesla short
You might only risk 10% of that when you see it at 10% over-valued
If your right and the price returns to your price you get out take your profit and go back again or concentrate on another stock.
But if the price rises again you have another 9000 to get in again , its now 20% over valued stick in another 10-20% .
Most people lose money because they wait for the extreme at each end , as some trader told me "theres enough people wanting to get rich quick , that he was happy to get rich slowly " basically scalping the market , getting in and out constantly for small percentages here and there can be much less risk and higher profit .

With all due respect Brendan , I don't see you making money shorting stocks with the attitude of "i'm going to buy Bitcoin and I'm sure its going to go to zero but i'll get out at 2000" or whatever. You might be right but the nature of the market probably means a lot of time your upper limit gets hit as it fluctuates wildy before your lower limit gets hit. If you go back into Tesla again I'd make you odds against winning , every time you take a short position you are taking a negative expected return bet - You will disagree with me on this but you are 100% wrong if you think you have even a par value bet . It is a negative expected return , keep doing it over your lifetime and your going to be down , same with Colm.
 
Hi Fella

My understanding of Kelly is that it only relevant when there is a risk of losing your entire bankroll.

I limited my exposure to 1% of my portfolio.

If I decided that I could frequently identify shares which were overvalued and undervalued, then Kelly might be applicable.

I lost about 0.8% on this particular short. So if the return on my portfolio would otherwise have been -10% this year, I will lose -10.8% instead.

Kelly might be more relevant to Colm.

Brendan
 
Brendan Burgess said:
Hi Fella

My understanding of Kelly is that it only relevant when there is a risk of losing your entire bankroll.

I limited my exposure to 1% of my portfolio.

If I decided that I could frequently identify shares which were overvalued and undervalued, then Kelly might be applicable.

I lost about 0.8% on this particular short. So if the return on my portfolio would otherwise have been -10% this year, I will lose -10.8% instead.

Kelly might be more relevant to Colm.

Brendan
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Well you could use Kelly on the 1% of your porfolio you allocate to shorting . So you don't risk all that 1% in one go or you could take 10% of your portfolio and allocate it to more risky stuff but using a staking calculator.
 
Duke of Marmalade said:
And yet Colm, we have the paradox that you as I must think that Tesla is hugely overpriced now much more than you did back at 300 but you won’t short now while you did at 300. In the technical jargon your decisions are not Markov, they are influenced by your history.
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Ah, Duke, how long do you have?
First of all, at a visceral level, I never again want to hear the word Tesla. Not ever. You could say that Pavlov, not Markov, rules OK :)
I've also recognised that we're dealing with a cult. Cults frighten me: Waco and all that. The fact that it's a cult is clear even from this thread. Cults are unpredictable. The price could get to $2,000 before it gets back to the more rational (IMO) $200.
That brings me to the technical reason why I'm out. I don't have an adequate conceptual framework for handling shorts. For long positions, it's straightforward. If you're ahead, you can hold forever. As readers know by now, that's my default for long holdings. If you're losing on a long position, it matters less and less as the price falls whether you hold or sell. There's no similarly satisfactory conceptual framework for short positions. You could do a "Brendan" on it and fix specific upper and lower bounds, but then you're faced with the problem that you have to exit when your position is at its most valuable. That's crazy, but I don't have a good answer. Maybe @Fella's suggestion of "Kelly", whatever it is, provides the required conceptual framework. I never heard of it.
The cash implications are another important consideration. I've had to keep finding cash to fund the increased margin calls, which meant selling other shares. If I ever do another short, I'll make sure to have the cash readily available to meet increased margin calls if the price rises. That will mean committing a lot of cash for a relatively small expected return. It could prove difficult to get the numbers to stack up.
Finally, I don't want anyone to think that it hasn't been a painful experience for me. It has. Yes, even after Tesla, my portfolio is worth more now than it was 6 months ago, and quite a bit more than at end 2018, despite all the withdrawals in the meantime, but it's worth a heck of a lot less than it would have been if I had never gone near Tesla.
 
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Hi Colm. Glad you got out with your sanity intact, even if your pocket is a litte lighter.
I think this thread has indeed illustrated the "Perils of Shorting".
 
Hi Colm

A problem for poker players is that they keep going bust after a bad run.

My understanding of Kelly is that it determines the maximum stakes they should be playing with to maximise their long term wealth and avoid going bust.

And the maximum is surprisingly low.

en.wikipedia.org

Kelly criterion - Wikipedia

en.wikipedia.org en.wikipedia.org
 
There's a funny postscript to my Tesla story. I went to the garage yesterday for a car wash. I bought my token in the shop and drove to where the drive-in car wash is located. There was another car in the line ahead of me, but no-one in it. I was naturally fuming. Then a guy strolls over, having gone to the shop after me, and gets his car washed ahead of me. It was a Tesla!!!
 
Ok, I won't mention the T word :oops: Personally, I am not looking forward to the day I have to drive an EV.

I don't think Kelly helps.
Boss, Kelly is the opposite of risking all your stake, you only ever risk a proportion of your stake, so you are never actually out, and in the long run you maximise your wealth. But the unrealistic assumption of Kelly is that you can continually have a piece of the same gimme opportunity. Thus say you had endless repeated access to 6/4 against Heads in a fair toss, you should bet 1/6th of your pile every time to max your wealth long run, and this you will achieve with certainty as you will never run out of stakes.
But shorts aren't like that, they may be only a fleeting opportunity.
(Ahh! this crossed with your last post, Boss)
 
Colm Fagan said:
There's a funny postscript to my Tesla story. I went to the garage yesterday for a car wash. I bought my token in the shop and drove to where the drive-in car wash is located. There was another car in the line ahead of me, but no-one in it. I was naturally fuming. Then a guy strolls over, having gone to the shop after me, and gets his car washed ahead of me. It was a Tesla!!!
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I thought for a moment you were going to say it was driverless :)
 
Hi Fella,

You have made many interesting contributions to this thread. I think we both agree that shorting, in isolation, is more akin to gambling than investing and certainly, neither of us can be accused of after-timing here!

Do you have time to expand on various shorting strategies? Based on my sense/gut that Tesla is likely to continue to be extremely volatile for the foreseeable future, what shorting strategies are available? [Let's park Kelly for now].

For example, I shorted at $926. Right now, in pre-market, its $723. It could plausibly fall or jump $100 today. If not today, tomorrow - and almost certainly someday soon! If I put a stop-loss in at, at for example, $760 - it means that if Tesla is on a going day, my leakage is curtailed. If it drops like a stone, I'm further in the money. I get it that luck will be a major factor and that, for example, I'm banjaxed if it initially jumps by x and subsequently falls by 2x in the one session, etc.

Sorry - a bit rushed. Is my question clear? Am interested in your thoughts / options available. [I get it that this is a very simple example - by all means up the complexity dial if you think appropriate.]
 
elacsaplau said:
Hi Fella,

You have made many interesting contributions to this thread. I think we both agree that shorting, in isolation, is more akin to gambling than investing and certainly, neither of us can be accused of after-timing here!

Do you have time to expand on various shorting strategies? Based on my sense/gut that Tesla is likely to continue to be extremely volatile for the foreseeable future, what shorting strategies are available? [Let's park Kelly for now].

For example, I shorted at $926. Right now, in pre-market, its $723. It could plausibly fall or jump $100 today. If not today, tomorrow - and almost certainly someday soon! If I put a stop-loss in at, at for example, $760 - it means that if Tesla is on a going day, my leakage is curtailed. If it drops like a stone, I'm further in the money. I get it that luck will be a major factor and that, for example, I'm banjaxed if it initially jumps by x and subsequently falls by 2x in the one session, etc.

Sorry - a bit rushed. Is my question clear? Am interested in your thoughts / options available. [I get it that this is a very simple example - by all means up the complexity dial if you think appropriate.]
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A good friend of mine was a currency trader , I went to visit him when I was in london before and watched him trade currencies and make money. He tried to explain it to me how watching the charts you could predict the price movements. I wasn't clever enough for it. I am not clever enough to make money shorting but I have a firm belief that there is no edge here.

I only get involved when I can see a definite edge , I used to make money trading Betfair but I knew generally which way the market was going to move , I had an advantage here in that I was getting information through various means and only competing with other traders but it involved spending the day sitting on the laptop.

I don't know anything about Tesla that is not in the public domain , I have no clue what way that share price will move , I could go long now or short and it would be down to luck , If I put 10,000 into IG index and start trading I suspect I would lose it . I would also advise people to NEVER use a demo account at any IG index or anywhere else as the results you will get are not true to life. The reasons for this is you are not actually in the queue your money is "matched " as soon as a price is hit but in reality its totally different , I see people open demo accounts and they are well up and then put real money in and lose which is fairly obvious to see why .
 
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