The Perils of Shorting: A Real Life Example

[elacsaplau]

Thanks Fella for taking the time to respond. Points well made. Upon reflection, I am going to cease publicly talking about shorting strategies. It has the potential (especially if lady luck goes with me!) to obfuscate what should be the clear message emanating from this thread.

 

[EmmDee]

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.]

I was a little sarcastic in the thread earlier when I mentioned selling volatility. But in effect, if you don't have a clear view on what direction a stock could move AND there is a period of significant price action, it is possible to take a position which is effectively selling the volatility "premium".

One way is to use option spreads - selling and buying optiosn wit a difference o date and/or strike price. The voaltility element of the pricing on longer dated options is more significant and likewise on out-of-the-money options.

If you already hold shares in Tesla, selling short dated call options (covered call selling) at way out-of-the-money strike prices captures the same volatility premium.

 

[Monksfield]

"I don't have an adequate conceptual framework for handling shorts" (Colm).

This is the most profound statement on the whole thread. In my opinion and experience very, very few people do. Including people who know quite a lot about investment markets and who have a high risk tolerance and capacity.

 

[elacsaplau]

Thanks EmmDee,

Your usual high-grade food-for-thought post. You're talking senior hurling now! In my excitement earlier/yesterday, this was the type of stuff I wanted to explore on AAM (when I realised that I needed a quick crash course in this area and your tantalising post of yesterday really did get me thinking.) Upon reflection, I now consider it best if I don't post further in relation to this type of "money placement" (read: certainly not investing in my case!!) - for the reasons set out in post #561.

[There is so much potential learning in this thread about investing, I hope this learning can be appropriately captured and summarised. Otherwise, the learning of the 500+ posts is likely to get lost. I am not the man for the job. Neither, I think, is Fella. We tried, in vain, many times to point out the risks. By risks, I don't just mean simply losses as has been incorrectly inferred. I mean proper risk assessment and management. Monksfield's observations just now in this regard are completely apt. Related to this, there is also much rich material on the whole psychology of investment. If the guy who wrote Thinking Fast and Slow got his hands on this thread, he'd surely be salivating!!]

 

[Sunny]

Thanks EmmDee,

Your usual high-grade food-for-thought post. You're talking senior hurling now! In my excitement earlier/yesterday, this was the type of stuff I wanted to explore on AAM (when I realised that I needed a quick crash course in this area and your tantalising post of yesterday really did get me thinking.) Upon reflection, I now consider it best if I don't post further in relation to this type of "money placement" (read: certainly not investing in my case!!) - for the reasons set out in post #561.

[There is so much potential learning in this thread about investing, I hope this learning can be appropriately captured and summarised. Otherwise, the learning of the 500+ posts is likely to get lost. I am not the man for the job. Neither, I think, is Fella. We tried, in vain, many times to point out the risks. By risks, I don't just mean simply losses as has been incorrectly inferred. I mean proper risk assessment and management. Monksfield's observations just now in this regard are completely apt. Related to this, there is also much rich material on the whole psychology of investment. If the guy who wrote Thinking Fast and Slow got his hands on this thread, he'd surely be salivating!!]

You are missing the point of this thread. Colm and Brendan knew the risks. Nobody was saying that taking a short position was not risky. You yourself decided to short at $900. Why? That was as logical as the decision as Brendan and Colm's decision to short at a lower level. Just because you accept it is gambling, you still still put on the bet when you had no idea what the share would do. So you did exactly what Brendan and Colm did but you think by telling yourself that you know it is gambling, it is very different. It's not. You even started asking about shorting strategies so you already accepted that it wasn't just a plain bet. But was something you could have a strategy with so you acted like it was an investment which went against your argument. Your bet will pay off but don't kid yourself into thinking what you did was anything different to Brendan and Colm.

To be honest, the shorting angle on this thread isn't what is interesting at this stage. Everyone here agree that shorts are risky and can end up badly. The really interesting thing and the reason I hope that the thread isn't closed, is Tesla itself. As Colm said, this is the ultimate story stock with a cult like following. There is going to be realms of academic research written about this company one way or another and it is going to be fascinating to follow.

 

[galway_blow_in]

Nice technical bounce today

 

[Sunny]

By the way Colm, sorry to hear you had to get out. I agree with your analysis but I just can't bring myself to short a stock. I still remember my days working with credit default swaps.....

Thanks for posting it though. It was a great ride!!!

 

[elacsaplau]

That was as logical as the decision as Brendan and Colm's decision to short at a lower level.

Sunny,

As our current Taoiseach doth say: "Not sure about that"!

Personally, I genuinely believe that there is much skill in gambling. If you don't - that's ok!! (It's ok to have different opinions, right?) It's for this reason that I initially sought in these here parts for a crash course on effective strategies! (The old adage about entering a poker game and being able or not to identify the weak player is, in my opinion, completely on the money!!).

If you think, as you have stated, that Colm thought all along that he was gambling - that's news to me and more importantly, perhaps to Colm also - as in, "I didn't realise that I was entering a casino" (or words to that effect!!). Please explain which is it - I'd love to know!

I also believe in "being greedy when others are fearful" with my "satellite" allowance (I'm uncertain but imagine that you are familiar with the core/satellite concept?). Personally, I think Buffett rocks - others may disagree!! (Not, incidentally, just about investment but about life in general).

Regarding gambling - a lot about effective gambling is understanding the interaction between the odds and the probability. 'Twas always thus and always thus will be! (see Hamlet Act V). Your highlighted statement suggests that my potential upside relative to my potential undisclosed (stop)loss is similar to Colm and Brendan's. This is false. Not an opinion. mathematically so!!!!

you've got to know when to hold'em, know when to fold'em
know when to walk away, know when to run...…

 

[joe sod]

For example, I shorted at $926. Right now, in pre-market, its $723.

Really, it seems a bit unbelievable that you got a short on at that level, because the share price spent very little time above that level only about an hour I think . Did you put the short on when it was rocketing upwards? I very much doubt you got it on the way down as the share price was collapsed by big traders , it free falled down past $900 in less than a minute I think

Why did you only reveal today that you put on that short ? you have been an active participant on this thread but you only revealed today that you put on the short after you saw yesterdays price action where it continued to free fall.

 

[elacsaplau]

Hi Joe,

Yes, it went up initially. Merde se passe. Actually, I expected that it wouldn't remain for a long time at $926. I thought that there was a significant chance that the share price would increase or reduce! I wasn't especially perturbed that it went the wrong way initially. Not delighted just not phased! I didn't expect to magically short right at the summit. My tactic was a combination of a stoploss and to "double up" if it went significantly higher and I set my initial bet/foray accordingly. The "unbelievable" and quoting from today makes me smile. The morning after I did the trade, i.e. yesterday morning, I posted up my trade - couldn't have done so much earlier, agreed??!! And a day, is a long time in Tesla!

****

Edit: Just saw your edit of Why did you only reveal today that you put on that short? - at least it makes clear the insinuation of the original post. My CBT therapist tells me not to be reading into things that are not there (JOKE!!). Please refer to the relevant thread of YESTERDAY MORNING. Actually, in fairness, I admire the candour of your edit! Are we good? Please say yes!

 

[joe sod]

Yes elacsaplau, I believe you now, I thought you were bluffing. I just thought it a bit unbelievable that you managed to get a short on successfully at that price especially as this stock has been terrible for shorters up until tuesday evening. It just seemed too good to be true thats all

 

[elacsaplau]

Joe,

See link for the classic image of financial bubbles.

Here's How You'll Spot the Tech Bubble Top

"When I see a bubble, I invest." - George Soros I don't think there is a single human being with a Wordpress password who hasn't weighed in on whether or not there is a tech bubble underway. The answer is obviously yes, but being in a bubble doesn't mean [...]

www.forbes.com

If Tesla is indeed in bubble territory, it just seems to me that the longer the mania persists, the better the odds for the shorter becomes (less wrong side potential and massively increased good side possibility).

Remember much of what has been said about fundamentals is plausible. In this regard, Tesla needs to be disassociated with Bitcoin and other cryptos as the fundamentals will win in the end for stocks. Some of the theses that I have seen as to how to value Bitcoin make Comical Ali look measured. In the short term the stock market is a voting machine, in the long term it's a weighing machine, etc.

So where oh where are we on this graph? - now, that is the question (see Hamlet Act III). The crazy thing is that this graph gets wheeled out time and again. If you short too early, you will get mushed by the propulsion - if you go long too late, gravity will kill you.

 

[Sunny]

If Tesla is indeed in bubble territory, it just seems to me that the longer the mania persists, the better the odds for the shorter becomes (less wrong side potential and massively increased good side possibility).

I don't care about shorts or Tesla's share price. The most interesting thing is seeing how people think. For someone who has been criticising Colm and Brendan for the past couple of weeks for not understanding what they were doing to come out on page 29 with this statement is fascinating. The longer a share is in a bubble, the better the odds for a short become with less downside and increased upside..

 

[elacsaplau]

If you think, as you have stated, that Colm thought all along that he was gambling - that's news to me and more importantly, perhaps to Colm also - as in, "I didn't realise that I was entering a casino" (or words to that effect!!). Please explain which is it - I'd love to know!

Hi Sunny,

I really should know better than engaging with you further. My final comments for now. I actually have devoted too much time to this thread already for the time-being. If I don't go to the trouble of answering your next observation(s), I seek your understanding in advance. I need to devote whatever available time I have to studying the card!

1. Yesterday, IMVHO you made a dodgy (read: flat wrong) statement as per the quote above. I asked for clarification - but, hey, it didn't arrive. Am I particularly surprised? It's what happens inconvenient statements sometimes....

[For yonks, I've been highlighting the risks that those that follow Colm's approach could get mushed - ring any bells??!! My warnings, like those of Fella and others, were ignored, dismissed, etc. Now that the chickens have come home to roost - sure we all always knew the risks! I think you're having a laugh, maybe even a right laugh!]

2. Yesterday,

To be honest, the shorting angle on this thread isn't what is interesting at this stage. Everyone here agree that shorts are risky and can end up badly. The really interesting thing and the reason I hope that the thread isn't closed, is Tesla itself.

becomes today

The most interesting thing is seeing how people think.

Which is it??!! Are you having another laugh?

********

I get it that Duke of Marmalade, yourself and others are in the Fagan camp, so to speak. But as I said yesterday and am repeating now (note the consistency here! )……..

It's ok to have different opinions, right?

 

[Sunny]

Hi Sunny,

I really should know better than engaging with you further. My final comments for now. I actually have devoted too much time to this thread already for the time-being. If I don't go to the trouble of answering your next observation(s), I seek your understanding in advance. I need to devote whatever available time I have to studying the card!

1. Yesterday, IMVHO you made a dodgy (read: flat wrong) statement as per the quote above. I asked for clarification - but, hey, it didn't arrive. Am I particularly surprised? It's what happens inconvenient statements sometimes....

[For yonks, I've been highlighting the risks that those that follow Colm's approach could get mushed - ring any bells??!! My warnings, like those of Fella and others, were ignored, dismissed, etc. Now that the chickens have come home to roost - sure we all always knew the risks! I think you're having a laugh, maybe even a right laugh!]

2. Yesterday,


becomes today



Which is it??!! Are you having another laugh?

********

I get it that Duke of Marmalade, yourself and others are in the Fagan camp, so to speak. But as I said yesterday and am repeating now (note the consistency here! )……..

I have no idea why you are getting so defensive and to be honest I don't care. If you think that the odds of your short trade being successful improved because you thought it was in a bubble for longer, then what you were doing was not just a gamble but a completely misunderstood gamble and would advise you to stop now.

Colm and Brendan put on a short trade because they thought the fundamentals didn't match the share price. They lost out because as Colm has already stated, they were betting against a share in a bull market and the market can stay irrational a lot longer than you can stay solvent. They could have kept the short on or indeed doubled up as you suggested when the trade got to $700 - $900 as they still believe in the trade but they quiet rightly realised that it wasn't worth the hassle. That in this climate, the share could of as easily gone to $1200 as $400. You looked at the same situation and decided to short Tesla because the 'odds were better' with a more limited downside and a higher upside. It might have paid out for you but your logic is completely flawed and as dangerous for anyone to follow as anything Colm and Brendan have said on this thread and you among others called them out for.

I have stated from the very beginning that I agreed with Colm's analysis of Tesla. It is a cult company. I also stated that I wouldn't short it because shorts are completely different trades to understand and to manage and I can't face margin calls. I don't agree that is the same as gambling but it is much riskier and more complicated than long investing. Brendan and Colm were very clear that were not going to lose their houses with the trades they put on and the thread is a very useful example of the perils of shorting. At no point, did Colm or Brendan suggest anyone should follow them or suggest that what they were doing wasn't risky. They always pointed out that they might have to close out the position and lose. You coming on and saying that you were right and they were wrong is simply just ridiculous. Coming on and telling people that the odds for the same trade have improved shows a fascinating insight into the way people think and is a better example why nobody should use short trades than the logic and the trades that Brendan and Colm used.

As I said, the psychology of the way people think in this thread is what is really interesting. Whether that is the way they look at Tesla and decide the fundamentals don't apply to them or the way people look at short trades and how the longer the bubble lasts, the better the odds are for a short trade.

As you say, we don't have to agree and that is the whole point of this.

 

[Gordon Gekko]

Baillie Gifford don’t think it’s a cult; they’re sitting pretty with their Tesla position. The same guys who backed Amazon early on. I’m amazed at the way people dismiss Tesla so readily as if it was WorldOfFruit.Com and this was 1999. It’s a real company that’s shifting hundreds of thousands of electric cars every year in a world that’s on the cusp of pivoting towards electric cars. The P&L and the Balance Sheet don’t always tell the full story; what did the financials of Facebook or Amazon look like previously? I am disappointed that Colm lost money on this trade but the idea that he ever had a bull’s notion about Tesla’s prospects is preposterous. Equally, I find the charge that “it’s a cult” almost akin to an excuse. The reality for all of us is that we’re out of our depth trying to call the prospects for this type of growth company. Hubris is very dangerous in the world of investments.

 

[Sunny]

Baillie Gifford don’t think it’s a cult; they’re sitting pretty with their Tesla position. The same guys who backed Amazon early on. I’m amazed at the way people dismiss Tesla so readily as if it was WorldOfFruit.Com and this was 1999. It’s a real company that’s shifting hundreds of thousands of electric cars every year in a world that’s on the cusp of pivoting towards electric cars. The P&L and the Balance Sheet don’t always tell the full story; what did the financials of Facebook or Amazon look like previously? I am disappointed that Colm lost money on this trade but the idea that he ever had a bull’s notion about Tesla’s prospects is preposterous. Equally, I find the charge that “it’s a cult” almost akin to an excuse. The reality for all of us is that we’re out of our depth trying to call the prospects for this type of growth company. Hubris is very dangerous in the world of investments.

That's exactly it. It is shifting 360000 cars a year. Already they are saying this will fall in Q1 and Q2. They said they would sell 500000 cars in 2018 and 2019. Now its 2020 that this is going to happen. Q4 figures were probably inflated as people took advantage before tax credits in both the US and the Netherlands ended at the end of the year. The 'profit' they announced at the end of Q4 was based on the trading of credits, not from selling cars. They still haven't shown an ability to sell a large number of cars and make a profit. Six months ago they were laying off 7% of their workforce and wearing that they are running out of cash.

The company could end up successful but this 'nobody understands how to value the company' and 'this company is different' is just daft. A $150 billion company it is not. It is not even a successful profitable carmaker at the moment. It might well turn out that way but if you are investing in the company now, you are investing on the back of what might be and huge valuation of intangible assets. Nothing wrong with that but the constant telling people who point out the weaknesses that they are dinosaurs is cult like. We even had someone say that they are a profitable company because they announced a quarterly profit....

Anyway let's see at the end of the year...

 

[Gordon Gekko]

I think you’re missing the point. I am not claiming to know whether Tesla will do well or badly. My point is that an Irish person sitting in his or her kitchen and trawling through Tesla’s financial statements hasn’t a notion. And that profit is not the be all and end all for certain types of companies. They’re shifting 397,000 of all of the electric cars sold in the world and electric cars represent a tiny part of the total number of cars sold. What happens to Tesla’s sales when all of the cars sold are electric?

 

[joe sod]

@Gordon Gekko producing cars is not like producing smartphones or software, they need big factories, lots of materials and suppliers, the established car companies are in a lot better position to produce those electric cars than tesla because they have the experience in producing and selling big complicated machines like cars at volume. Because Tesla have sold so few cars yet and they are new, nobody knows of potential glitches, like braking, maybe charging problems, fire hazards etc. In other words all the dull boring but very important safety stuff that the big car makers have already mastered. You only master that stuff by producing lots of cars.
Producing cars cannot be increased rapidly like producing smartphones

 

[James Kirk]

@Gordon Gekko producing cars is not like producing smartphones or software, they need big factories, lots of materials and suppliers, the established car companies are in a lot better position to produce those electric cars than tesla because they have the experience in producing and selling big complicated machines like cars at volume. Because Tesla have sold so few cars yet and they are new, nobody knows of potential glitches, like braking, maybe charging problems, fire hazards etc. In other words all the dull boring but very important safety stuff that the big car makers have already mastered. You only master that stuff by producing lots of cars.
Producing cars cannot be increased rapidly like producing smartphones

Joe. You just proved Gordon's point. You have either zero knowledge of Tesla or you choose to misrepresented them(again).

It is debatable what value Tsla should be today. If you are valuing the company on profit from cars sold in the past or potential 2020 sales then you will get a wildly different price than someone taking a more futuristic look at Tesla.

Take Waymo, worth (supposedly) $100 billion purely based on its self driving software. No cars, no batteries, no energy, no credits, just technology. Tesla will have so much more to offer...in the future...and that's the value that the markets are struggling to access. Calling people who believe Tesla will achieve their goals in the future "a cult" is misunderstandings what's going on. It's also blinding investment decisions. If enough people believe Tesla will succeed then the share price will have a forward looking slant, and as it happens thousands do. Also this rubbish put out by vested interests that Musk is a conman is also blinding investment decisions. He's definitely unconventional and a bit mad but in a very productive and visionary way. If you believe in his ideas then naturally you have to put a value on them, if not then you discount them. Hence the disparity in analysts and investors predictions.