The Perils of Shorting: A Real Life Example

[Spud50]

One of the perils of shorting the stock market is it is long biased , also it cant be done using fundamental analysis , it is dangerous enough using Technical analysis and even then you need an edge and a specific rule set around price action.

 

[joe sod]

Hi Colm,

These guys, Baillie Gifford, have delivered 500% return over the last 10 years. The Scottish Mortgage Trust is one of their flagship investment vehicles. Tesla is one of their biggest holdings.

Scottish Mortgage Investment Trust | Global Investment Trust | Low-cost Actively Managed Equity Fund | Baillie Gifford | Individual Investor

Find out more about Scottish Mortgage Investment Trust.

www.bailliegifford.com

Yet you’re “in your attic” picking holes in Tesla’s business model and shorting the stock on the basis that you have some edge.

This is crazy stuff.

I am genuinely worried for you.

Gordon

I wonder ,Gordon do you still agree with your viewpoint in this post now given what's happened to the Tesla and Scottish Mortgage trust share price. Im not picking on you or anything as you were right on this short term back then in 2020 as the tech sector exploded upwards in 2020 but I doubt you still have this investment now?

@Colm Fagan just wondering how did you get on with this position in Tesla, you were right but just way too early, I think Covid disrupted the normal functioning of markets as the very expensive tech sector (in early 2020) got another big leg upwards from covid lockdowns

 

[Gordon Gekko]

I wonder ,Gordon do you still agree with your viewpoint in this post now given what's happened to the Tesla and Scottish Mortgage trust share price. Im not picking on you or anything as you were right on this short term back then in 2020 as the tech sector exploded upwards in 2020 but I doubt you still have this investment now?

@Colm Fagan just wondering how did you get on with this position in Tesla, you were right but just way too early, I think Covid disrupted the normal functioning of markets as the very expensive tech sector (in early 2020) got another big leg upwards from covid lockdowns

That was over three years ago to be fair.

Lots has happened since, to put it mildly.

 

[Colm Fagan]

Just wondering how did you get on with this position in Tesla, you were right but just way too early, I think Covid disrupted the normal functioning of markets as the very expensive tech sector (in early 2020) got another big leg upwards from covid lockdowns

Hi Joe. The quick answer is that I didn't make a killing from the fall in the share price. I made a few bob OK but nothing like what I lost on the way up. I just don't have the mentality for shorting, which requires a trading rather than an investing perspective. I closed my final short position in Tesla months ago.
I have a long-term investment perspective. Many of my investments have been there for well over a decade, some for more than 20 years.

It amazes me how some proclaim the importance of a long-term perspective, but don't live by what they preach. The latest post from @Gordon Gekko proves my point:

That was over three years ago to be fair.

Lots has happened since, to put it mildly.

If we can't be held to account for what we wrote three years ago about investing, God help us!

 

[Gordon Gekko]

Hi Joe. The quick answer is that I didn't make a killing from the fall in the share price. I made a few bob OK but nothing like what I lost on the way up. I just don't have the mentality for shorting, which requires a trading rather than an investing perspective. I closed my final short position in Tesla months ago.
I have a long-term investment perspective. Many of my investments have been there for well over a decade, some for more than 20 years.

It amazes me how some proclaim the importance of a long-term perspective, but don't live by what they preach. The latest post from @Gordon Gekko proves my point:

If we can't be held to account for what we wrote three years ago about investing, God help us!

To be fair, Colm, the poster was asking whether I still have the same view.

The facts change, I change my mind. We’re now in a different interest rate environment.

My core view about shorting though is that it’s a mugs’ game. You can run out of money before you’re proven right.

 

[Bluefin]

Hi Joe. The quick answer is that I didn't make a killing from the fall in the share price. I made a few bob OK but nothing like what I lost on the way up. I just don't have the mentality for shorting, which requires a trading rather than an investing perspective. I closed my final short position in Tesla months ago.
I have a long-term investment perspective. Many of my investments have been there for well over a decade, some for more than 20 years.

It amazes me how some proclaim the importance of a long-term perspective, but don't live by what they preach. The latest post from @Gordon Gekko proves my point:

If we can't be held to account for what we wrote three years ago about investing, God help us!

Good to see you back Colm... I appreciate your insights on investing.

As we approach the end of the trading year how did your investments survive volatile period we all have experience over the last 12 months?

 

[joe sod]

Hi Joe. The quick answer is that I didn't make a killing from the fall in the share price. I made a few bob OK but nothing like what I lost on the way up. I just don't have the mentality for shorting, which requires a trading rather than an investing perspective. I closed my final short position in Tesla months ago.

Fair play for your honesty Colm, it was a great lesson alright in the dangers of shorting, I have never shorted or never will but I lost money back in 2016 doubling down on a few mining stocks as they fell heavily back then, they have recovered greatly since but I harvested the capital losses and didn't have the heart to reinvest in them again later.

I wasn't having a go at @Gordon Gekko either he changed his view on Tesla now as he said above

 

[Gordon Gekko]

The ‘Musk brand’ is significantly devalued given recent events also.

My overriding view is that it’s best not to have strident views and concentrated bets on the direction of single stocks, especially relatively complex ones.

Yes, there was a point where shorting Tesla probably made sense, but then it’d keep going up and you’d lose your money!

 

[Colm Fagan]

As we approach the end of the trading year how did your investments survive volatile period we all have experience over the last 12 months?

Hi @Bluefin

As you may know, much of my recent effort has been concentrated elsewhere - trying to do my bit for the financial welfare of ordinary savers - and I haven't given much time to my investments. For instance, I only had six buy or sell transactions in 2022 (excluding the odd foray into shorting Tesla, as outlined above) , so the main stocks in my portfolio are the same as last year and haven't escaped the general sell-off.
The one big exception to the downward trend was Novo Nordisk. Here's what I wrote about it back in 2019 :

"Novo Nordisk is a Danish pharmaceutical company, which specialises in treatments for diabetes. It ticks a good number of boxes in relation to what I’m looking for in a share. It improves the geographic and industry distribution of the portfolio: I don’t own any other pharmaceutical or healthcare stocks. The potential market for its products is huge: over 415 million people or one-tenth of the world’s adult population suffer from diabetes. Approximately 90% of them have Type 2 diabetes, which is becoming more prevalent as obesity levels increase. I like the company’s financials. It has a strong balance sheet, virtually no debt and billions in the bank. It generates lots of cash, some of which it uses to buy back shares, which it then extinguishes. Continuing shareholders get a bigger share of the pie every time the company extinguishes shares. The earnings yield of 4.8% at the DKr335 share price ruling at 30 June is attractive, given my positive views on the company’s prospects."

The full essay can be found at https://colmfagan.ie/documents/24_Document.pdf?d=July 04 2019 23:45:04.

It is now my fourth largest holding, accounting for over 10% of my total portfolio. At end 2020, the share price was 426Kr. It had increased to 735Kr by end 2021 and at close of play today it's 940Kr, more than double its price just two years ago. Thankfully, I kept my entire holding for the full two years (and longer).

In January I hope to get round to reviewing overall performance for the last couple of years. It won't be pretty - particularly for this year.