The Perils of Shorting: A Real Life Example

Sarenco said:
However, Duke is saying that the expectation of somebody acquiring a single stock is the same as somebody acquiring the entire market.
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I don't want to trawl back through his posts, but if he said that, it's not what he meant.

The Expected Return from a single stock (or coin toss) is the same as that of the market (or a series of coin tosses)

The expectation is different because it's an different term. The expectation as the Duke has pointed out is that there is a greater chance that he will underperform the market which is compensated for by the small chance that he will significantly outperform the market.

The reason we are discussing this is that Gordon said that he should expect to greatly underperform the market which is not correct.

Brendan
 
If 10,000 people all buy 1 different stock each , then they will all have the expected return of the stock market but the distrubition of returns will be fairly large.
Where as 1 person buying 10,000 stocks should get the expected market return and smaller variance.
I don't know the maths for it but if only a handful of the 10,000 stocks are making the bulk of the returns then it would seem like the odds are stacked against the individual stock holders beating the market , hmmmm I can see how expected return is the same if you ran unlimited simulations but the variance is so high holding fewer stocks .
 
Oh dear, we are getting our Y-fronts in a twist. Expectation is the precise mathematical term. I think it is equivalent to Expected Return as used by Boss.
 
That is correct. Let us imagine a fair lotto (I know that is a challenge to even the most fertile imagination). Someone who buys one ticket is most likely to lose but there is a small chance she will multiply her stakes a million fold. Her expectation is that she will get her money back. Someone who buys a million tickets also has an expectation of getting their money back. They have a far better chance than person A of actually winning but the very most they can hope to achieve might be to double their money.
 
Of more relevance to this thread, all my long stocks are falling in value today. There is one riser though. You’ve guessed it!
 
Aren't Tesla releasing an Electric Truck or something this week? Presume there is reaction to that. How do you deal with product announcements like this Colm? Especially with a short position. Do you just ignore them and stick to long term view??
 
Sunny said:
Do you just ignore them and stick to long term view??
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Yes, it only matters when I close the position. Hype is par for the course with Tesla. I only get worried if something happens that I think changes the fundamentals- or I run out of money to fund margin calls!
 
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Getting back to your original question about Tesla I watched a YouTube where it was speculated that Tesla is years ahead in the area of electric vehicles. And has significant intellectual property built up in the area of motors, batteries, self driving technology, etc. And also has supply chains built up for scarce raw materials for batteries.
That competitor car companies even huge established ones could go bust because of Tesla's dominance and the old car companies inability to adapt to a changing marketplace.
 
I suspect investors in Tesla have a greater expectation of return than would be justified by the expected return of the stock.
 
RichInSpirit said:
And has significant intellectual property built up in the area of motors, batteries, self driving technology, etc
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First of all, I know nothing about cars, so I must rely on statements from the company and from analysts. In relation to Autopilot and Full Self-Driving (FSD), Tesla's Q2 update letter at the end of July reads: "We are making progress towards stopping at stop signs and traffic lights." You can find it [broken link removed]. That doesn't seem like "years ahead" to me. There was no mention in the Q3 update on whether they had made progress in the quarter in stopping at stop signs and traffic lights. The cut in R&D expenditure doesn't augur well. Instead, this quarter they're talking about a gigafactory in Shanghai that's going to do the devil and all, followed by one in Berlin. Two quarters ago, all the talk was of Robotaxis, whereby your Tesla would be driving around by itself all night, ferrying party-goers home from night-clubs so that you could earn money on your car while you slept (but don't worry about cleaning up the sick in the morning). Would you like to work as a senior executive in an organisation like that, where the strategic narrative kept changing?
 
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Colm,

Again, your approach scares me. You’re taking investment positions in respect of Tesla yet you freely admit that you know nothing about cars!

To reiterate, my fear in relation to your concentrated approach is based on:

- Your inability to analyse the companies properly because of your relatively limited resources

- It being harder to identify winners nowadays because of the great technological disruption

- The fact that market returns come from a small number of stocks and most stocks are neutral or duds; ergo with your concentrated approach you’ll have too few stars and too many duds with the result being material underperformance.

Again I would urge you to stick 80% of your money into a global ETF or an ILIM or Zurich global equity fund. Then apply your crazy investment plan to the other 20%. Have fun comparing the two and writing about it safe in the knowledge that the gin and tonics will keep flowing.
 
Tesla down 6% today, Wall Street up, negative beta indeed

Newsflash! Shares of car manufacturers have been suspended on world stockmarkets. It follows the announcement by Elon Musk that he has discovered a cheap and effective way to harness solar energy that will make the ordinary family saloon as powerful as a Formula 1 car. On the grey market shares in General Motors were trading down 95% whilst Tesla was up 10,000%.
Mr Musk also announced that he was granting Colm Fagan a lifetime supply of shorts. A range of patterns were available from green and white with an orange waistband to Union Jack. It is understood that Mr Fagan has chosen green and red.
In other reaction Greta Thunberg said it was the happiest day of her short life whilst Donald Trump tweeted that it was fake news.

* note for moderators: I do not believe this is off topic, it highlights for AAM readers the dangers of short positions
 
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Hi Colm,

Thanks for all your input to this thread, I find it very interesting.

I would personally be a sceptic of Tesla, and am not nearly capable of valuing a company, however 2 things are changing my mind:

1. A colleague of mine picked up a new Model 3 last week and to be fair it's an object of desire and had everyone talking.

2. The self-driving capability is an area where, if they do get a lead they could probably more money licensing it than making cars. The following video looks pretty impressive

Full Self-Driving

https://ts.la/FSD
www.youtube.com
 
only ever shorted a security once , that was a german car company which had a problem with its diesel filtration system , think i made a few hundred euro as it was well into the haircut
 
Thanks @Firefly The video is very impressive.
You're right that the real risk to my short position is if they have a big lead in some key area, such as Full Self-Driving. I'm lucky that this seems not to be the case. I read an article on the subject in the FT in February last. Here's the link, but it's probably behind a pay wall

Waymo builds big lead in self-driving car testing

Data show widening gap in autonomous vehicle race with Uber going into reverse in 2018
www.ft.com
The article says that Waymo, the Google (Alphabet) subsidiary, has a big lead in this area. The article includes a chart showing Waymo with 11,018 miles per manual intervention, followed by GM with 5,205. Some of the big players come nowhere. For example, Apple had 1.15 and Uber had 0.35. Tesla didn't appear anywhere. Someone asked in the comments section of the paper why Tesla wasn't shown and someone else replied that their figure was zero, which seems to tally with the extract from the Q2 2019 investor update quoted above. I don't know how that fits with the video you posted, but I'm more prepared to believe the FT (and even Tesla's own Q2 earnings announcement)!
There is the additional consideration, mentioned in my article, that Tesla are scrimping on R&D spend. That's never a recipe for world leadership.
 
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