The Perils of Shorting: A Real Life Example

[Fella]

Hi Gordon

I would be more worried by these holdings than I would be by Colm's

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Having said that, Colm's is too concentrated for my liking.

Brendan

Scottish mortgage is my biggest holding its done very well over the last few years I had no idea what the fund was made up of , I bought it because it was cheap from charges point of view and very liquid .

 

[Fella]

Everything you buy is par value , doesn't matter what you buy . Some will get lucky others won't , I don't think theres enough evidence to even say Warren Buffett is more skilful than Colm , I think there are thousands of other investors in the attic that could do what Buffett did but who is to say its skill or luck theres no enough evidence. Of course people will think its silly to say this but you only need to get to a certain level and then you can influence the market and Buffett just needs to buy anything for its price to rise and hes also benefited hugely from time in the market hes 90 or something and investing consistently since he was very young , anyone investing that long and regularly would be up hugely also.

So I am not that impressed with Scottish mortgage stock picker over Colm but I like the diversity it gives me and I think shorting has a negative expected return so yeah I'd be more concerned with Colm's approach than Scottish mortgage.

 

[Colm Fagan]

I care about you but also anyone else who follows your lead,

Gordon, I'm not looking for anyone to follow my lead. As I've said countless times, I don't claim to be the best investor in the world. On the contrary, I've given numerous examples of mistakes I've made to show that I'm far from that. Neither have I a burning desire to beat "the market" or "the professionals". I just want to get a good long-term return, which I define as a money-weighted return over my investing lifetime (net of fees) that beats risk-free returns by around 5% a year on average. I'm not worried about volatility along the way. In fact, I embrace it as a surer way of getting the target return in the long-term.

I like to have a clear DCF model of how I'll get that return from the shares in which I've invested. Sometimes that model is in my head rather than in a spreadsheet. I can't see how anyone can complete that model for Tesla with any degree of confidence.

 

[Brendan Burgess]

Who does it make more sense to back?

Hi Gordon

Strange as it may seem, I think that Colm is more likely to perform.

These guys have been lucky. They made a few concentrated bets which paid off.

I don't know much about them, but they are not Warren Buffetts. They picked high risk stocks which paid off. I am sure that there are other fund managers who had the same strategy, but they were unlucky and so we haven't heard of them.

Both The Scottish Mortgage Investment Trust and Colm are risky but I reckon that Colm's strategy is less risky.

Brendan

 

[joe sod]

I don't know much about them, but they are not Warren Buffetts. They picked high risk stocks which paid off. I am sure that there are other fund managers who had the same strategy, but they were unlucky and so we haven't heard of them.

Neil woodford being one, he had a great track record avoiding both the dot com crash and the financial collapse in 2008, because of this he became the top fund manager in britain

 

[Sarenco]

Neil woodford being one, he had a great track record avoiding both the dot com crash and the financial collapse in 2008, because of this he became the top fund manager in britain

Until he crashed in spectalour fashion.

A shining example of the fact that past performance is no guide to future returns.

 

[Gordon Gekko]

Until he crashed in spectalour fashion.

A shining example of the fact that past performance is no guide to future returns.

You’re playing a fourball at Augusta National. Tiger Woods’ stroke average is 69; some other pro has never played the course. Who should you partner? After all, “past performance is no guide to future returns”...

That phrase is totally misused. It is meant to imply that just because you earned X in the past, you may actually earn Y in the future.

It does not imply that Warren Buffett is less likely, on balance, to do better prospectively than Colm, you, me, or my dog.

Mr Buffett, or the guys at Baillie Gifford, or Tiger Woods are more likely to do better...to suggest otherwise is just silly. They may not, but they’ve a better chance.

 

[Brendan Burgess]

It's not like choosing Tiger Woods to play with.

It's more like betting on Tiger Woods to win a tournament.

You don't need to know anything about golf. The odds on Tiger Woods are set by the people who do know about him and the other players.

So someone like me who knows nothing about golf is likely to have the same outcome from a series of bets as someone who knows a lot about golf.

If Gordon has been winning all year and Sarenco has been losing all year, that past performance says nothing about future performance.

(Minor exception: There are stats based sports betting syndicates who have a small edge and exploit pricing errors in the market.)

Brendan

 

[Gordon Gekko]

I fundamentally disagree Brendan.

You would be right if investing or backing a player was merely luck.

But it’s not.

To continue the betting analogy, why does someone like Jeremy Chapman (a golf pundit) do so well in terms of picking winners?

Because, like investing, it’s not luck!

Baillie Gifford are better tech investors than most other people.

Hence, past performance can provide some guidance in relation to the likelihood of good future returns.

 

[Brendan Burgess]

Hi Gordon

I have pointed out that there are exceptions in investing (Warren Buffett) and Betting ( stats based & maybe Chapman)

I don't know about Bailie Gifford. Maybe they have been doing it as long as Buffett and their record is significant. But based on the evidence you used, they have just been lucky. They made big bets which have paid off in the recent past.

Brendan

 

[Andrew365]

I care about you but also anyone else who follows your lead, ‘DIY invests’ and then blows themselves up down the line.

Imagine I had to back one of the following:

- Colm ‘in his attic’
- The managers of a FTSE 100 investment company who specialise in tech, who identified Amazon, who have delivered returns north of 500% over the last decade, and who actually meet and grill people like Elon Musk and Jeff Bezos face to face

The former is short Tesla. The latter is long Tesla and increased their position this year.

Who does it make more sense to back?

Past performance is not indicative of future performance in investing, just look at Neil Woodford. The last 10 years anybody could have made good money in the market, it has been a bull run.

Shorting Tesla is a perfectly legitimate strategy, as is going long. The fool is the person who chooses either of these strategies based on this forum.

 

[elacsaplau]

A dhaoine uaisle,

Very interesting thread - fair play to all.

Just a few comments:

1. Climate change is a big problem which requires urgent and multi-pronged actions. One area requiring action is the better use of technology. Whilst Colm may very well be right in his views regarding the finances of Tesla - personally, I wouldn't like to be hoping to profit from the demise of a such a company. Be careful what you wish for.

2. In an earlier post, a few days ago, Colm acknowledged, something along the lines, that his concentrated portfolio approach was not suitable for the majority of folk. I wanted to quote the precise text with a view to applauding this admission - as I have consistently argued that Colm's approach is not appropriate for the majority of folk. Further, I had not previously noticed Colm make such an admission. Anyway, it looks like said post has been edited...….and the acknowledgement withdrawn?*

For the avoidance of doubt, there is overwhelming evidence that the majority of people will do better in a fully diversified portfolio.

3. In relation to return expectations....

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

I'm a bit rusty on investment theory, Brendan, but I'm having a hard time with this argument. Just trying to get my head around it. Jury is out!

First of all, at a very simple level, in an efficient market, shouldn't rational investors be rewarded with greater returns for taking on greater risks? If yes, it follows that if the return expectations are all the same, then the risks of individual equities are all the same which doesn't make sense to me as we would be saying that there is no difference in the risk profile between defensive and speculative stocks? Otherwise put, wouldn't the rational investor need a higher expected return to compensate for increased risk of speculative versus defensive stocks?

At a technical level - admittedly I'm a little rusty here - but from memory....
(a) Isn't the Beta of the market overall equal to 1 and calculated based on the cap weighted Betas of component stocks?
(b) Won't each component stock have its own Beta?

In other words, won't the return expectation of the market equal the weighted average of all the return expectations of the stocks in the market?


* Looks like I got this bit wrong - as pointed out by Sarenco in post 177 below. Am pleased with this correction!

 

[Gordon Gekko]

Past performance is not indicative of future performance in investing, just look at Neil Woodford

Repeating a generic caveat and citing specific examples is not a coherent argument.

You, and others, seem to be misunderstanding what the statement means.

“Past performance is not indicative of future performance”; all it means that the future may not mirror the past.

But who is more likely to outperform? Specialist tech investors with a track record? Tiger Woods? Jeremy Chapman? Pep Guardiola? Warren Buffett?

Past performance IS a factor when considering whether someone in any field will perform going forward. To suggest otherwise is crazy in my humble view.

Gordon

 

[declan11]

I see Musk has announced orders for 250,000 of these Cybertrucks in the first week worth 10 billion dollars at their sale price of $39,000. Maybe we are all wrong to doubt him

 

[Andrew365]

Repeating a generic caveat and citing specific examples is not a coherent argument.

You, and others, seem to be misunderstanding what the statement means.

“Past performance is not indicative of future performance”; all it means that the future may not mirror the past.

But who is more likely to outperform? Specialist tech investors with a track record? Tiger Woods? Jeremy Chapman? Pep Guardiola? Warren Buffett?

Past performance IS a factor when considering whether someone in any field will perform going forward. To suggest otherwise is crazy in my humble view.

Gordon

What exactly does Tech mean? That is such a broadstroke definition. What does successfully investing in Amazon have to do with investing in Tesla? These are two different industries, that is why you have research analysts that spend their career in the Auto industry and research analysts in the Tech industry.

David EInhorn is a pretty famous and successful investor and he is the biggest shorter of Tesla.

I agree past performance is an indicator but not a predictor otherwise there would be no need for banks to spend billions trying to predict and simulate potential future outcomes. If we take WeWork as an example, Softbank vision fund has been one if not the most successful Tech investment vehicle since 2000. Softbank just lost 8 billion on their WeWork investment.

Lastly, Tiger Woods, does not win every tournament he plays because there are equally qualified people who play better, have studied the course more, more experience on that course etc. Just because Woods won in Augusta didn't mean he was going to win the British Open.

 

[Andrew365]

I see Musk has announced orders for 250,000 of these Cybertrucks in the first week worth 10 billion dollars at their sale price of $39,000. Maybe we are all wrong to doubt him

Somewhat arbitrary numbers as you just had to pay a $100 (fully refundable) deposit. It is not a commitment of $10bln dollars.

 

[Sarenco]

In an earlier post, a few days ago, Colm acknowledged, something along the lines, that his concentrated portfolio approach was not suitable for the majority of folk. I wanted to quote the precise text with a view to applauding this admission - as I have consistently argued that Colm's approach is not appropriate for the majority of folk. Further, I had not previously noticed Colm make such an admission. Anyway, it looks like said post has been edited...….and the acknowledgement withdrawn?

But make no mistake: if someone were to ask me what I would advise, I would tell them to put their money in a low-cost passive world equity fund, where they would get lots of diversification, etc.

 

[Sarenco]

“Past performance is not indicative of future performance”; all it means that the future may not mirror the past.

There are dozens, if not hundreds, of studies showing that the past performance of an active manager is a poor predictor of future results. Hence the obligatory regulatory health warning.

Only a tiny number of active fund managers have ever managed to outperform their benchmark on a sustained basis over anything like the long-term.

 

[Duke of Marmalade]

Past performance IS a factor when considering whether someone in any field will perform going forward. To suggest otherwise is crazy in my humble view.
Gordon

Of course, in general, past performance is absolutely key to assessing future prospects. Our whole examination system is based on it, our criminal justice system is based on it, HR policy from recruiting football managers* to promoting staff is based on it.
The very fact that when it comes to investment management the authorities single out past performance as not subscribing to the almost universal principle only serves to emphasise the caution. Many studies have been performed to show that alpha is an illusion.

* albeit we have the reversal of the usual situation here, the bigger your failure as a football manager seems the more sought after you are

 

[Gordon Gekko]

There are dozens, if not hundreds, of studies showing that the past performance of active managers is a poor predictor of future results. Hence the obligatory regulatory health warning.

Only a tiny number of active fund managers have ever managed to outperform their benchmark on a sustained basis over anything like the long-term.

Fine, but who would you fancy to do better going forward, a specialist fund manager with a track record or me in my kitchen?