Do you happen to remember when Elon Musk drank whiskey and smoked pot during a podcast appearance?
Do I happen to remember that?! The investing community had to check their diapers after the news came out.
Are you referring to reactions like this?:
Musk got CRUSHED by just about everyone with a suit on. I can’t remember a day on Wall Street quite like it.
Well, at least you weren’t David Einhorn or Jim Chanos.
Who and who?
David Einhorn and Jim Chanos are notable hedge fund managers. Einhorn’s claim to fame was his bet against Lehman Brothers stock in 2007. Chanos recognized a house of cards in 2001 when he predicted the collapse of Enron in 2001. Together they are worth around $2.2 billion and manage billions for their clients.
What are they up to since?
Two to three years ago they placed heavy bets against Tesla by shorting the stock. And we all know how that ended…
How bad was it exactly?
Their losses are not public but consider this: since Musk’s smoky appearance on the Joe Rogan podcast, Tesla stock has risen over 1100%. Short sellers lost nearly $40 billion in 2020 alone.
Yikes, the bears got slaughtered.
Indeed, they did.
So, is this your third edition of Bury the Hedge Fund Manager?
No, no, no. This has everything to do with the success, or lack thereof, of shorting stocks. I could go on for days about why you should think twice before placing a short.
I have a few minutes…
For one, your profits are bounded, and your losses are unlimited. One bad short play can deteriorate the gains you have in the rest of your portfolio.
True but you know that going in. And most short sellers implement stop loss limits to prevent a massive mistake.
That’s absolutely correct. However, that means short sellers not only have to be right about a stock but also about the timing. If a stock rises considerably, the stop loss limit will put an end to the pain….and then three months later the stock could take a tumble. You are now correct on your call but have no profits to show for it.
That’s fine, but can’t the same be said of betting ON a stock? Timing is everything.
It can but think about the psychology behind this. If you purchase a stock, a decrease in the price of the stock will mean it becomes a smaller portion of the portfolio. The exact opposite thing occurs when shorting a stock. Once again, you can limit your losses, but this requires more effort and mental conviction.
Fair point. I prefer to be a low-effort investor.
And that’s the biggest point I want to make. Shorting stocks is a strategy that requires more time and more decisions by the investor. The math isn’t perfect but More Time + More Decisions = Lower Returns.
Tough to argue with that.
Lastly, it can be helpful to point out the obvious: stocks rise far more often than they fall. If you picked any 5-year period since 1926, the S&P was up almost 87% of the time. That number goes to 100% if you choose any 13.5-year period.
All good points. But I’m not an eternal optimist like you. The world will always be littered with charlatans and crooks. Shorting stocks provides insurance against the Jeff Skillings of the world.
I get that. At the very least it can provide some psychological relief knowing there is some downside protection built in. All I ask is that you don’t think you’re Jared Vennett. Because no one, and I mean no one, is as suave as this man.