Tesla, The great Short Squeeze & the Lesson it Offers

You would have to be living under a rock to not have but noticed the twitter chatter around the ever rising price of Tesla’s stock. We are just one month into 2020 and yet it seems that traders who shorted Tesla may have already lost $8.3 billion this year alone.

But first, the Tesla Chart

This is a kind of move that can make or break careers. In 2009, when Porsche squeezed the shorts in Volkswagen, it ruined many fund houses then. 

Hedge funds lose $30 billion on VW infinity squeeze 

While one can lose money by going long in a stock, a stock can at worst go down to zero. But when you short, there is no limit on how much you can lose since there is no limit on how high the stock price can go.

Most Long – Short funds which have a large portfolio of short positions short stocks that they strongly believe are candidates for bankruptcy or are frauds. In the case of Tesla, many of the ardent short activists believe both to be true.

But my or your beliefs don’t make the market. The markets finally are Supreme even if they are wrong on many occasions. What is interesting about those who shorted or have a negative view on Tesla is how they seem to be blindsided that there are shades of Good, Bad and Grey in Tesla as it is with any other company. 

I am neither an investor in Tesla nor own its Car nor tweet about US markets regularly. Yet, I have amusingly found out that I am blocked by dozens of folks and the only common thread between them is that they are bearish on Tesla. 

Given that I have never followed or even replied to their tweets, the only way I would get blocked is if they specifically searched for me and blocked me. To me that shows a kind of hatred that has nothing to do with money.

But coming back to Tesla, it’s okay to be wrong but not okay to stay wrong is an adage everyone knows and yet Fund managers managing Billions of assets seem to believe that “apna time ayega”.

In India, Nifty today is a hated Index. The reason for the hate is that the Index is up while portfolio’s are down. Wouldn’t it be simpler and more profitable to own Nifty versus wallowing about how it’s all manipulated and stuff. How different otherwise are we then to folks who are bearish on Tesla and go about tweeting any and every conspiracy theory they can lay their hands upon.

Success in markets I have learnt comes in two ways. The first is to have a strategy that works on the long term for no strategy works all the time and will be wrong some of the time.

The second is behavior where one requirement is the ability to understand what is within our abilities and what is not. No point wishing for things which we cannot be influencing in any way.

It’s been 2 years since my portfolio saw an all time high. In my own past world, I would have already jumped through at least 2 if not more strategies to try and compensate for the chronic under performance I am observing.

But data I have tells me that this move has been well within the boundaries of what I should have expected. The risk was known and is well under control. As long as you have control of the risk and its not exceeded preset limits, there is no reason to switch to what is working today for tomorrow even that may stop working.

The reason for me to follow this strategy versus buying a Nifty ETF was to get a return which is greater than say buying and holding Nifty 50 and there is no reason for me to quit the same. This is one way to look at your portfolio when your strategy differs from the one everyone is tracking.

Kingfisher Airlines stopped operations in mid 2012. The stock continued to trade till September 2014. More recently we saw similar trading in Jet Airways long after the company had shut the door. I remember the same enthusiasm when Global Trust Bank botched up and it was to be acquired by Oriental Bank of Commerce with all equity being wiped out.

Investors continue to lap up even dead stocks in the faint hope that maybe one day it will all work out okay.

I am a strong believer in trends and regardless of how great a stock is, having learned my lessons at great cost, I would not wish to hold it once the stock starts to trade below its 200 day moving average. A 200 moving average is no different from say a 199 day moving average or a 201 day moving average. What all of them offer though is a defined exit that I can rely upon.

If you were short Tesla with a stop above the 200 day moving average, you would have been out of your short position when it traded at $300. Today its trading 3 times that number and we haven’t seemingly done yet.

Risk Management is critical for any Investor or Trader. If you don’t manage your risks properly, all it requires is for one to hurl you towards financial ruin for it’s a slippery slope with very little support on the way. The funds and individuals who are short Tesla today are those who ignored the Risks. Some may survive, but the harm it does in terms of psychology alone is Irreparable.  

Don’t fall in love with the stock is an adage as old as the hills. It works well to remember every time we try to defend a stock we are holding for we are just side-car participants in the company’s boom or bust.There are no additional points for you just because you happen to love them more. Have a plan on containing the risk a stock can do to your portfolio and stick with it. It’s that simple to avoid financial ruin.