In 2020 Tesla short sellers lost a whopping US$40 billion betting against the stock.
Those losses continued to rack up in the first few days of 2021
with Elon Musk even surpassing Amazon boss Jeff Bezos as the world’s richest man
as a result of the continued meteoric rise in the share price of Telsa.
However it isn’t just the average joe who is losing money shorting Tesla stock.
There are some legendary investors who have announced that they are shorting Tesla
including Jim Chanos who helped expose the accounting scandals of Enron in the early 2000s
and David Einhorn who called out Lehman Brothers in 2008.
More recently, Michael Burry of the Big Short fame
who is well known for making a fortune from betting against the real estate market in 2008
announced that he is also shorting Tesla stock.
So why do they all seem to be getting it wrong so far?
In this video we’ll explain why these seasoned investors are losing billions by appearing to apply a value investing strategy
made famous by the one and only Warren Buffet, to invest in Tesla shorts
We’ll explain the flaws of using value investing principles when shorting a stock
and why so many investors are getting caught out.
We’ll also explain how short-selling works, what is a short squeeze and why this only fuels Tesla’s stock price.
Before we get into the rest of this video, just a quick reminder to please read the disclaimer in the description box below.
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The term value investing is used to describe an investment strategy made famous by Benjamin Graham in the book
The Intelligent Investor, a strategy which led to Warren Buffet becoming a billionaire.
Value investors typically undertake fundamental analysis which means that they look at a company’s fundamental factors
including financial performance such as revenue, profits, cash flow and debt
as well as consider the company’s business model, competitive advantage and growth opportunities.
They then use all of this information to work out whether the stock is currently undervalued and is worth buying.
Value investors often take a long-term view on investing
and try not to listen to the noise in the market which can cause short term price fluctuations.
When you look at some of the reasons investors have given for shorting Tesla stock,
you can see that they are applying value investing principles to justify why the stock is overpriced.
In this article by the Los Angeles Times where they interviewed 4 investors who were shorting the stock back in 2017,
those investors gave a number of reasons including poor cashflow, high competition in the electric car market
the company’s high debt burden and the inability of Tesla to meet its forecasts
The stakes are high if you get it wrong when shorting a stock
as short sellers can experience what is called a short squeeze, leading to devastating financial losses.
Here’s a quick overview of what is a short squeeze.
Short-selling works by investors borrowing the shares which they believe will drop in price.
Short-sellers make their money by then returning those shares they’ve borrowed by buying them on the stock market.
Say a short seller borrows Tesla shares when they're priced at $100 each.
If the short seller is right and the price of Tesla does drop to say $50
then the short-seller will buy the Tesla shares from the market then return the shares to the lender
- pocketing the difference of $50.
However if the short seller is wrong and the price of Tesla increases to $150,
then they will be forced to buy the Tesla shares at the higher price so they can repay the lender and they will lose $50.
But it gets worse when the price of a stock increases rapidly which is what happened with Tesla in 2020.
Short sale contracts have an expiration date so when the price of a stock increases quickly
short sellers need to act quickly to limit any losses.
Unfortunately when short sellers exit their positions, they need to buy additional stock
and this only further increases the share price, causing other short sellers to also exit their short positions and buy additional stock, and so forth.
In this way, this only compounds short sellers woes, and short sellers may even be inadvertently fuelling Tesla’s price rise.
Tesla is a cautionary tale of using fundamental analysis as the basis for entering into a short position.
Value investing is intended to be a long term strategy and the expiration dates of shorts are usually
well too short to ensure that investors make a profit from their bet.
Short sellers have an important role to play in the financial market by highlighting the risk of an investment before anyone else spots them.
They are usually successful when they spot misinformation or irregularities in a company before anyone else does
and then manage to convince everyone that the company is overvalued.
The problem with shorting Tesla however, is that the reasons cited for shorting it are not because Tesla is hiding or misreporting any information.
Investors in Tesla are well aware that it is a company that has weak earnings, a weak balance sheet and that it often misses production targets.
However investors simply don’t care.
They see Elon Musk as someone who is worth investing in, and believe that Tesla has open-ended growth opportunities.
You would need to be pretty ballsy now to take a short position in Tesla when some of the best have fallen flat on their faces.
I hope you found this video useful.
Let me know in the comments below if you’d like to see more videos about Tesla, shorting stocks or any other finance matters.
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