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Short Selling Can Bridge the Gap Between Speculation and Reality
Discipline and strict attention to risk and reward in short selling separate the winners from the losers.
Short sellers may not be the most popular market participants, but they serve a critical role in the stock market. No CEO or founder appreciates a short seller, and the world’s wealthiest man once expressed his disgust for short selling in a tweet. In January 2021, Elon Musk wrote, “You can’t sell houses you don’t own you can’t sell cars you don’t own but you *can* sell stock you don’t own!? This is bs - shorting is a scam legal only for vestigial reasons.”
Elon made no secret of his opinion of those shorting Tesla (TSLA) shares. In January 2021, the high in TSLA was $900.40 per share after rising from a low of $70.10 in March 2020. TSLA reached an all-time high of $1,243.49 in November 2021 and was over the $1,010 level at the end of last week. Short sellers did not do well on the EV maker, as Mr. Musk had the last laugh.
Meanwhile, many short sellers do their homework and sell stocks they find are at unsustainable prices given the current and projected future revenue and earnings levels. Management or accounting issues can also lead to a wave of short selling. In many ways, short sellers pounce on opportunities created by what former Fed Chairman Alan Greenspan once called “irrational exuberance,” or excessive speculation.
The media gives short sellers a platform where some of the leading short sellers make their case about what they believe is an overvalued stock.
Jim Chanos is a successful short seller - Enron made him rich:
Mr. Chanos took advantage of exuberance in DraftKings (DKNG) over the past months:
His new target is Coinbase (COIN):
Short sellers take risk - Tesla was no fun for the short-seller:
Short sellers like Jim Chanos and others perform a service as they ignore speculative froth and identify overpriced stocks. However, like all investors and traders, they are not perfect. Discipline and strict attention to risk and reward separate the winners like Mr. Chanos from the losers. Shorting stocks can be hazardous, but the rewards can be substantial for those that locate mispriced assets.
Thanks for reading, and stay tuned for the next edition of the Tradier Rundown!