Who cares what gamblers lost? "Betting on/against" whatever company isn't trading. It's not arbitrage, it doesn't have an edge, it's just fingers crossed hope for the best gambling.
And of all gambles, shorting is the worst. By all I mean "long or short", so I guess there isn't much variation left when you leave shorting out. But with going long on a company at least you can buy and forget. Maybe it bounces back up. Not today or this year but eventually.
With shorting though, it's pure loss. On top of the interest the lender is charging you for the stock that they loaned to you (some 2% last time I checked, when reference rate was pretty much zero). Unlike long where you earn interest (dividends).
So unless you got a really really good reason to short (insider knowledge, some solid stat arb reasoning)... don't do it. Or if you do it, I won't weep for you when you lose.
Nobody is arguing that you should feel sorry for short-sellers. It's just a mildly interesting fact, although it's less meaningful than implied in the article, because Tesla is also one of the most-heavily traded companies on the market.
A lot of "index fund" folks criticize shorting and other "gambling" tactics, but it's probably worth noting that the argument for the soundness of index funds hinges on there being a class of traders who identify bad businesses and try to drive their price down. Otherwise, you're just pumping money into a snapshot of the market with no regard for the health of the constituent businesses, and it eventually ends in tears.
There are reasons for short selling and we'd be in stone age without it.
Black-Scholes delta hedging (more fancy called "replication of theoretical option prices") relies on it. Shorting for Black-Scholes also has two facets: one where your loss is limited, when you buy a call then delta-hedge by shorting against it. And another one where the market is up to get you, selling a put and hedging by shorting. Works in theory but in practice you get funked and there's little to nothing you can do against it when it happens. I suspect most "betting against Tesla" shorters were actually institutional put sellers. Case when they weren't "betting" at all but hedging.
Price discovery doesn't rely on short selling. An active investor with stock in a company is already motivated to monitor if the company is overvalued and sell their stake. Short selling may improve the efficiency of price discovery but given the relativly high costs of needing to pay interest on the borrowed stock while you hold a short position (in contrast to a long position where you get payed dividends), I'm skeptical on how much selling actually helps with this.
There are certainly ways to use short selling as a hedge for other positions. But in those cases, loosing money on the short is typically good because it (hopefully) correlates to making more money on your main investment.
The market is not an isolated thing sitting out there in nature. It is a complex system built and run by humans. Index investors are freeloading off of the work that a bunch of active investors are doing. This is good for the index investors because they do not need to pay for all the work that active investors are doing for them.
Active investors, for their part, need to either maintain enough of an edge over freeloaders to justify their pay, or serve a niche market with concerns other than "line go up" (this is where the "hedge" in "hedge fund" comes from).
If every participant is an index investor, then no one is doing the actual work, so the entire system crumbles.
Index funds aren’t the entire market. Just specific major stocks (eg, s&p 500). You want someone “thinning the herd” to keep the index sound over time.
This is all true, but it's a bit of a shame as it puts a limit on market efficiency. To take an extreme example, every rational person knew that Gamestop wasn't worth $20B+. (Or even close to what it's trading at now.) But given the costs and risks of shorting, there was (is) no way for most traders to profit off of that with a reasonable risk/reward, and so the mispricing persists.
Tesla could be seen as a less extreme example of the same. Unlike Gamestop, it's a very successful company with a lot going for it. But was it ever really worth more than every other car company combined?
If it’s making more profit per vehicle than all other car companies combined, while continuing to grow its business at a rapid clip, then do you think that justifies the market cap?
Teslas revenue growth is rapidly slowing. Growth contracting by 50% each year since 2019
Tesla has .66x the revenue of GM but 18x the market cap.
Even at todays rate of growth, teslas market cap today is valued at like 100 years in the future.
Disclaimer, I didn’t even do napkin math because teslas valuation is utterly absurd and claiming it’s proper in comparison to other companies in the same segment is completely ludicrous.
And what if one of those companies has $200 billion in debt to service at a high interest rate and the other has close to no debt? How does that impact your calculations? I would love to see your valuation model.
You have an odd view of how investing or trading works. Why should the only choices be "this will go up" or "im gonna sit this one out". What's wrong with the equally valid scenario of "this is overvalued and will go down"?
Were they incorrect? Sure. But that doesn't mean believing that something will go down is inherently wrong or invalid behavior.
"Believing" is not "investing", sorry for breaking this out to you. God bless, lol!!! :))
Getting back to being serious, "believing" is pretty much what betting is about. Synonym that is. "jecroisque" / "io crecă" trading system, rofl again :)))) . jecroisque = Je crois que.
Short selling could be argued as the literal opposite to investing because you're borrowing stock, immediately selling and hoping it goes down in value so you can buy it back cheaper. You're not actually investing in anything.
Maybe you're getting confused with normal trades where you hold onto your stock and hope it goes up in value (like with any other investment)?
I don't think that it makes a ton of sense to draw an ideological difference between shorting and buying in the secondary market, where buying is 'Investing' and short selling isn't. Both are valid contributors to price discovery. The initial investment already happened, you're not actually adding capital to the company when buying shares on an exchange.
Investing doesn't mean you have to contribute to the thing you're investing in. Take investing in gold for example, you don't polish nor do anything else to the metal. You just buy a quantity of it and hope it goes up in value.
The problem with short selling is that you're actually borrowing.
That all said, I'm not saying I disagree with your point either. It is hard to make an ideological argument when this is really more just different shades of grey. Personally I'd say all investments are a form of gambling. Some investments are just riskier than others.
I mean, I think they were only arguing long- and short- selling are gambling, not any form of investment. I would also say most daytrading is at least gambling-adjacent. We get a little more fuzzy once we talk about investing significant amounts into a business (e.g. "Angel Investors") where you can meaningfully be said to be influencing the outcome you're betting on in a significant way, and we can probably say that investing in vehicles like index funds are a pretty safe bet as long as the economy writ large doesn't crash, but like many terms in the english language a whole ambiguous grey area exists where the connotational choice you make in describing it is pretty subjective
These articles never take into account what investor’s NET exposure is.
An investor who has a lot of tesla shares might write calls to collect premium. Or buy puts for downside protection. Or short tesla shares to offset out-of-the-money calls.
Or maybe an investor has a large position in an ETF that has a position in tesla. If the investor wants to be neutral tesla he has to short the stock in order to cancel out the tesla exposure through the ETF.
I don’t know why the subject of short selling makes peoples brains melt.
Which is an integral part of Tesla's PR and marketing strategy.
The idea being to cultivate an underdog attitude amongst owners.
Even on Reddit's EV and Tesla forums you will see people default to wild conspiracy theories in order to defend the actions of the company or explain why EVs are having issues in certain areas.
I know it's fun to hate on billionaires these days, but it's not a conspiracy to short sell. If you look at the PE ratio and look at the automotive market and other telsa ventures, it's perfectly reasonable to believe it will not "clear the runway" with growth. The short sellers also happened to be really wrong this year.
The simplest answer is they wanted to make money because they thought the stock was over valued. It is probably not due to EVs or Telsa specifically. Some people made a lot of money from it recently. From the article:
> The losses by short sellers are a stark contrast to a year ago, when shorts made a $15.9 billion profit on Tesla shares as the company’s stock lost 65% of the value.
But I'm also not sure where this idea of a whale short seller is coming from. With $13bn in losses almost entirely in 6 months, I would have to imagine there's just some riskier institutional investors.
Another way to look at it is they made it cheaper for people who are bullish on tesla to buy stock.
I'm assuming here: It was a hunch where he probably was thinking that the incumbent auto-makers would catch up and squash the new guy. People make these decisions all of the time based on what they know and how history has played out.
They are specifically betting the stock will go down. That could be for a number of reasons and from the article, shorting was slightly profitable in the second half of the year. Perhaps around Cybertruck news.
It's not exactly divorced from reality. You can synthetically create the very same position. While it sounds like what they're doing is attacking markets and economy, that's just not the case. Unless they made both the options and derivatives markets illegal and also made borrowing and lending stock shares illegal, shorting the security is a position that can easily be created. It was organically discovered at the Amsterdam Stock Exchange within like a couple years after it was founded. The exchange didn't invent it and start offering it either. The traders simply realized that if they could borrow/lend and buy/sell, then they can take an inverse position.
Oh, I agree that the hate for short-sellers is overdone.
But the financial world (and the stock market in particular) forces the detachment of "profit" from "(useful) productivity", and this is clear to everyone, even if they don't express it like that.
For a substantial part, Tesla stock is not valued based on its underlying fundamentals, but on its polularity as a David vs Goliath story, and on Elons charisma/character. The latter two won't likely yield actual value, so financially speaking ste stock is highly overvalued. That said, I'd never bet against it, because those two factors are entirely dominant in TSLA valuation.
I think the valuation is based on potential for growth.
People expect Tesla to grow by doing new things that other companies don’t have the ability to do, either because they have a cash cow they don’t want to disrupt, they don’t appreciate the value software can bring to automotive with some more love than it has been getting, they don’t have the people and culture to take risks and everyone is happy with small tweaks to existing designs, they don’t know how to go back to the drawing board and make a new car and new production line from first principles.
Tesla has learned how to do everything in a decade and has exceeded traditional automakers in some areas and has nothing to lose.
I don’t care about Elon, I have never owned Tesla stock, but I surely admire his ability to execute, and I think that is part of the reason the market assigns such a high multiple Tesla - they are going to be at the vanguard of any developments in the electric terrestrial transportation space.
"The market can remain irrational longer than you can remain solvent" has been a financial truism for a long time. Tesla is just the most glaring and recent example of it.
In fairness to Tesla stockholders, I think there is some genuine attraction to owning a company that isn’t entirely hobbled by US professional management culture, and that is trying to build new things on an aggressive schedule. And watching the big US carmakers fall on their faces trying to launch EVs, I’ve come to the conclusion that maybe those “Tesla will eat the entire legacy car industry” predictions aren’t quite as outlandish as I once thought.
> isn’t entirely hobbled by US professional management culture
When the only competitor fully keeping up/overpassing Tesla on the EV side is BYD, and VW is cuting through it's workforce to "stay competitive", it gives a lot of pause on the ethics of the car makers in the field.
Do we need to go through a dark age again before ever getting out of the tunnel ?
I think this is going to be one of those comments like “gosh Nissan/Sony/Toyota only makes cheap and junky items, who could ever imagine them becoming a mainstream competitor to established brands like GM/Zenith/Eagle.”
I’m very worried about the fact that Tesla can’t take advantage of a (huge) $7,500 tax credit because their batteries are sourced in China. (Yes, they may be sourced in a Tesla factory in China but that doesn’t matter.) It does not speak well to Tesla’s many years of US factory development that they still can’t compete with Chinese-based battery production. It puts them in a position where US competitiveness is dependent on the good graces of the Chinese government, and the Chinese government is primarily interested in the success of Chinese firms. (And ETA: obviously most other Western automakers are worse off than Tesla.)
Tesla Breaks Ground on Lithium Processing Center in Texas
American electric carmaker Tesla has broken ground on a new lithium processing center it says will support the production of up to 1 million vehicles by 2025.
...
Albemarle plans to build a lithium processing center in South Carolina that will aim to refine 100,000 tons of the substance each year. Building on that project is expected to begin next year.
> Tesla stock is not valued based on its underlying fundamentals
I'm no Musk fan with his latest comments, but I disagree with this quite strongly.
Have a look at how many vehicles Toyota have produced for the last 10 years, and have a look at their stock price. Take a guess at their stock price in 10 more years. It's a flat line
Now have a look at the number of vehicles Tesla have produced in the last ten years. Now guess at their stock price in 10 more years.
There is a chance Tesla will make 20 million vehicles by 2030. If they do, their stock price will go up a lot. There really is not much chance of Toyota doing that. (they're not trying to)
This is a good point. The fact that stock prices are not connected to output with car companies is an indicator that the market is rational. This explains why the appeal of the Tesla figurehead is not a factor
There is $254.20 billion in Toyota shares and they made 8.7 million cars in 2023. Tesla's market cap is $744.17 billion for 1.8 million cars, 14x higher per car.
If Teslas price were based on the possibility that they could eventually reach a bit over double Toyota's production, they wouldn't already be almost 3x more highly valued.
Missing from your calculation is the fact that Tesla makes almost 10 times more profit per vehicle than Toyota does, and is still growing sales at a much faster rate.
Market cap is much more closely related to total profit and future company outlook rather than a current snapshot of the number of cars sold.
They also don’t have dealer networks or unions, almost no debt, and have somehow maintained those high margins despite their low debt and rapid growth. It’s possible that by the time they start making the $20k car their margins will still be relatively high compared to other cars in the same price range.
I wonder how almost $200 billion in debt at these interest rates might factor into your calculations? Or were you not aware of Toyota’s debt?
I wasn't aware of Toyota's (or VW's debt), but just raw debt numbers don't provide enough insight. Is it long term debt? Short term? What are the interest rates?
And again, let's see Tesla a few years down the line when political and social factors start weighing them down, too.
The big automakers have the profit margins they do not just simply because they're all dumb, as Tesla fanboys would love to believe, but because their environment is constrained by many things, primarily legislation.
My guess, Tesla will stabilize as a major car maker, maybe even #1 for a short period of time, and after a while the shine will wear off. They'll just be GM for the internet era.
But even just assuming 0% interest rate on that debt is still a lot better than ignoring it entirely. For simplicity you can add Toyota's $200 billion debt to its market cap to do a more apples to apples comparison with Tesla (since tesla only has ~$5 billion debt). So now we're talking $700B for Tesla to $500B Toyota assuming Toyota's debt is interest-free.
As for political factors, it seems that would only benefit Tesla vs the other automakers as Tesla only makes electric cars which is where many governments are trying to push consumers to. Other carmakers have to figure out a way to convert their ICE assembly lines to EV lines if we assume that we'll be moving towards a mostly electric future (which I believe, regardless if it's Tesla or someone else who takes us there).
A current snapshot of the per vehicle profit of a luxury car manufacturer versus a mass market manufacturer tells us even less. Suffice to say that if they were to scale sales to hit the multiple of Toyota's annual profit level implied by their respective market caps, Tesla would need to be selling cars for a lot less than $40k...
No. Tesla calling their cruise control Autopilot is a gross overstatement, meanwhile Cruise and Wayne has rolled out actual driverless vehicles and Honda released the first Level 3 autonomous vehicle to Japan last March [1].
I thought calling it autopilot was an understatement. All auto pilot does on an airplane is keep the plane flying in a straight line. Cruise controls on modern cars slow down and can keep a lane. It’s telling that Tesla doesn’t call it’s FSD “autopilot”, using the term instead for modern cruise control features that most other higher end new cars have.
And then fans are all too eager to remind us of the (utterly ridiculous at times) market cap when that fits the narrative.
(Oh yes, absolutely worth more than deep breath Toyota, Volkwagen Group, Hyundai/Kia, General Motors, Ford, Nissan, Honda, Fiat Chrysler, Renault, Suzuki, Daimler, BMW, Mazda and Mitsubishi combined. (Oh, and several Chinese manufacturers: SAID, Geely, Changan, Dongfeng).)
The Tesla Model Y is 2023’s top selling vehicle model in the world. Plus, the Cybertruck is the most hyped/anticipated car in history. The current market valuation may not be rational, but betting against such a disruptive company is foolish.
What sets Tesla apart from other automakers is not the product, but their attitude as a company. Say tomorrow flying cars become feasible. I can believe that Toyota or BMW or Ford might get around to building a flying car. I KNOW that Tesla will jump right into building one.
I support a person or organization’s right to invest in whatever they want. I also think that maybe people are being deluded or misguided by some media outlets so they think that Tesla is in a worse position than it is, or maybe they just didn’t time the market correctly. I do think it’s un-American to short sell a great American company like Tesla though. Many people work for the company and they make great products. I’m reminded of the fact that Bill Gates was shorting Tesla while asking Elon for philanthropic donations.
You can’t have a market without buyers and sellers. The only way to get tesla shares is by buying them from another person. It doesn’t matter whether the seller has 100 shares left after selling to you, or -100. The financial transaction is the same. One person believes the shares will go up and buys. The other believes the opposite and sells.
It’s not “un-American”. If anything, the superstition that that short selling harms companies or the economy is “un-American”. It’s good when badly operated businesses go bankrupt. The employees can then work somewhere else where they can make a better contribution to society. Keeping zombie companies alive is bad. (And Tesla made over a million cars last year; bankwuptcy is not happening anytime soon.)
And of all gambles, shorting is the worst. By all I mean "long or short", so I guess there isn't much variation left when you leave shorting out. But with going long on a company at least you can buy and forget. Maybe it bounces back up. Not today or this year but eventually.
With shorting though, it's pure loss. On top of the interest the lender is charging you for the stock that they loaned to you (some 2% last time I checked, when reference rate was pretty much zero). Unlike long where you earn interest (dividends).
So unless you got a really really good reason to short (insider knowledge, some solid stat arb reasoning)... don't do it. Or if you do it, I won't weep for you when you lose.