10 ms·

Fair warning. Buying stocks with high short interest is, over the long run, a terrible investment strategy. Mountains of academic research has consistently foun

Fair warning. Buying stocks with high short interest is, over the long run, a terrible investment strategy. Mountains of academic research has consistently found the most heavily shorted stocks to significantly underperform the market[1] (to the order of 10% per year). Heavily shorted stocks tend to be the companies with the most negative cash flow shocks[2], low quality earnings statements[3], negative earnings revisions, and future bad news[4]. In other words, when a company is heavily shorted it's almost always for a good reason. (Like being a brick and mortar video game retailer, that's losing mountains of cash with no turnaround plan.) High short interest is a tell-tale warning of a bad investment. This shouldn't be surprising. Research has consistently found that short-sellers are the most sophisticated and well-informed investors in the market[5]. There activity strongly predicts soon-to-be released negative public announcements[6]. Short sellers are exactly the type of trader, you do not want to be on the other side of. [1]https://onlinelibrary.wiley.com/doi/abs/10.1111/0022-1082.00495 https://onlinelibrary.wiley.com/doi/abs/10.1111/0022-1082.00... [2]https://www.sciencedirect.com/science/article/abs/pii/S0304405X16300320 https://www.sciencedirect.com/science/article/abs/pii/S03044... [3]https://link.springer.com/article/10.1007/s11142-006-6396-x https://link.springer.com/article/10.1007/s11142-006-6396-x [4]https://onlinelibrary.wiley.com/doi/abs/10.1111/fima.12144 https://onlinelibrary.wiley.com/doi/abs/10.1111/fima.12144 [6]https://www.newyorkfed.org/medialibrary/media/research/conference/2010/cb/Boehmer_Jones_Zhang1.pdf https://www.newyorkfed.org/medialibrary/media/research/confe... [5]https://onlinelibrary.wiley.com/doi/abs/10.1111/jfir.12121 https://onlinelibrary.wiley.com/doi/abs/10.1111/jfir.12121

optimiz3 6y ago
Works until it doesn't. Exhibit TSLA.
- mike00632 6y ago
  Give it a few years. I'm still skeptical that Tesla should be worth more than all the other auto companies combined.
  - option 6y ago
    In addition to making cars people want, Tesla also makes their own software, chips for AI inference and training, batteries, charging network, home energy solutions (solar+ battery). All of these not just related products but a cohesive strategy with sum much equal to its parts. Which other automaker does that? Edit: Having said that, I bought them long ago at their IPO price and sold long ago when they were around 300 pre-splits. The current valuation is indeed a little risky.
    - mike00632 6y ago
      I agree. I even own Tesla stock. But Tesla 1) still has a lot of scaling to get through before they reach anything close to the sales volume of their competition. Elon talks a lot about scaling but Tesla is still microscopic compared to other manufacturers. The business operations of a much larger company will present challenges in communication, structure, quality assurance, legal liabilities in various jurisdictions, not to mention the struggle of sourcing battery components. Tesla scaling is not as easy as spinning up additional Kubernetes pods. 2) The competition WILL electrify. Tesla is not likely to have more than 6 models in the coming years yet they will compete with hundreds of models from different companies that cater to different niches. Any company that offers an electric vehicle with physical buttons instead of a touchscreen has my attention. 3) Tesla workers will unionize and/or mature away from the company. I grew up around Detroit and witnessed a lot of labor dynamics with the UAW. Assuming Tesla succeeds in preventing a union the workers will eventually cash out their stock and leave for better offers at other automotive companies or spin off their services into tier automotive groups. Why write software for Tesla robots when the robot company will hire you to write software for all auto companies?
      - krrrh 6y ago
        The competition has electrified. America is just behind the trend. https://twitter.com/asymco/status/1352335793025650695?s=20 https://twitter.com/asymco/status/1352335793025650695?s=20
  - omgwtfbyobbq 6y ago
- dcolkitt 6y ago
  I'm old enough to remember people saying the exact same thing in 1999. The four most dangerous words in investing are: "This time is different"
  - ngngngng 6y ago
    I'm fairly confident it's going to be a while before a stock is shorted over 100% again, barring some big regulatory overreach. As soon as it happens, we'll meme it again.
    - joncrane 6y ago
      Are you sure? Won't markets get more efficient and the squeeze start earlier (before it gets to 100% short interest)? Surely there will be more caution on the shorters' side (and perhaps earlier exits) and faster uptake on the squeezers' side? I think this GME thing is not only unprecedented, there won't be followed by anything similar (for maybe 100 years...the Piggly Wiggly short squeeze happened almost exactly 100 years ago...) Piggly Wiggly short squeeze story: https://twitter.com/dollarsanddata/status/1354561444780646401 https://twitter.com/dollarsanddata/status/135456144478064640...
  - omgwtfbyobbq 6y ago
    "This time isn't different" too. Back in 1999, people weren't very hot on Amazon. https://www.thestreet.com/opinion/net-stock-horror-stories-readers-give-it-up-679070 https://www.thestreet.com/opinion/net-stock-horror-stories-r...
- vadym909 6y ago
  Many stocks grow into it over time: AMZN
  - worker767424 6y ago
    But Jeff Bezos grew up, and now he's a fuckin tool. Elon Musk might as will still be 15.
- PartiallyTyped 6y ago
  'Fundamentals' and all that is a bs excuse used to scapegoat driving stocks they or their friends don't like to the ground. Let me ask this. How in the world can an 'analyst' know more about tech than the people that work all their lives in bleeding edge research and technology? They don't. They don't know more than Jim Keller whose primary task was development of Zen architecture at AMD - which traded at $5 before he joined and until after he was done. Why do I mention Jim Keller? Because a certain class of people can not only turn around a company, but whole industries even if only due to being famous and drawing unknown talents. In the case of TSLA; Andrej Karpathy leads the AI division. My argument is that 'analysts' know nothing of tech and they are in no position to act as the judges.
  - kgwgk 6y ago
    “Our goal is, and I feel pretty good about this goal, that we’ll be able to do a demonstration drive of full autonomy all the way from LA to New York, from home in LA to let’s say dropping you off in Time Square in New York, and then having the car go park itself, by the end of next year,” [Musk] said on a press call [in October 2016]. “Without the need for a single touch, including the charger.” How much did you need to know about tech to realize that wasn't going to happen?
    - PartiallyTyped 6y ago
      Consider the following, everyone claimed reusing rockets was physically impossible. Well here we are now. Sure 'end of next year' may be impossible, but doing it at some point is not necessarily impossible given certain conditions. Nothing to do with targets, everything to do with values. And a company is more than what it produces, it is also the patents they own and the brains they wield. PS: I do research in ML.
      - kgwgk 6y ago
        The patents expire. The brains have legs. A valuation of 20 times revenue - and thousands of times earnings - is not justified by saying "a company is more than what it produces". Edit: put otherwise, how does your comment relate to the fact that Tesla was trading at 5-10% of the current price in 2019? Aren't the patents and brains the same? Why are Tesla's patents and brains worth now almost as much as those of Apple or Microsoft?
dclowd9901 6y ago
Is it not also possible that the shorting itself influences the direction of the stock/performance of the company? I'm not sure you can make a statement like you're making. There, to me, is not a direct cause/effect relationship here.
- dcolkitt 6y ago
  How would short selling cause a company's next quarterly earnings to be disappointing?
  - totalZero 6y ago
    I sometimes wonder how much the share price affects management's opinion of its own performance. If valuation is viewed as a report card of sorts, then management is likely to seek financing and damage control when shares are cheap. Doubt of that nature could have a negative effect on their ability to perform. Not to mention that share price likely plays a role in their personal wealth.
    - xxs 6y ago
      Stock price affects regular engineers/developers, if they have stock options for example.
- MattGaiser 6y ago
  It influences the direction of the stock price perhaps, but why the fundamentals?
  - xxs 6y ago
    The easiest part - cut workforce to improve bottom line (and share prices, as management gets their own stock options), kill R&D. Engineers* quit as part of their remuneration packages are stock options. Overall perception and morale, hard to acquire new talents, etc.
  - dclowd9901 6y ago
thrwn_frthr_awy 6y ago
It turns out an online community can stay irrational longer than a hedge can solvent.
- PragmaticPulp 6y ago
  These situations tend to blow Up both sides, more or less. A few lucky Redditors will get out with profits. Most of the late entries are going to take steep losses. Those losing Redditors will be paying the winning Redditors. The narrative that this is hedge funds losing to Redditors isn’t fully accurate.
  - cbozeman 6y ago
    Hedge funds are down $70 billion over this, so I'm pretty sure there's some accuracy. And no, its not all GameStop, but $GME is a driver. https://www.reuters.com/article/us-retail-trading-shortbets-idUSKBN29X1SW https://www.reuters.com/article/us-retail-trading-shortbets-...
    - pjc50 6y ago
      This is very much reminding me of 2008. If you keep blowing up financial institutions, eventually you're going to hit a Lehman and the counterparty risk spreads to the rest of the system.
      - germinalphrase 6y ago
        The zeitgeist seems to be “screw ‘em; they’re jackals”.
        pjc50 6y ago
        Yes, I'm aware of that. Do we actually want to rerun 2008 again, though? Are people expecting it to have a different, better outcome and not a different, worse outcome or just the bailout again? The hedge funds aren't structurally important. Brokerages start to be. Retail banks definitely are.
lxbky 6y ago
[deleted]
- Triv888 6y ago
  Don't put all of your eggs in the same basket. I have no clue how anyone, especially edge funds, could get majorly impacted by just one stock moving the wrong way. I have stocks in my portfolio that move 25 to 50% the wrong way almost everyday and I still get about 1% overall gain daily in this bull market (which is probably not great in this economy).
  - deleted 6y ago
    [deleted]
  - njanirudh 6y ago
    Because you don't get 10 or 100x leverage like hft guys get.
  - thatguy0900 6y ago
    Shorts are a little unique in that the risk is technically infinite. Stocks you own can only lose whatever value you bought them for. Stocks youve promised to buy later from someone else, though, can lose you however much money they decide to charge you when you have to buy. They could have thousands of profitable positions and lose 2 billion off one very unlucky short call because of a meme.
    - Triv888 6y ago
      Good point. Maybe they will learn something?
      - thatguy0900 6y ago
        Well, I can't imagine we'll see any stocks shorted to 128% for a very long time. Probably not much else
      - marvin 6y ago
shrimpx 6y ago
It sounds like in the case of Melvin, their aggressive and continued short-selling likely drove down the price. It sounds like powerful and aggressive short-sellers can parasitically drive a company's value down and then make a killing at the bottom. If that's the case then yes, you don't want to be on the other side, because they're manufacturing their desired outcome.
lucideer 6y ago
> Mountains of academic research has consistently found ... "Past performance does not guarantee future returns", and vice-versa. That's a somewhat trite statement (albeit technically true), but it's particularly relevant here where people are betting on disruption. The "concept" behind this movement is that one can influence stock performance through collective action by taking decisions that would not have been taken in the past (for very obvious industry reasons, like those given in your comment). It's a high-risk bet for some, but noone is going into this hoping for a return based on traditional market performance.
NoOneNew 6y ago
Yea, but you know what a lot of these studies fail to grasp that the WSB exposed? The human factor. Namely, predatory humans. Yes, a lot of the companies who get heavily shorted stumbled. But then, to guarantee a profit, the shorting hedge funds knee cap the company. Then they short them again and again. The current fiasco also shows the widespread influence these firms have to enact their will on the market. If you look at the stock market as independent number generator, you'll always use statistics to explain what's going on. If you realize there are humans behind those numbers, you see it more like a crime scene rather than a math problem.

optimiz3 6y ago

Works until it doesn't. Exhibit TSLA.

mike00632 6y ago
Give it a few years. I'm still skeptical that Tesla should be worth more than all the other auto companies combined.
- option 6y ago
  In addition to making cars people want, Tesla also makes their own software, chips for AI inference and training, batteries, charging network, home energy solutions (solar+ battery). All of these not just related products but a cohesive strategy with sum much equal to its parts. Which other automaker does that? Edit: Having said that, I bought them long ago at their IPO price and sold long ago when they were around 300 pre-splits. The current valuation is indeed a little risky.
  - mike00632 6y ago
    I agree. I even own Tesla stock. But Tesla 1) still has a lot of scaling to get through before they reach anything close to the sales volume of their competition. Elon talks a lot about scaling but Tesla is still microscopic compared to other manufacturers. The business operations of a much larger company will present challenges in communication, structure, quality assurance, legal liabilities in various jurisdictions, not to mention the struggle of sourcing battery components. Tesla scaling is not as easy as spinning up additional Kubernetes pods. 2) The competition WILL electrify. Tesla is not likely to have more than 6 models in the coming years yet they will compete with hundreds of models from different companies that cater to different niches. Any company that offers an electric vehicle with physical buttons instead of a touchscreen has my attention. 3) Tesla workers will unionize and/or mature away from the company. I grew up around Detroit and witnessed a lot of labor dynamics with the UAW. Assuming Tesla succeeds in preventing a union the workers will eventually cash out their stock and leave for better offers at other automotive companies or spin off their services into tier automotive groups. Why write software for Tesla robots when the robot company will hire you to write software for all auto companies?
    - krrrh 6y ago
      The competition has electrified. America is just behind the trend. https://twitter.com/asymco/status/1352335793025650695?s=20 https://twitter.com/asymco/status/1352335793025650695?s=20
- omgwtfbyobbq 6y ago
dcolkitt 6y ago
I'm old enough to remember people saying the exact same thing in 1999. The four most dangerous words in investing are: "This time is different"
- ngngngng 6y ago
  I'm fairly confident it's going to be a while before a stock is shorted over 100% again, barring some big regulatory overreach. As soon as it happens, we'll meme it again.
  - joncrane 6y ago
    Are you sure? Won't markets get more efficient and the squeeze start earlier (before it gets to 100% short interest)? Surely there will be more caution on the shorters' side (and perhaps earlier exits) and faster uptake on the squeezers' side? I think this GME thing is not only unprecedented, there won't be followed by anything similar (for maybe 100 years...the Piggly Wiggly short squeeze happened almost exactly 100 years ago...) Piggly Wiggly short squeeze story: https://twitter.com/dollarsanddata/status/1354561444780646401 https://twitter.com/dollarsanddata/status/135456144478064640...
- omgwtfbyobbq 6y ago
  "This time isn't different" too. Back in 1999, people weren't very hot on Amazon. https://www.thestreet.com/opinion/net-stock-horror-stories-readers-give-it-up-679070 https://www.thestreet.com/opinion/net-stock-horror-stories-r...
vadym909 6y ago
Many stocks grow into it over time: AMZN
- worker767424 6y ago
  But Jeff Bezos grew up, and now he's a fuckin tool. Elon Musk might as will still be 15.
PartiallyTyped 6y ago
'Fundamentals' and all that is a bs excuse used to scapegoat driving stocks they or their friends don't like to the ground. Let me ask this. How in the world can an 'analyst' know more about tech than the people that work all their lives in bleeding edge research and technology? They don't. They don't know more than Jim Keller whose primary task was development of Zen architecture at AMD - which traded at $5 before he joined and until after he was done. Why do I mention Jim Keller? Because a certain class of people can not only turn around a company, but whole industries even if only due to being famous and drawing unknown talents. In the case of TSLA; Andrej Karpathy leads the AI division. My argument is that 'analysts' know nothing of tech and they are in no position to act as the judges.
- kgwgk 6y ago
  “Our goal is, and I feel pretty good about this goal, that we’ll be able to do a demonstration drive of full autonomy all the way from LA to New York, from home in LA to let’s say dropping you off in Time Square in New York, and then having the car go park itself, by the end of next year,” [Musk] said on a press call [in October 2016]. “Without the need for a single touch, including the charger.” How much did you need to know about tech to realize that wasn't going to happen?
  - PartiallyTyped 6y ago
    Consider the following, everyone claimed reusing rockets was physically impossible. Well here we are now. Sure 'end of next year' may be impossible, but doing it at some point is not necessarily impossible given certain conditions. Nothing to do with targets, everything to do with values. And a company is more than what it produces, it is also the patents they own and the brains they wield. PS: I do research in ML.
    - kgwgk 6y ago
      The patents expire. The brains have legs. A valuation of 20 times revenue - and thousands of times earnings - is not justified by saying "a company is more than what it produces". Edit: put otherwise, how does your comment relate to the fact that Tesla was trading at 5-10% of the current price in 2019? Aren't the patents and brains the same? Why are Tesla's patents and brains worth now almost as much as those of Apple or Microsoft?

dclowd9901 6y ago

Is it not also possible that the shorting itself influences the direction of the stock/performance of the company? I'm not sure you can make a statement like you're making. There, to me, is not a direct cause/effect relationship here.

dcolkitt 6y ago
How would short selling cause a company's next quarterly earnings to be disappointing?
- totalZero 6y ago
  I sometimes wonder how much the share price affects management's opinion of its own performance. If valuation is viewed as a report card of sorts, then management is likely to seek financing and damage control when shares are cheap. Doubt of that nature could have a negative effect on their ability to perform. Not to mention that share price likely plays a role in their personal wealth.
  - xxs 6y ago
    Stock price affects regular engineers/developers, if they have stock options for example.
MattGaiser 6y ago
It influences the direction of the stock price perhaps, but why the fundamentals?
- xxs 6y ago
  The easiest part - cut workforce to improve bottom line (and share prices, as management gets their own stock options), kill R&D. Engineers* quit as part of their remuneration packages are stock options. Overall perception and morale, hard to acquire new talents, etc.
- dclowd9901 6y ago

thrwn_frthr_awy 6y ago

It turns out an online community can stay irrational longer than a hedge can solvent.

PragmaticPulp 6y ago
These situations tend to blow Up both sides, more or less. A few lucky Redditors will get out with profits. Most of the late entries are going to take steep losses. Those losing Redditors will be paying the winning Redditors. The narrative that this is hedge funds losing to Redditors isn’t fully accurate.
- cbozeman 6y ago
  Hedge funds are down $70 billion over this, so I'm pretty sure there's some accuracy. And no, its not all GameStop, but $GME is a driver. https://www.reuters.com/article/us-retail-trading-shortbets-idUSKBN29X1SW https://www.reuters.com/article/us-retail-trading-shortbets-...
  - pjc50 6y ago
    This is very much reminding me of 2008. If you keep blowing up financial institutions, eventually you're going to hit a Lehman and the counterparty risk spreads to the rest of the system.
    - germinalphrase 6y ago
      The zeitgeist seems to be “screw ‘em; they’re jackals”.
      - pjc50 6y ago
        Yes, I'm aware of that. Do we actually want to rerun 2008 again, though? Are people expecting it to have a different, better outcome and not a different, worse outcome or just the bailout again? The hedge funds aren't structurally important. Brokerages start to be. Retail banks definitely are.

lxbky 6y ago

[deleted]

Triv888 6y ago
Don't put all of your eggs in the same basket. I have no clue how anyone, especially edge funds, could get majorly impacted by just one stock moving the wrong way. I have stocks in my portfolio that move 25 to 50% the wrong way almost everyday and I still get about 1% overall gain daily in this bull market (which is probably not great in this economy).
- deleted 6y ago
  [deleted]
- njanirudh 6y ago
  Because you don't get 10 or 100x leverage like hft guys get.
- thatguy0900 6y ago
  Shorts are a little unique in that the risk is technically infinite. Stocks you own can only lose whatever value you bought them for. Stocks youve promised to buy later from someone else, though, can lose you however much money they decide to charge you when you have to buy. They could have thousands of profitable positions and lose 2 billion off one very unlucky short call because of a meme.
  - Triv888 6y ago
    Good point. Maybe they will learn something?
    - thatguy0900 6y ago
      Well, I can't imagine we'll see any stocks shorted to 128% for a very long time. Probably not much else
    - marvin 6y ago

shrimpx 6y ago

It sounds like in the case of Melvin, their aggressive and continued short-selling likely drove down the price. It sounds like powerful and aggressive short-sellers can parasitically drive a company's value down and then make a killing at the bottom. If that's the case then yes, you don't want to be on the other side, because they're manufacturing their desired outcome.

lucideer 6y ago

> Mountains of academic research has consistently found ... "Past performance does not guarantee future returns", and vice-versa. That's a somewhat trite statement (albeit technically true), but it's particularly relevant here where people are betting on disruption. The "concept" behind this movement is that one can influence stock performance through collective action by taking decisions that would not have been taken in the past (for very obvious industry reasons, like those given in your comment). It's a high-risk bet for some, but noone is going into this hoping for a return based on traditional market performance.

NoOneNew 6y ago

Yea, but you know what a lot of these studies fail to grasp that the WSB exposed? The human factor. Namely, predatory humans. Yes, a lot of the companies who get heavily shorted stumbled. But then, to guarantee a profit, the shorting hedge funds knee cap the company. Then they short them again and again. The current fiasco also shows the widespread influence these firms have to enact their will on the market. If you look at the stock market as independent number generator, you'll always use statistics to explain what's going on. If you realize there are humans behind those numbers, you see it more like a crime scene rather than a math problem.