Posted January 08, 2021
By Ray Blanco
How Not to Lose 1,200% in Just 1 Year
When you think of the richest person in the world, who comes to mind?
Some of you will say Jeff Bezos. Others will point fingers to Bill Gates or Warren Buffett.
And even others will remember the early 90s when Japans billionaires dominated with names like Taikichiro Mori or Yoshiaki Tsutsumi.
Well, throw all of that away. Today, we crown a new champion Elon Musk.
If someone would have told you five years ago that Musk would be the richest man in the world, youd have thought them crazy.
Yes, Tesla had finally made a name for itself in the markets, but the company was heavily criticized by the markets and the financial media.
It broke records becoming the most shorted stock of all time with billions of dollars being bet that Tesla would collapse.
Their bets were seemingly well warranted.
There were major concerns in 2017 and 2018 that Tesla wouldnt be able to meet the supply demand and that their new brand of electric vehicle wouldnt take among the American public.
Furthermore, Musk wasnt making a good case for himself as CEO of the company.
The infamous $420 secured tweet, as seen below, put Musk in hot water with the SEC
It forced him to step down from the companys board and nominate a successor as chair. He stayed on as CEO, which continued to worry investors.
His erratic behavior combined with the big questions of deliverability made bears pounce on the stock.
Tens of billions of stock were shorted against Tesla.
RBC Capital, a global investment bank, started shorting Tesla stock in early February of 2019.
Things started off on the right foot for them as the stock dropped nearly 30% during that year
But soon they would be sorely mistaken in their bet.
To explain their mistake, let me first explain shorting.
Say you short 10 stocks of Apple in todays market the price being $135. You would immediately receive $1,350 for shorting the stock. What you would then do is hope the stock drops so you can buy back in at a lower price.
The problem with shorting, though, is that theres unlimited risk if the stock keeps going up.
Coming back to our friends at RBC Capital, they shorted Tesla stock when it was around $60.
Despite the dip in prices in the middle of the year, they would find that the stock went up 20% by the end of the year.
And since that time, the stock is now up 1,200%.
Put it this way
If you shorted 10 stocks of Tesla at $60 back in February of 2019, you would now be over $7,500 in debt.
Short sellers on Tesla are now tens of billions of dollars in the hole.
The thing is, though, RBC Capital is still around. They didnt shutter their doors on this trade.
In fact, theyre close to reaching all-time highs on their own stock (NYSE: RY).
So what gives?
There are a couple things we can take away from this story
The first is as a retail investor like you or me, be extremely careful how you invest your money.
Buying stock, call options or other investments usually has a cap on how much money you can lose.
Shorting a stock has infinite downside, as seen with our Tesla example.
The second lesson is that banks, institutional money and big hedge funds dont invest like you or I do.
They have huge swathes of cash to throw around and arent worried if a bet like the one they did in Tesla falls through.
They only look at the big companies out there. They arent going to bother with your small-cap stocks or your tiny potentially explosive picks.
They have so much money that if they decided to put money into a small-cap stock, they would make the price of that stock shoot up to enormous heights which brings in the issue of manipulating the markets.
Furthermore, putting in a smaller amount of money into these stocks just doesnt make any sense. Its not worth getting a couple thousand dollars when they can make millions on a company like Apple or JP Morgan.
They just dont care about the little stocks out there, and they arent in the business to try to find the ones with the biggest potential.
To a bright future,