Tesla

One of the more interesting blogs listed on my blogroll is Wayward Lad's Pension Builder. His horse racing blog has been running since 2010, and his Pension Builder since 2013, which makes them two of the longer running blogs out there. 

The raison d'être for the Pension Builder idea is summarised as:

Having given up on the professionals, this is my own actively managed UK private pension (SIPP). I have a target for annual growth of 15% which - should I achieve it - will give me a Pension fund value of over £500,000 when I reach my 65th birthday.

To date, Wayward's decision is paying off. He has a target of 15% a year, i.e. 1.17% per month, which is certainly on the high side, but as of today he is ahead of schedule. 

Readers will know that my approach is to avoid higher cost actively managed funds and invest mostly in low cost index funds. 

However I do own some individual stocks, the most recent portfolio addition being that of Tesla last November. 

The trigger was seeing articles about the company being the most shorted stock in the USA. Shorting stocks is a risky business, and the more I read, the more it seemed that there are several misconceptions about the company. I also happen to like CEO Elon Musk's sarcastic, flippant, sometimes rude, approach to those trying to spread a false narrative about him or his company.

Also potentially unsettling investors: Shortly before commenting on the Model Y, Musk flippantly dismissed a pair of analyst questions -- one related to capital needs, and one related to the percentage of Model 3 reservation holders who buy the vehicle once they're able to.

I also liked that "around three-quarters of Tesla’s stock is held by major institutional investors — companies who have built their empires based on choosing good stocks. Furthermore, institutional investors have recently been increasing their stakes in the company". 

These investors usually (not always) know what they're doing.
To cut a long story short, I invested.

It's not been the prettiest of rides, especially in early April, but the stock is up 46.44% from that low, and the last couple of weeks have seen the red turn to green with some breathing room, and I think there is plenty more upside.

Here's a good description about short selling and how a short squeeze works. 

Tesla is the most shorted stock in the United States — 10.7 billion dollars bet against it.

What does this mean? In short selling, you pay a stockholder interest to “borrow” their shares, which you promptly sell, with an obligation to buy them back for the stockholder later. Because these stockholders would not have otherwise sold their stock, it injects new stock into the market, which depresses the stock value. Inversely, when shorts cover their position by buying the stock back later, this creates extra buying that otherwise wouldn’t have happened, elevating the price.

Short selling is always dangerous, but it’s unusually dangerous when a large portion of the stock is in short positions. The downside to a short position is technically unlimited; if you shorted a stock at $1 a share and it rose to $1 million a share, your losses would be a million times your investment. To prevent shorts from getting into a situation that they can’t get out of, short positions come with contractual obligations to cover their shorts (aka, buy back the stock) if the stock price rises too much. However, as shorts buy back stock, this raises the price of the stock, which can trigger other shorts to be forced to cover. This self-perpetuating cycle is known as a short squeeze. The more of a company’s stock is shorted, the more of a risk there is for a short squeeze, and the more the price will spike during it; in a Tesla short squeeze, the shorts would have to buy nearly a quarter of all of the stock in the market in a relatively short period of time. But most entities holding Tesla’s stock are long-term investors, and correspondingly don’t want to sell. This puts even more upward pressure on the stock.

Tesla has gone through several short squeezes before (due to the large number of people who either don’t believe in EVs, don’t believe in automotive upstarts, or just simply don’t like Musk). But never on this scale. To reiterate, if Tesla’s stock rises too much, people with 10.7 billion dollars bet against Tesla stand to utterly lose their shirt.

I'm letting this one run.