What can go wrong in shorting Tilray, and can EU investors short it (and how?)

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Lauretta
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What can go wrong in shorting Tilray, and can EU investors short it (and how?)

Post by Lauretta » Wed Sep 19, 2018 4:55 am

I have read about the cannabis stock Tilray, which has 28M$ in sales and a market cap of over 14B$; its price has gone up fivefold in six months and I've seen that even people who bought it 6 months ago are now shorting it.
With this market cap at 500 times sales the valuations seems absurd. So I thought about shorting it too. My questions:
-what can go wrong (I've never done it before)? Is it just a question that if it takes long enough for the price to come down, I might lose money in the mean time due to the costs of borrowing the stock?
-do you know what's the easiest way for a EU investor to do it? Would I need to open a brokerage account in the US?
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Re: What can go wrong in shorting Tilray, and can EU investors short it (and how?)

Post by Valuethinker » Wed Sep 19, 2018 5:05 am

Lauretta wrote:
Wed Sep 19, 2018 4:55 am
I have read about the cannabis stock Tilray, which has 28M$ in sales and a market cap of over 14B$; its price has gone up fivefold in six months and I've seen that even people who bought it 6 months ago are now shorting it.
With this market cap at 500 times sales the valuations seems absurd. So I thought about shorting it too. My questions:
-what can go wrong (I've never done it before)? Is it just a question that if it takes long enough for the price to come down, I might lose money in the mean time due to the costs of borrowing the stock?
Short covering. Your short position is by definition on margin - you have borrowed the money because you borrowed the stock and sold it.

If the share price goes up then you have to cover the loss in your account as per your margin agreement. I suspect this stock is thinly traded, so you will get big price jumps (up and down). The market can remain irrational in pricing a lot longer than you can stay solvent. The VW short situation (Porsche using CFDs to build a stake, undisclosed) cost investors billions of Euros when they had to cover, and one German hedge fund manager committed suicide over it.

In addition a stock like this will have high shorting costs -- your borrowing rate. In fact it may be impossible to borrow stock -- not enough around. There are published numbers for short interest in stocks.

I remember an accounting professor re Krispy Kreme donuts. He said it was clear the accounts were bad and the earnings overstated, but when he tried to short the stock, the broker basically told them there was none on offer. The market knew there was a problem with the earnings even though it had not yet moved the share price. Market efficiency was reflected in liquidity not share price, in effect.
-do you know what's the easiest way for a EU investor to do it? Would I need to open a brokerage account in the US?
Open up a Contracts For Difference (CFD) account at a spread better like CMC Markets or IG Index? They are FCA regulated and thus any EU resident should be able to use them (what happens post Brexit is unclear but I assume they will simply/ or have move you to an EU based subsidiary).

Beware your tax on these things, it could be brutal. As in pay taxes on the winnings but not be able to use the losses.

You are, in effect, short volatility. They have more capital than you do, they are long volatility in effect, and a capacity to lay off exposures onto other financial market players. Thus, they stay in business longer than you do -- that's why they are always advertising for new customers (they are big sponsors of sports events etc.).
Last edited by Valuethinker on Wed Sep 19, 2018 5:10 am, edited 1 time in total.

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Re: What can go wrong in shorting Tilray, and can EU investors short it (and how?)

Post by IowaFarmBoy » Wed Sep 19, 2018 5:09 am

The biggest risk is that it can keep going up. There is no limit to your potential losses if the stock keeps going up. I've never shorted a stock but I believe that if it does go up, you can't just wait it out, you will need to cover the losses in the meantime (Valuethinker has covered this well).

Here is a link that I borrowed from another thread about a short that didn't end well:
https://money.cnn.com/2015/11/20/invest ... s-shkreli/

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Re: What can go wrong in shorting Tilray, and can EU investors short it (and how?)

Post by Lauretta » Wed Sep 19, 2018 5:27 am

IowaFarmBoy wrote:
Wed Sep 19, 2018 5:09 am
The biggest risk is that it can keep going up. There is no limit to your potential losses if the stock keeps going up. I've never shorted a stock but I believe that if it does go up, you can't just wait it out, you will need to cover the losses in the meantime (Valuethinker has covered this well).

Here is a link that I borrowed from another thread about a short that didn't end well:
https://money.cnn.com/2015/11/20/invest ... s-shkreli/
wow scary, I checked the stock mentioned in the article and today it's worth 0.7$ apparently so in the long term it was a good bet, but the price spiked just after he made it! Can you share the link to the thread you mention (I assume it's a boglehead thread)? I'd like to read it; I've done a search on Bogleheads with the url of the Cnn article you posted but could not find the thread.
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Re: What can go wrong in shorting Tilray, and can EU investors short it (and how?)

Post by Lauretta » Wed Sep 19, 2018 5:35 am

Valuethinker wrote:
Wed Sep 19, 2018 5:05 am
Lauretta wrote:
Wed Sep 19, 2018 4:55 am
I have read about the cannabis stock Tilray, which has 28M$ in sales and a market cap of over 14B$; its price has gone up fivefold in six months and I've seen that even people who bought it 6 months ago are now shorting it.
With this market cap at 500 times sales the valuations seems absurd. So I thought about shorting it too. My questions:
-what can go wrong (I've never done it before)? Is it just a question that if it takes long enough for the price to come down, I might lose money in the mean time due to the costs of borrowing the stock?
Short covering. Your short position is by definition on margin - you have borrowed the money because you borrowed the stock and sold it.

If the share price goes up then you have to cover the loss in your account as per your margin agreement. I suspect this stock is thinly traded, so you will get big price jumps (up and down). The market can remain irrational in pricing a lot longer than you can stay solvent. The VW short situation (Porsche using CFDs to build a stake, undisclosed) cost investors billions of Euros when they had to cover, and one German hedge fund manager committed suicide over it.

In addition a stock like this will have high shorting costs -- your borrowing rate. In fact it may be impossible to borrow stock -- not enough around. There are published numbers for short interest in stocks.

I remember an accounting professor re Krispy Kreme donuts. He said it was clear the accounts were bad and the earnings overstated, but when he tried to short the stock, the broker basically told them there was none on offer. The market knew there was a problem with the earnings even though it had not yet moved the share price. Market efficiency was reflected in liquidity not share price, in effect.
-do you know what's the easiest way for a EU investor to do it? Would I need to open a brokerage account in the US?
Open up a Contracts For Difference (CFD) account at a spread better like CMC Markets or IG Index? They are FCA regulated and thus any EU resident should be able to use them (what happens post Brexit is unclear but I assume they will simply/ or have move you to an EU based subsidiary).

Beware your tax on these things, it could be brutal. As in pay taxes on the winnings but not be able to use the losses.

You are, in effect, short volatility. They have more capital than you do, they are long volatility in effect, and a capacity to lay off exposures onto other financial market players. Thus, they stay in business longer than you do -- that's why they are always advertising for new customers (they are big sponsors of sports events etc.).
Thank you for your detailed answer :-) After your explanation I understand more clearly the Keynes sentence you mention 'The market can remain irrational in pricing a lot longer than you can stay solvent.' which I had heard before but did not really know what to make of it.

Just one thing, I don't really understand what you mean by saying that
You are, in effect, short volatility. They have more capital than you do, they are long volatility in effect
Volatility can go both ways, so if the stock is volatile and has a big drop in value, I win. So I am not sure what you meant by that.
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Re: What can go wrong in shorting Tilray, and can EU investors short it (and how?)

Post by Lauretta » Wed Sep 19, 2018 5:45 am

Valuethinker wrote:
Wed Sep 19, 2018 5:05 am

If the share price goes up then you have to cover the loss in your account as per your margin agreement.
Right. So this is the reason for the controversy following Elon Musk tweet that Tesla had secured funding for going private I guess(?) Short sellers were damaged when the price went up (even though it went up only temporarily).
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Re: What can go wrong in shorting Tilray, and can EU investors short it (and how?)

Post by Valuethinker » Wed Sep 19, 2018 5:48 am

Lauretta wrote:
Wed Sep 19, 2018 5:35 am
Valuethinker wrote:
Wed Sep 19, 2018 5:05 am


Thank you for your detailed answer :-) After your explanation I understand more clearly the Keynes sentence you mention 'The market can remain irrational in pricing a lot longer than you can stay solvent.' which I had heard before but did not really know what to make of it.
Believe it. If it were easy lots of people would be doing it and making large profits. Since markets rise in the long run, a short is a bet on a losing proposition - that sometimes comes good. But Tesla is the most shorted stock out there and it hasn't collapsed yet -- although Musk's Gotterdamerung (sp?) appears closer than it was.

Swensen speaks admiringly of Jim Charnos and Kynikos Associates. The pure shorts are a specialized area of the market and Swensen thinks they play a role - not just hedge funds that occasionally short but ones that focus exclusively on betting against things. Charnos has been a bear on China for 10 years though, without the trade coming good.
Just one thing, I don't really understand what you mean by saying that
You are, in effect, short volatility. They have more capital than you do, they are long volatility in effect
Volatility can go both ways, so if the stock is volatile and has a big drop in value, I win. So I am not sure what you meant by that.
There is a world of one stock or stock index, priced at 100. By fundamental analysis, you ascertain that its correct value is 40.

The price is volatile. It goes to 80 and the spread betting firm loses money on that particular bet: but it has scale of financial resources and the ability to take the opposite side of that bet with another firm. It hurts them, but they control the risk. And, they make a turn (profit) on the bid-ask spread every time the punter (client) buys or sells.

It then goes to 150. You cannot afford to lose $50 on that stock. You are margin called at 130 and your position is sold.

It then goes down to 40. You were right, but you were right too soon AND you didn't have enough capital to hold your position.

(Now you know why short selling is a lonely business see the documentary "the China Hustle" for examples of what can happen to you (for instance, being chucked into a Chinese prison). People were right about Sino Forest but it didn't do them much good for a long time, such was the weight of consensus against them. The heroes in The Big Short (the ones trading from a garage) nearly get wiped out by their (correct in the long run) bets on CDO tranches going against them).

The clients of a spread betting firm are, in effect, short on volatility. Their capacity to bear volatility is lower than that of the counterparty, the spread betting firm.

You see this all the time in FX pairs trading. You can be right about an exchange rate, but there are deviations from what rates "should" be for very long periods of time (see our current discussion of Uncovered Interest Parity on another thread). Small punters get wiped out all the time.

(being bearish on volatility itself, ie that that volatility as measured by the VIX index will rise, has itself been a bit of a loser in recent years. Markets have gone one way (up) and volatility fell to historic lows. )
Last edited by Valuethinker on Wed Sep 19, 2018 5:49 am, edited 1 time in total.

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Re: What can go wrong in shorting Tilray, and can EU investors short it (and how?)

Post by IowaFarmBoy » Wed Sep 19, 2018 5:49 am

Lauretta wrote:
Wed Sep 19, 2018 5:27 am
... Can you share the link to the thread you mention...
Here you go!
viewtopic.php?t=180293

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Re: What can go wrong in shorting Tilray, and can EU investors short it (and how?)

Post by Valuethinker » Wed Sep 19, 2018 5:52 am

Lauretta wrote:
Wed Sep 19, 2018 5:45 am
Valuethinker wrote:
Wed Sep 19, 2018 5:05 am

If the share price goes up then you have to cover the loss in your account as per your margin agreement.
Right. So this is the reason for the controversy following Elon Musk tweet that Tesla had secured funding for going private I guess(?) Short sellers were damaged when the price went up (even though it went up only temporarily).
Musk could have violated laws regarding the position of corporate insiders:

- if there was a genuine intent to buy out Tesla (see Barbarians at the Gate for what one of those LBOs looks like) then he might have leaked inside information

- if it was simply, as seems likely, a bid to cause a short squeeze (stock price going up), and there was no actual bid on the table, then he is guilty of manipulating his stock price (spreading false information)

Both of those are crimes not matters just for civil litigation (regarding losses incurred).

Some shorts would have taken material losses because their positions got closed out. That might make them complainants, and Musk/ Tesla the subject of civil litigation, but the criminal matters are (closer to, I am not a legal expert especially US Securities law) as above.

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Re: What can go wrong in shorting Tilray, and can EU investors short it (and how?)

Post by FIREmeup » Wed Sep 19, 2018 6:15 am

Lauretta wrote:
Wed Sep 19, 2018 4:55 am
I have read about the cannabis stock Tilray, which has 28M$ in sales and a market cap of over 14B$; its price has gone up fivefold in six months and I've seen that even people who bought it 6 months ago are now shorting it.
With this market cap at 500 times sales the valuations seems absurd. So I thought about shorting it too.
You seem to get the gist of it. You probably are right about the stock and may very well be 100% right but nothing can stop this stock going to 200 first then collapsing 95% and margin calling all the shorts before. It is so disjointed from reality at this point that if it is worth nothing, it can be worth anything, and we are definitely at the anything portion of the story.

I browsed the comments and didn't see any mention of buying put options. They can define your potential loss, unlike shorting. The problem is you have to be right on the price move in a certain time span, which I guess is the same as a straight short at this time.

https://www.nasdaq.com/symbol/tlry/opti ... &money=out

As you can see a Decembe 100 put is priced at 35. TLRY has to go to 65 before you are in the money though the put pricepremium will increase some if it trends towards 65.

I am a day trader by profession. I would never put my own hard earned personal money into the position you suggested or I outlined. You may make money, then you are emboldened, and then you risk more and more of your own money and given enough time, something very bad will happen when you short stocks.

Head down and keep Bogleheading.

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Re: What can go wrong in shorting Tilray, and can EU investors short it (and how?)

Post by typical.investor » Wed Sep 19, 2018 6:22 am

Lauretta wrote:
Wed Sep 19, 2018 4:55 am
I have read about the cannabis stock Tilray, which has 28M$ in sales and a market cap of over 14B$; its price has gone up fivefold in six months and I've seen that even people who bought it 6 months ago are now shorting it.
With this market cap at 500 times sales the valuations seems absurd. So I thought about shorting it too. My questions:
-what can go wrong (I've never done it before)? Is it just a question that if it takes long enough for the price to come down, I might lose money in the mean time due to the costs of borrowing the stock?
-do you know what's the easiest way for a EU investor to do it? Would I need to open a brokerage account in the US?
Tilray in particular is extremely, extremely expensive to borrow now.
Tilray especially has outsize fees for short sellers — those wishing to borrow the stock to short it were paying 450% to 600% Monday.
How can that be right??? Apparently a typical basket of cannabis stocks overall would cost 20% to borrow.

https://www.marketwatch.com/story/pot-s ... 2018-09-18

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Re: What can go wrong in shorting Tilray, and can EU investors short it (and how?)

Post by Lauretta » Wed Sep 19, 2018 6:37 am

typical.investor wrote:
Wed Sep 19, 2018 6:22 am


Tilray in particular is extremely, extremely expensive to borrow now.
Tilray especially has outsize fees for short sellers — those wishing to borrow the stock to short it were paying 450% to 600% Monday.
How can that be right??? Apparently a typical basket of cannabis stocks overall would cost 20% to borrow.

https://www.marketwatch.com/story/pot-s ... 2018-09-18
Right, so I am not the first one who thought about shorting it :D :D Oh well...
This is probably a strange question as I am just learning about short selling, but how are the very high fees you mention determined, and who profits from them? Is is the brokers?
I am asking because I understand retail investors who buy shares, can choose to have their broker lend them to short sellers. At least my broker once sent a message asking whether clients were prepared to lend their shares. But the fees they were offering for that were very low!
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Re: What can go wrong in shorting Tilray, and can EU investors short it (and how?)

Post by nisiprius » Wed Sep 19, 2018 6:52 am

Lauretta wrote:
Wed Sep 19, 2018 5:35 am
...
You are, in effect, short volatility. They have more capital than you do, they are long volatility in effect
Volatility can go both ways, so if the stock is volatile and has a big drop in value, I win. So I am not sure what you meant by that...
Probability theory, gambler's ruin, St. Petersburg paradox, martingale gambling systems, Kelly criterion...

In any gambling situation, if the two gamblers have widely different amounts of money to play with, the one with more capital has an advantage above and beyond the intrinsic fairness of the game. The problem is that the game can't continue forever, it must eventually end with one or the other player running out of money ("ruin.") Depending on the sizes of the bets, the gambling system if any, and the true odds of the game, the results vary. Consider as a real-world gambler in a real-world casino. Despite the house odds, gamblers can and do "break the bank," i.e. win all of the chips the croupier has. And, of course, the croupier and does run the gambler out of chips. The difference is that the croupier can always get more chips. The chances of the gambler being ruined are not negligible, it really happens. The chance of the casino being ruined (through such bad luck that the player hits such a series of wins that he wins all the money the casino has) are so small that it is unlikely to occur within, who knows, a googol times the lifetime of the universe. The casino has its thumb on the scales, but size matters.

This is the flaw behind all gambling "systems," the simplest being doubling your bet and adding something every time you lose. The naïve analysis is that eventually you must win and when you do you recoup all your losses and more, so it should work. The flaw is unconsciously assuming that you can always go on playing, always double your bet... assuming in effect that you have an infinite supply of money. With a finite stake, eventually an "impossible" run of bad luck occurs, creating a catastrophic loss that ruins the gambler--and more than offsets all of the small winnings.

In short, in real life situations that have a large element of risk, speculation, gambling, etc. one of the factors that enters into the question is "probability of ruin" (losing everything). That isn't a normal element for Boglehead-style investors, but it becomes an element if you start to combine the risk of individual stock investments, the risk of small companies, and the risk of short positions.

Even shorter, in high-risk situations the person with more capital has an advantage, above and beyond the intrinsic statistics of the game.
Last edited by nisiprius on Wed Sep 19, 2018 7:01 am, edited 2 times in total.
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Re: What can go wrong in shorting Tilray, and can EU investors short it (and how?)

Post by Valuethinker » Wed Sep 19, 2018 6:55 am

Lauretta wrote:
Wed Sep 19, 2018 6:37 am
typical.investor wrote:
Wed Sep 19, 2018 6:22 am


Tilray in particular is extremely, extremely expensive to borrow now.
Tilray especially has outsize fees for short sellers — those wishing to borrow the stock to short it were paying 450% to 600% Monday.
How can that be right??? Apparently a typical basket of cannabis stocks overall would cost 20% to borrow.

https://www.marketwatch.com/story/pot-s ... 2018-09-18
Right, so I am not the first one who thought about shorting it :D :D Oh well...
This is probably a strange question as I am just learning about short selling, but how are the very high fees you mention determined, and who profits from them? Is is the brokers?
I am asking because I understand retail investors who buy shares, can choose to have their broker lend them to short sellers. At least my broker once sent a message asking whether clients were prepared to lend their shares. But the fees they were offering for that were very low!
The majority of stock lending is from index funds and ETFs. I don't know what the disclosures are, but I believe Blackrock (ishares) typically takes about 40% of that, the fund 60%. But I stress I don't know.

Only illiquid stocks get high stock lending fees.

Yes the broker (the Prime Broker in the case of a hedge fund) takes a slice of the stock lending fees. It's one of the main reasons why investment banks commit capital to Prime Brokerage.

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Re: What can go wrong in shorting Tilray, and can EU investors short it (and how?)

Post by Lauretta » Wed Sep 19, 2018 7:11 am

nisiprius wrote:
Wed Sep 19, 2018 6:52 am
Lauretta wrote:
Wed Sep 19, 2018 5:35 am
...
You are, in effect, short volatility. They have more capital than you do, they are long volatility in effect
Volatility can go both ways, so if the stock is volatile and has a big drop in value, I win. So I am not sure what you meant by that...
Probability theory, gambler's ruin, St. Petersburg paradox, martingale gambling systems, Kelly criterion...

In any gambling situation, if the two gamblers have widely different amounts of money to play with, the one with more capital has an advantage above and beyond the intrinsic fairness of the game. The problem is that the game can't continue forever, it must eventually end with one or the other player running out of money ("ruin.") Depending on the sizes of the bets, the gambling system if any, and the true odds of the game, the results vary. Consider as a real-world gambler in a real-world casino. Despite the house odds, gamblers can and do "break the bank," i.e. win all of the chips the croupier has. And, of course, the croupier and does run the gambler out of chips. The difference is that the croupier can always get more chips. The chances of the gambler being ruined are not negligible, it really happens. The chance of the casino being ruined (through such bad luck that the player hits such a series of wins that he wins all the money the casino has) are so small that it is unlikely to occur within, who knows, a googol times the lifetime of the universe. The casino has its thumb on the scales, but size matters.

This is the flaw behind all gambling "systems," the simplest being doubling your bet and adding something every time you lose. The naïve analysis is that eventually you must win and when you do you recoup all your losses and more, so it should work. The flaw is unconsciously assuming that you can always go on playing, always double your bet... assuming in effect that you have an infinite supply of money. With a finite stake, eventually an "impossible" run of bad luck occurs, creating a catastrophic loss that ruins the gambler--and more than offsets all of the small winnings.

In short, in real life situations that have a large element of risk, speculation, gambling, etc. one of the factors that enters into the question is "probability of ruin" (losing everything). That isn't a normal element for Boglehead-style investors, but it becomes an element if you start to combine the risk of individual stock investments, the risk of small companies, and the risk of short positions.

Even shorter, in high-risk situations the person with more capital has an advantage, above and beyond the intrinsic statistics of the game.
Thank you for your explanations. I don't always agree with you (for example on the question of EW vs Market cap weighting) but I always appreciate the pedagogy of your posts.
I think I will give shorting Tilray a miss then. :happy
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Re: What can go wrong in shorting Tilray, and can EU investors short it (and how?)

Post by Valuethinker » Wed Sep 19, 2018 7:17 am

nisiprius wrote:
Wed Sep 19, 2018 6:52 am
Lauretta wrote:
Wed Sep 19, 2018 5:35 am
...
You are, in effect, short volatility. They have more capital than you do, they are long volatility in effect
Volatility can go both ways, so if the stock is volatile and has a big drop in value, I win. So I am not sure what you meant by that...
Probability theory, gambler's ruin, St. Petersburg paradox, martingale gambling systems, Kelly criterion...

In any gambling situation, if the two gamblers have widely different amounts of money to play with, the one with more capital has an advantage above and beyond the intrinsic fairness of the game. The problem is that the game can't continue forever, it must eventually end with one or the other player running out of money ("ruin.") Depending on the sizes of the bets, the gambling system if any, and the true odds of the game, the results vary. For realistic situations (such as a real-world gambler in a real-world casino) the chances of the gambler being ruined are not negligible, while the chance of the casino being ruined (through such bad luck that the player hits such a series of wins that he wins all the money the casinos has) are so small that it is unlikely to occur within the lifetime of the universe.

This the flaw behind all gambling "systems," the simplest being doubling your bet and adding something every time you lose. The naïve analysis is that eventually you must win and when you do you recoup all your losses and more, so it should work. In practice, sophisticated systems both obfuscate the basic nature (doubling until you win), and, in real life, create a steady stream of small winnings that appear to validate them... until eventually an "impossible" run of bad luck occurs, creating a catastrophic loss that more than offsets the small winnings, and quite possible ruins the gambler.

In short, in real life situations that have a large element of risk, speculation, gambling, etc. one of the factors that enters into the question is "probability of ruin" (losing everything). That isn't a normal element for Boglehead-style investors, but it becomes an element if you start to combine the risk of individual stock investments, the risk of small companies, and the risk of short positions.

Even shorter, in high-risk situations the person with more capital has an advantage, above and beyond the intrinsic statistics of the game.
Examples of this in the real world abound, in particular hedge funds. Pre 2008 Crisis, the trading desks of many investment banks behaved in a similar fashion - can't speak to the current state of play.

https://www.calculatedriskblog.com/2013 ... pital.html

http://econbrowser.com/archives/2005/11/hedge_fund_risk
I do not know anything about the investment strategy of Renaissance or Medallion. But let me tell you about one fund I do know about called CDP, which was described by MIT Professor Andrew Lo in an article published in Financial Analysts Journal in 2001.

1992-1999 was a good time to be in stocks– a strategy of buying and holding the S&P 500 would have earned you a 16% annual return, with $100 million invested in 1992 growing to $367 million by 1999. As nice as this was, it pales in comparison to CDP’s strategy, which would have turned $100 million into $2.7 billion, a 41% annual compounded return, with a positive return in every single year.

Want to learn more? CDP stands for “Capital Decimation Partners”, a hypothetical fund created by Professor Lo in order to illustrate the potential difficulty in evaluating a fund’s risk if all you had to go on was a decade of stellar returns. The strategy whereby CDP would have amassed a hypothetical fortune was amazingly simple– it simply sold put options on the S&P 500 stock index (SPX).

Buying put options is a way that an investor can buy insurance against the possibility of a big loss. For example, the S&P 500 index is currently valued around 1250. You can buy an option (the 1150 March 2006 put) that will pay you $100 for every point that the S&P is below 1150 on a specified date in March. Such an insurance policy would today cost you about $750. If you’ve bought enough puts to balance the equity you have invested long, you have nothing to fear if the market goes below 1150, because every dollar you lose on your main holdings you can gain back from your put option.

But what about the person who sold you that put? They have now assumed all of your downside risk. Lo’s Capital Decimation Partners would use its capital to meet the margin requirements (which guarantee to the exchange that CDP could in fact make the payments to the buyer of the put), and roll over the proceeds to make even bigger bets. Essentially it was thus using leverage to turn the relatively small proceeds from selling these puts into a huge return on the capital invested.

Of course, if you play that game long enough, eventually the market will make a big enough move against you that your capital used to meet margin requirements gets completely wiped out, giving you a long-run guaranteed return on your investment of -100%. But over the 1992-99 period, Lo’s hypothetical fund dodged that bullet and ended up turning in a whopping performance.

Lo gives a variety of other examples of funds that could go for a long period with very high returns and yet entail enormous risks. They all have this feature of pursuing investments that have a high probability of a modest return and a very small probability of a huge loss
. By leveraging such investments, one can achieve a very impressive record as long as that low probability disastrous event does not occur. It is certainly possible that some strategies along these lines would, unlike Capital Decimation Partners, earn a higher return than the market on average if you stuck with them forever. However, you should view that higher return as coming at the expense of much higher risk.
Long Term Capital Management was, in the end, shown to be doing something similar. So were the trading desks of various investment banks that then blew up in 2008-09.

The problem is the owners of capital are not the managers of capital. This Principal-Agent problem causes the difficulty that it is rational to create a fund that makes small profits every year, earning a good living for the manager, but loses huge amounts of money every so many years.

In the end, investors in LTCM who forcibly had capital repaid early (against their wishes) by the managers (the stink was created that this was not done equally across all investors, some were "favoured" "friends & family" and allowed to keep all of their money in) did better than those who rode it down to implosion.

In hedge fund returns, if it looks too good to be true, then there is quite possibly:

- some sort of Madoff like fraud going on
- the strategy is, in effect, a CDP-like strategy

It is in the private asset sphere -- where fund Net Asset Value is produced using the manager's (subject to audit) judgement of the value of investments - that I now see significant risks. For example, some of the Venture Funds have written up their investments in various "unicorn" companies (not implying a conscious attempt to defraud -- I have no direct personal knowledge) which will not be validated by subsequent events.

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Re: What can go wrong in shorting Tilray, and can EU investors short it (and how?)

Post by Valuethinker » Wed Sep 19, 2018 7:22 am

nisiprius wrote:
Wed Sep 19, 2018 6:52 am


In short, in real life situations that have a large element of risk, speculation, gambling, etc. one of the factors that enters into the question is "probability of ruin" (losing everything). That isn't a normal element for Boglehead-style investors, but it becomes an element if you start to combine the risk of individual stock investments, the risk of small companies, and the risk of short positions.
To emphasize this:

- stocks are more volatile than underlying metrics like dividends would lead one to predict. A lot more volatile. The high returns of equities are paid for by the risk of another Great Depression (80% fall in stocks in nominal terms? less in real), Japan (30 year bear market), UK 1972-74 (80%+ fall in real terms), St. Petersburg (100% fall in stock prices in 1917-1990) etc. Those Russian Imperial Government, Chinese Republic (pre 1949) and Confederate States of America bonds make nice wallpaper.*

- leverage is just not part of the BH investment philosophy, for this reason. Most of us would probably say that consumer debt is OK if a mortgage and/or low interest rate car loan (I stress low interest rate on the latter). But leverage to invest? No.


* I vaguely recall the Chinese and the US government settled on some value for those, when the US officially recognized People's Republic of China, but I am not sure.

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Re: What can go wrong in shorting Tilray, and can EU investors short it (and how?)

Post by FIREmeup » Wed Sep 19, 2018 8:02 am

To prove the insanity, because TLRY was highlighted on Mad Money last night it is currently trading at 230 in premarket. Previous close 155. The stock moved from 180 at 7am up to 240 by 830 AM todat. If you liked the short yesterday you will love it today!

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Re: What can go wrong in shorting Tilray, and can EU investors short it (and how?)

Post by Lauretta » Wed Sep 19, 2018 8:17 am

FIREmeup wrote:
Wed Sep 19, 2018 8:02 am
To prove the insanity, because TLRY was highlighted on Mad Money last night it is currently trading at 230 in premarket. Previous close 155. The stock moved from 180 at 7am up to 240 by 830 AM todat. If you liked the short yesterday you will love it today!
yes :D It's interesting that you are a day trader but you say that you would not short it nor buy put options. May I ask, am I correct in understanding then that you are a day trader for your job (and so you buy and sell individual stocks) but you invest your own money in the bogleheads way?
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Re: What can go wrong in shorting Tilray, and can EU investors short it (and how?)

Post by asif408 » Wed Sep 19, 2018 8:35 am

As others have pointed out, shorting is risky because you can be right about Tilray crashing in the longer run and lose all your money and more in the short run doing it.

If you want to gamble, I'd take the other side and just buy a small amount, say equivalent to 0.1% of your overall portfolio, and look at it as a lottery ticket that might either pay off big or crash. At least that way you can (and probably will) only lose 0.1%, vs shorting, where you could lose a lot more. And if for some crazy reason Tilray continues to appreciate and become a decent chunk of your portfolio, sell it and count your blessings.

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Re: What can go wrong in shorting Tilray, and can EU investors short it (and how?)

Post by Lauretta » Wed Sep 19, 2018 8:46 am

asif408 wrote:
Wed Sep 19, 2018 8:35 am
As others have pointed out, shorting is risky because you can be right about Tilray crashing in the longer run and lose all your money and more in the short run doing it.

If you want to gamble, I'd take the other side and just buy a small amount, say equivalent to 0.1% of your overall portfolio, and look at it as a lottery ticket that might either pay off big or crash. At least that way you can (and probably will) only lose 0.1%, vs shorting, where you could lose a lot more. And if for some crazy reason Tilray continues to appreciate and become a decent chunk of your portfolio, sell it and count your blessings.
Ok I see your point thank you; but I already gambled a small fraction of a percent of my assets with bitcoin last year and in the end I didn't like it. I liked the idea of shorting because the price didn't make sense based on fundamentals, but I now understand the risks so I won't do it and I'll just have fun watching how the price evolves out of curiosity. Someone mentioned in a post above that it reached 240$ this morning; right now it's about 180$ so it's going to be fun to watch! :o
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Re: What can go wrong in shorting Tilray, and can EU investors short it (and how?)

Post by Dottie57 » Wed Sep 19, 2018 10:24 am

Can you tell me how you stop shorting a stock ? Do you pay it back? Can you limit your loss in some way?

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Re: What can go wrong in shorting Tilray, and can EU investors short it (and how?)

Post by Lauretta » Wed Sep 19, 2018 2:38 pm

Dottie57 wrote:
Wed Sep 19, 2018 10:24 am
Can you tell me how you stop shorting a stock ? Do you pay it back? Can you limit your loss in some way?
I think you just buy it and then 'give it back' to whomever you borrowed it from. Not sure if you can limit the loss particularly if say it occurs overnight in after hours trading.
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Re: What can go wrong in shorting Tilray, and can EU investors short it (and how?)

Post by bgf » Wed Sep 19, 2018 2:44 pm

WOAH, at the money put options for Jan. '19 are worth over HALF the current share price. the premium for a put option with a $170 strike is currently $88... lolwut.
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Re: What can go wrong in shorting Tilray, and can EU investors short it (and how?)

Post by Lauretta » Wed Sep 19, 2018 3:13 pm

bgf wrote:
Wed Sep 19, 2018 2:44 pm
WOAH, at the money put options for Jan. '19 are worth over HALF the current share price. the premium for a put option with a $170 strike is currently $88... lolwut.
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Re: What can go wrong in shorting Tilray, and can EU investors short it (and how?)

Post by pkcrafter » Wed Sep 19, 2018 3:30 pm

Lauretta, you should go look at your investing strategy and investment policy statement and see if you really are a Boglehead or not.

Paul
When times are good, investors tend to forget about risk and focus on opportunity. When times are bad, investors tend to forget about opportunity and focus on risk.

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Re: What can go wrong in shorting Tilray, and can EU investors short it (and how?)

Post by FIREmeup » Wed Sep 19, 2018 3:52 pm

Lauretta wrote:
Wed Sep 19, 2018 8:17 am
FIREmeup wrote:
Wed Sep 19, 2018 8:02 am
To prove the insanity, because TLRY was highlighted on Mad Money last night it is currently trading at 230 in premarket. Previous close 155. The stock moved from 180 at 7am up to 240 by 830 AM todat. If you liked the short yesterday you will love it today!
yes :D It's interesting that you are a day trader but you say that you would not short it nor buy put options. May I ask, am I correct in understanding then that you are a day trader for your job (and so you buy and sell individual stocks) but you invest your own money in the bogleheads way?
Hope you waited until 299 to short! And covered at 185 before the bounce back to 215! Then reshorted it again! All in the last hour of the day.

Yes I am a proprietary trader by profession for 9 years now. I figured I'd learn to trade for a few years, then eventually trade my own money, make my own hours, everything would be great! Well I was right, there are some trading inefficiencies but they are measured in minutes if not seconds and milliseconds. They are hard to find and even then they have a 60% success rate at this point with all the computers fighting each other.

The longer I sat in front of all my screens watching the stocks tick, I became convinced that long term, no one has an advantage. It's not worth the the work, the stress, the numerous hours to find those stocks that may be mispriced....to pick the right entry point....to not get shaken out if you get in too early...to get put before you get too greedy and it comes off. Too many things have to go right for you to be right, even when you are right.

Pretty early I did find myself buying low cost ETFs. I probably hold about 20 etfs of 100 to 200 shares that are appreciated greatlt now that i wont sell. After a few years I found the boglehead community and now just employ the simple 3 fund strategy. Well I do a few extra about 6, and do time some small cap etf additional investments and maybe more value since they've been weaker. But always etfs or mutual funds of the Vanguard or Schwab variety, always buying and holding, never selling.

Most importantly it gives you the best asset ever...more time! And less worry!

I have friends who love to talk day trading with me. I tell them to boglehead it. They always talk about their gains. But when their stock or sector collapses I don't hear much but I can feel it.

So do yourself a favor, go full boglehead. If you must, allocate 2% to play money and when it's gone, which it will be, don't do it again.. DO NOT SHORT ever. you can lose your intended bet plus way more.

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Re: What can go wrong in shorting Tilray, and can EU investors short it (and how?)

Post by Lauretta » Wed Sep 19, 2018 3:55 pm

pkcrafter wrote:
Wed Sep 19, 2018 3:30 pm
Lauretta, you should go look at your investing strategy and investment policy statement and see if you really are a Boglehead or not.

Paul
'I'd say I am pretty much a Boglehead, or perhaps even more a Swedroehead :D (since I came up with a barbell portfolio for myself quite similar to the Swedroe portfolio before knowing that the latter existed). However I like to explore things, and sometimes have ideas like this one (of shorting Tilray), so I come to this forum to see what are the reasons not to.
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Re: What can go wrong in shorting Tilray, and can EU investors short it (and how?)

Post by alex_686 » Wed Sep 19, 2018 3:58 pm

I was on the margin desk during the dot.com boom and bust. A good lesson that I learned was that the market can stay irrational longer than you can stay liquid. I saw quite a few people bet against the dot.com boom, get crushed but the continuing irrational rise, have to close out their position and declare bankruptcy, and only then for the market to go bust.

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Re: What can go wrong in shorting Tilray, and can EU investors short it (and how?)

Post by Tanelorn » Wed Sep 19, 2018 4:03 pm

Valuethinker wrote:
Wed Sep 19, 2018 6:55 am
Only illiquid stocks get high stock lending fees.
Not always, and not in this case. Lending rates are determined by supply and demand. Less liquid stocks may have less supply (but probably less demand too), but that doesn’t apply here. TLRY has around 75M shares and traded over $1B in daily volume consistently for the past week or two (10-30M shares/day). It’s liquid, it’s just crazy high and demand by short sellers is very high compared to supply. Today’s price action was particularly volatile, ranging from $150-300.

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