How do you know when it's the right time to short a stock like Tesla?
I think there are a lot of opportunities to short stocks in a Covid world. I'm wondering if there are some leading indicators or other signs that it's the right time to short a stock. As I evaluate the market for automobiles, it seems like, in the short-term, they will continue taking a big hit. How do I determine if it's still a good time to short it?
Answers ( 1 )
Full disclosure first. I invest in index funds with the exception of one company: Tesla. I've been long on TSLA since 2015.
I've never shorted a stock. In general, the world increases in value over time. Companies (especially the ones that have issued public stock) add value to the world and share it with stockholders as dividends (eventually). People buy those shares to take part in that value and that drives prices up. This is the entire reason for investing in stocks.
Shorting a stock is betting that the company will do poorly and this -- to be blunt -- is a bad bet for the average company. You have to know something that other traders don't if you want have a short that is expected to be profitable. But here's the thing about Tesla: it's just about the most-researched company on the planet. There is vanishingly little chance that you know something that gives you that advantage. Whatever cleverness you think is going to be profitable is just a mirage. You might make money, you might lose money -- but unless you have inside information, it's just luck. And while ownership is an expected positive return, shorts are expected negative.
So don't. :-)