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Steve Eisman Reveals Mistake in Shorting Tesla
Eisman's Challenge in Shorting Cult Stocks
Steve Eisman, known for his role in "The Big Short," recently admitted to a mistake he made when attempting to deploy his strategy of betting against stocks. In 2018, Eisman shorted Tesla, but was forced to cover his position two years later at a significant loss. This experience taught him the difficulty of betting against a stock that doesn't trade on fundamentals. He explained, "The hardest thing that I have found over the years is trying to short cult stocks or meme stocks. They seem to go up on nothing."
The Success and Challenges of Shorting Tesla
Eisman became famous for his successful shorting of collateralized debt obligations to profit from the subprime mortgage loan crisis in 2008. However, he has faced challenges in shorting Tesla, which he refers to as a cult stock. Jim Chanos, another investor who has bet against Tesla, has also described it as a cult stock that the market perceives positively. Eisman expressed shock at Tesla's stock rally, despite the company's recent price cuts. Tesla has lowered prices for some of its electric vehicles multiple times, causing concerns about its profit margins.
The Difficulty of Shorting Tesla
Eisman highlighted the significant price cuts by Tesla and noted the focus on volume by investors until the company reports its earnings. He stated, "If you look at the fundamentals right now, you'd have to say it's kind of shocking how much they've cut prices." However, he acknowledged that shorting Tesla remains challenging due to the cult-like following the company has gained. Eisman concluded, "So I think the bull story on Tesla is not as great as it was, but it's still very hard to short because of the cultish aspect of the company."
Tesla's Impressive Stock Performance
Despite the challenges faced by short sellers like Eisman, Tesla's stock has surged an astounding 109% this year alone. The Elon Musk-led electric vehicle company has experienced significant growth since the start of the pandemic. This has resulted in losses for many short sellers, highlighting the resilience and market demand for Tesla's products.
Conclusion: Implications for New Businesses
The revelation of Steve Eisman's mistake in shorting Tesla sheds light on the challenges faced when betting against stocks that have a cult-like following. This topic holds important implications for new businesses, particularly those entering industries with the potential for a strong fan base or viral popularity.
Eisman's experience with Tesla illustrates the difficulty in shorting cult stocks, which often trade on sentiment rather than traditional fundamentals. New businesses should take note that the market's perception of a company can sometimes override financial realities. A strong and passionate following can sustain stock prices and propel them to unexpected heights, regardless of traditional valuation metrics.
For entrepreneurs and investors, understanding the dynamics of cult-like stocks becomes crucial. While shorting may seem tempting in such cases, it is important to recognize the risks involved. Attempting to bet against a stock that has captured the hearts and minds of its supporters can be a daunting and potentially costly task.
Instead, businesses should focus on building sustainable fundamentals and delivering value to their customers. By creating a solid foundation and providing exceptional products or services, new businesses can cultivate a loyal customer base that supports long-term growth and resilience.
In conclusion, the case of Steve Eisman and Tesla serves as a reminder that market behavior can often defy rationality, especially when cult-like followings are involved. For new businesses, the key takeaway lies in prioritizing sustainable growth and fostering customer loyalty rather than relying solely on hype or perception.
Article First Published at: https://www.cnbc.com/2023/07/24/big-short-investor-steve-eisman-on-the-hardest-lesson-hes-had-to-learn-over-the-years.html.svg)
