Shorting Stocks: A Riskier Gamble Than Going Long
When you think about shorting, remember the classic warning: “You can lose more than you put in.” That’s not just sarcasm; it’s a real possibility. Shorting is essentially taking a bet that a stock will drop, which flips the usual investing equation on its head.
Shorting vs. Going Long – The Simple Math
- Going long: buy low, sell high – you profit when the price walks up.
- Shorting: sell high (by borrowing), then buy low – you profit when the price slides down.
- Risk difference: A long position can lose at most the money you invested. A short position can lose essentially unlimited dollars if the stock surges.
Why Those Numbers Matter
Shorting isn’t just a flip‑flop of the long term; it demands a distinct skill set. You’re looking for a price trigger, but you’re also battling market sentiment, analyst bias, and the mechanics of borrowing and covering your position. It’s a different beast to tame.
Real‑World Examples That Teach Us the Rules
- Case 1: The “Cinderella” Stock – You shorted a company because it looked weak, but a surprise product launch turned it into a darling. By the time you closed the short, the price had climbed 30% – you had to cough up more than you’d initially invested.
- Case 2: The “Blind Spot” Stock – Expecting a regulation to choke a firm’s earnings, you shorted the stock. Instead, an unexpected partnership revived its valuation, and the price shot up wildly. Your short became an unbounded loss.
Shorting can feel like riding a roller coaster: you’re screaming while watching the line spin. If you want to juggle that dare, double‑check whether you really have the tools in your toolbox. If not, staying on the long side might be the smarter, more comforting route.
My investment club
My Journey Through the Witty World of Kairos Research
*What’s Kairos, Anyway?
*Kairos Research isn’t your run‑of‑the‑mill investment club – it’s the brainchild of three rockstars: Stanley Lim, Cheong Mun Hong, and Willie Keng. These same guys also launched the Value Invest Asia portal, the go‑to spot for hand‑picked, top‑tier investment wisdom that’s laser‑focused on Asia.
Why I’m Still All‑Hearted About It
*The “Intellectual Toll” You Pay
*To stay in the club, you only need to contribute one fresh stock‑market idea per year.That’s my membership fee, and I’ve gladly paid it for ages.It’s a tiny price to sweep up growth, both in portfolio and personality. And guess what? I’ll keep paying this fee as long as I’ve got a brain to dream up a new idea.
Riding all the way up
Luckin Coffee: A Wild Ride From Boom to Bust
June 2019 – The ‘Lucky’ Moment
In June 2019, our club gathered, and one of the most respected investors in the room cracked the whip on Luckin Coffee (NASDAQ: LK). He talked about a company that’s trying to be a coffee‑cue‑Big‑Ip in China, taking the thriving “take‑away” scene by storm.
From Startup to Superstore Frenzy
- Founded: Late 2017
- By next year, 2,000+ stores across China – that’s faster than most tech unicorns can grow.
- Target: To be the biggest coffee hit next to Starbucks, which views China as its biggest growth playground.
The Stock Market Rollercoaster
Back then, the stock’s hovering around $20 ( 28) – pretty close to its IPO close price from May 2019.
Fast forward to January 2020: our savvy clubmate dumped his shares as the stock screamed its peak at $50. Today, the price pokes around $4.
Why the Collapse?
A single day, April 2, 2020, saw the price dive 76% from $26, and the downward spiral kept rolling. NASDAQ even slapped a trading halt on Luckin’s shares to pause the chaos.
In short, a rapid rise followed by an even quicker fall – a classic case of a startup that grew fast enough to ask the market, “Can I reinvent the coffee grind?”
Not the first time…
Luckin Coffee’s “Cash‑Croc” Crisis
In January 2020, the gossip‑machine Muddy Waters Research dropped a bomb: Luckin Coffee had staged a fraud of its own.
Luckin, however, was quick to shut the door and deny the claim. The market didn’ explode this time – the stock only yawned a little.
Gradual Slide & Global Panic
Later that year, the share price fell, but the whole world margin shrank because of the Covid‑19 storm. It wasn’t the bank’s fault – it was the market’s.
April 2, 2020 – The Reality Check
On that day, Luckin announced a real rear‑view mirror – the board started an internal probe into the alleged fraud.
- Fraud covered 2nd to 4th quarter of 2019.
- Amount: RMB 2.2 billion (≈ $430 million).
- Revenue for 12 months – end 30 Sep 2019: $470 million.
Investors now can’t trust the previous financial statements for the 9 months ending 30 Sep 2019.
Liu Jian – The Face Behind the Smoke
The Chief Operating Officer, Liu Jian, was named the main culprit and has been suspended from his role.
Will There Be More?
When the bus finally shut down, it didn’t simply stop at that one cobweb. The “cockroach” story isn’t just a one‑foot tale – it’s a whole kitchen if you start looking around.
As Warren Buffett famously said: “What you find is there’s never just one cockroach in the kitchen when you start looking around.”
It’s tough being short
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What Luckin Really Did (The Untold Story)
“Mooning” from April 2019 to Jan 2020
- First red‑flag: Muddy Waters rang the alarm in January 2020.
- Turns out, the real party started in April 2019.
- Stock? Yo‑yoed up 59 % in that span.
- And once, it saw a near‑150 % jump—talk about a roller‑coaster.
Shorting Luckin: A Lesson in Financial Fashion Faux Pas
Picture this: you’re all set to flip a whole box of Luckin Coffee shares in April 2019 – you’re confident, you’re slick, you think you’ve got the inside scoop that the company is about to reveal some sun‑burnt secrets. But when the market shakes up, you find that you’ve lost more money than you originally staked.
Why Shorting Can Be a Deal‑breaker
- Timing is everything: Even if you’ve nailed the fundamentals, a wrong moment can cripple your position.
- Negative gearing anxiety: Unlike a regular long‑position, the downside is unlimited – you’re not capped at your initial investment.
- Feel the burn: Luckin’s infamous fraud scandal turned a short pot into a hot, burning mess, turning potential profit into a scalpel‑sharpened loss.
Shortening the Laughs – How Much You Could Actually Lose
Shorting isn’t just about a back‑to‑the‑future “who will pull the rug out from under the trader?” It’s about the terrifying possibility that the price dance could push you deeper into the red than your original bet. That’s why a lot of investors dodge the short side unless they’re absolutely sure they can survive the fallout.
Long‑Term “Ride the Wave” Strategy
In contrast, playing the long side with no leverage is a far less nerve‑wracking bet. If you’re riding the stock wave for the long haul, a temporary dip is just a blink of an eye. You don’t have to be a time‑teller’s wizard; you just hold, and the market smooths things out over the long run.
Bottom Line
- Shorting is a double‑edged sword – you need both crisp fundamentals and perfect timing to avoid turning your trade into a “more loss than you put in” nightmare.
- Going long stays comfy if you steer clear of leverage, letting the market give you a gentle nudge rather than a hard slap.
Shorting Luckin Coffee in 2019? A gut‑twisting reminder that the markets can be a brutal referee. Tune in, learn the lesson, and keep your future trades a bit less dramatic.
Even the legend fails
Jim Chanos: Legend of the Lengthy Short‑Squeeze
*Who’s this guy?
*Why His World Holds a Secret
*It all started in 1985 when Kynikos Capital Partners launched its flagship, a barefoot‑short partner called Ursus.
* The fund’s exotic math:The “Double‑Down” Strategy (Its Risk‑Double‑Reward Skillset)
*But What About That Little Short Arm, Ursus?
*In a Nutshell (Why the Internet Hums)
*Remember:
*My conclusion
Why Betting on Weak Stocks is a Bad Idea (and Shorting is Even Worse)
Shorting a stock is like betting that the company’s house will collapse—high risk, high reward, but you’re playing against the universe’s unlimited appetite for losses.
Red‑Flag Checklist for “Chilly” Stocks
- Weak balance sheets – Picture a company that can’t even keep its lights on.
- No free cash flow – They’re spending more than they’re making, and that’s a recipe for disaster.
- Rapidly declining industries – If the whole sector is dying, the company is just one grim addition.
Long positions: The Safer Road
When you buy a stock (“go long”), your upside is potentially limitless, while your downside is capped at the money you invested. It’s a classic one‑way street: you can only lose what you put in, but the sky’s the limit if the company thrives.
Why Shorting is a Double‑Edged Sword
Shorting means betting against a company—your potential loss is theoretically infinite, whereas your maximum gain is capped at 100 %. Plus, if the company surprises the market, you could be stuck in a price roller coaster that’s impossible to unwind.
Bottom Line
- Spot weak stocks first, then skip them—avoid the risk of shorting altogether.
- Shorting is only worth it if you’re okay with unlimited losses.
- Invest with the mindset that going long is a safer bet with controlled downside.
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This article was originally posted by The Good Investors.
