Wednesday, March 5, 2014

Two Rules Doug Kass Broke When He Shorted Tesla (TSLA)

I won't get into the wisdom of publicly announcing the short the day of the earnings announcement, that is either a publicity ploy (egads, I've fallen into the trap!) or a cry for help.
We'll look at shorting the stock in the first place and then the two successive shorts at higher prices.
The two rules that were violated were:

a) From Stephen Weiss, former co-manager, SAC capital:
...“This is analogous to shorting a momentum stock,” added Weiss, a veteran trader who at one time co-managed Steve Cohen’s legendary SAC Capital. “Astute investors don’t short momentum stocks as they climb purely on valuation because the market can stay irrational longer than an investor can stay solvent. However, once the momentum breaks and fundamental reality sets in, the shorts go after the equity like bees to honey.”.
-Attention All You Scam Dogs and Momo Mamas: "Actionable Call Alert: Green Mountain Coffee - Bounce?" (GMCR)

b) From Cassandra does Tokyo:
"#21. NEVER double-down (except when you have material non-public information and deep pockets) or if you're Ed Thorp, or if you're playing at The Martingale Room. "
-Cassandra's (Not so) Golden Rules About Investing (And Not Investing) 
Follow those two rules and avoid existential pain.

Fortunately for Mr. Kass he was able to cover some of his short on March 3rd at $236, just seconds before the stock screamed another 14 points to close that day at $250.56.
Previously:
UPDATED--Doug Kass Shorts More Tesla at $232, Announces Company Has Fallen Into His Trap (TSLA)
Shorting Tesla: Is Seabreeze Partners' Doug Kass a Genius? (The Key to Understanding Market Anomalies) TSLA