As the company leading this transformation, Carvana is my favorite pick in this long-term trend. My investment thesis is that used auto sales will shift to the internet. Will Carvana pull off an Amazon-like transformation of the used car industry? I think so.
Whatever profits are made in a short-term valuation call are tiny anthills compared to the giant gains to be made in owning a mighty business over decades. (Although you should notice all those peaks in this ugly bear chart - those short-term spikes can drive shorts from their positions).īut of course, the real mistake is to fixate on valuation with a young company that's growing quickly and miss its potential upside. In the short term, some of those shorts might have made money. Amazon's revenue growth was sky-high, but the company was unprofitable for many years, and a lot of people thought Amazon was heading for bankruptcy.Īmazon had a lot of shorts, and its stock once dropped 90%. People did that back in the day because its valuation seemed out of whack. What's dangerous is to short a Rule Breaker like Amazon, for example. Ask Smith Corona or Kodak what happens when technology changes the world. Technology shifts, and companies in the old world can die an ugly death. I don't short anything, but if I were going to short a stock, it would be a horribly run company that's heading for nonexistence. Shorting a highflier because of valuation is the worst kind of short Those early short positions were obliterated over the next couple of years, as the stock spiked to $239 by the end of 2020.ĬVNA data by YCharts 4. At the time, the stock was trading at about $20 a share. People were lining up around the block to short Carvana - 120% of the company's float was sold short. If you think people are bearish on Carvana now, you should have seen what the market was like back in 2018. They're not going to fund your downside forever - it's too dangerous. That's why brokerages are quick to make margin calls if the stock starts to charge higher. But the bulls have an infinite upside and a finite downside.Ī short has exactly the opposite scenario - finite gains and infinite losses. The stock market rewards patient, long-term investors, and sometimes by a lot.Ĭarvana might be a $1 trillion company one day, or it might go belly up. Meanwhile, when you're right, your winners can go up 1,000%, 10,000%, or even higher than that. You might have some losers that drop 50%, 75%, or even 100%, but that's a hard stop. That's how people get rich in the stock market. If you avoid margin debt, the most you can lose is 100% of your investment in a stock. The most amazing thing about the stock market is that the math is on your side. You're on the wrong side of the miracle of compound returns The more the shorts pile up, the more future buyers we have.Īlmost 30% of Carvana's public float (that is, the shares on the market) is sold short. Just remember this: Every bear who's short Carvana is a future buyer of the stock. I'll stop before it gets too complicated. This is what's known as the dreaded short squeeze. This can have a ripple effect, spiking the price higher and causing even more margin calls at other brokerages. If you fail to provide the cash, the brokerage will often close the short (i.e., buy the stock) even if you don't want to. That means you have to add cash to keep your short active. You're taking on a form of debt - and your brokerage needs to make sure you're good for it. If the stock you're shorting pops higher, and the brokerage needs proof you can cover your debt, you will receive a margin call. Unlike buying shares of a stock, shorting a stock means you're actually signing an I.O.U. If the stock costs less when you close your short position than it did when you opened it, congratulations - you made a profit on your short. But if the stock goes up, so does the amount you're obligated to pay later. The way a short sale is structured, you borrow shares from your brokerage at today's price with the obligation to buy them later, paying what the shares cost at that time.