At The Wall Street Journal, Michael Wursthorn and Geoffrey Rogow tell the story of Swedish investor, Kristjan Kullamägi, who found out the hard way that shorting stock can be a dangerous endeavor. They write:
“Lately, shorting has been a little more stressful,” said Kristjan Kullamägi, a 32-year-old trader who lives in Stockholm. “Some of these tech stocks have doubled and tripled.”
Mr. Kullamägi, who has been trading full time for himself for nearly a decade, was keeping an eye on smaller, more-volatile stocks for a potential opening to short. He found one in late July in shares of Eastman Kodak Co. KODK -9.34% The company, which for decades was a household name in photography, had received preliminary approval from the Trump administration for a $765 million loan to make pharmaceutical ingredients.
The stock had tripled, and Mr. Kullamägi thought that a new wave of day traders would push the shares up some more and that they would then fall. He intended to short 45,000 shares a few hours into July 29’s trading session but accidentally clicked the wrong button and shorted all of his 90,000 shares, a split-second mistake he decided to stick with. That proved costly.
Kodak shares rose sevenfold to roughly $60 a share intraday. The New York Stock Exchange halted trading of the stock more than a dozen times as it tripped so-called circuit breakers. Mr. Kullamägi was stuck for the ride.
He closed out his short after deciding he was unable to stomach the potential for further losses. The trade cost him $1.5 million.
“It was the dumbest thing I’ve ever done in my life,” Mr. Kullamägi said. “You never know when they’ll stop. You just have to get out.”
Shorting stock is the same old “greater fool” strategy, but instead of hoping you’ll be able to buy low and sell high, you’re hoping to borrow high and return low. This is speculation, not investing.
I warned you against such speculation back in July, and I hope you were listening then. Keep your investment strategy simple. Focus on compound interest, diversification, and balance.
Action line: Review your investments today to determine “the probable safety of the capital invested.”
