How do you know if the market will adopt your short position?
I've read about David Einhorn's massive losses trying to short Tesla. Despite having decent evidence about Tesla being overvalued for its financials, Einhorn got burned badly. While we know in hindsight why his argument failed to convince the market (Elon managed to fix key operating issues and deliver cars, cheap liquidity bumped the stock up, etc), how does a short seller know if his/her short arguments will be accepted by the market (except in cases of blatant fraud and illegal activity)?
You don't. When you short a stock, it is now a game of paying the broker interest on borrowed shares and waiting. You can short for as long as you have money to pay your broker, or until there is a squeeze and you have to cover. The problem with shorting is, you are timing the market, you don't win trying to time the market, you never do. Lot of Macro funds fail because of wrong timing, their overall thesis is intact and excellent but it took longer to play out. The only way I see market adjusting to short position is when the short is based on data like a company will have supply chain issue this quarter that will erode some value or in the macro backdrop like say shorting a bottle/can maker because price of the excess metal in their inventory is dropping and is now worth less and decreases their assets. There is a better way to short stocks, take billions worth of short positions and cry on national television about how everything is doomed and start fear mongering so people sell, this method is proven to work.
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The one thing my PM always says is that “we don’t get paid if we’re right; we get paid when the bulls are wrong”. So for any given short you have to figure out what the bull case is and what data is needed to debunk it. TSLA has always been a bit of a cult stock which makes shorting it incredibly difficult. An easier example would be PTON back in 2021. The market was pricing in explosive growth, but app data was showing that engagement wasn’t anywhere near that in the second half of the year.
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