Long and Short Positions - What Are They?

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A Look at the Markets - Tesla - Buy the Dip?

Tesla reported weaker earnings on July 23rd. At the time of writing (July 31st), the share price is down approximately 15% from the recent high.

Is this a buying opportunity? When a price drops, some investors use a technique called ‘buy the dip’. This is when they take advantage of drops in price to buy the shares at a cheaper price. It is important to note that you should only use this technique if you are fundamentally bullish on the company.

Even if you are long-term bullish on Tesla, potential investors should be aware that the price could very easily fall to the yellow areas that I marked on the chart - around 205 and 190.

None of this is financial advice. Make your own financial decisions based on your personal circumstances and risk tolerance.

Long and Short Positions - What Are They?

In a previous newsletter, we looked at the terms ‘bull market’ and ‘bear market’. We also looked at what it means to be ‘bullish’ and ‘bearish’.

In this week’s newsletter, I want to examine similar terms ‘to be long’ and ‘to be short’.

‘To be Long’ or ‘A Long Position’

‘To be long’ means that a trader has bought and owns a share or shares in a company and expects the price to rise over time. He or she has a ‘long position’.

For example, a trader who has bought Tesla shares might say:

‘To be Short’ or ‘A Short Position’

‘To be short’ means that a trader has sold a share or shares in a company that he or she does not yet own and expects the price to fall over time. He or she has a ‘short position’.

This trading concept can be a little tricky to understand because it is counterintuitive. However, let’s break it down with an analogy.

• Your friend says that he wants to buy a bicycle for his daughter’s birthday for 100$

• You don’t have a bicycle, but you are sure that you will be able to find one for less than 100$

• You take 100$ from your friend promising to give him a bicycle at a later date. You now must go and buy a bicycle.

• If all goes well, you find a bicycle for 80$, buy it, and give it to your friend. You make 20$ profit.

• If it does not go well, the only bicycle you can find costs 120$, you have to buy it because you owe it to your friend, and instead of making 20$ you lose 20$.

This is how short selling works except with shares in companies instead of bicycles.

If the price drops after you short a company, you make a profit. However, if the price rises you incur a loss if you have to close the trade.

Understanding Risk

If you buy 1 Tesla share for 230$ what is the maximum you can lose?

Answer: 230$ or 100% of your investment, if the Tesla share price falls to zero.

Note: This assumes you do not lose leverage which will we discuss in future newsletters.

However, if you short a Tesla share at 230$ what is the maximum you can lose?

• 230$

• Infinite

If you answered ‘Infinite’ you would be correct. A stock can theoretically go up forever but can only fall to zero.

This is why shorting shares is potentially much riskier than buying shares and I do not recommend it for retail investors. When shorting, you can lose more than your initial investment.

The Big Short

A famous film called ‘The Big Short’ is based on the concept of short selling. The leading character, Michael Burry (played by Christian Bale), shorts the property market before the 2007/08 global financial crash. Will his risky move pay off?

Bitcoin Strategic Reserve Bill

Senator Cynthia Lummis introduced a Bitcoin Strategic Reserve Bill in the United States this week. This is an interesting proposal that aims to establish a significant Bitcoin reserve for the US and reduce its national debt.

Key Points

1. Purpose: The primary goal of the strategic reserve is to utilise Bitcoin as a means to reduce the national debt, assuming that the price of Bitcoin will rise in dollar terms over time.

2. Acquisition: The bill proposes acquiring and holding 1 million Bitcoins over a period of 5 years (up to 200,000 Bitcoins per year). Remember, there can only ever be a maximum of 21 million Bitcoins so this holding would represent nearly 5%. Initially, 210,000 Bitcoins currently held by the US government would be moved into a Treasury-managed reserve.

3. Holding Period: The reserve would be held for at least 20 years with the condition that it can only be sold to pay down the national debt. After the initial 20 years, the government would be allowed to sell no more than 10% of the holding within any 2-year period.

4. Funding: The funding for the project is proposed to come from various sources including the revaluation of the Federal Reserve’s gold certificates and reallocating existing funds within the Federal Reserve System and the Treasury Department. This approach aims to avoid the need for additional taxpayer money.

5. Secure Storage Facilities: The bill highlights the creation of a decentralised network of secure storage facilities managed by the Treasury Department.

Why it Matters

The proposal signifies another notable step towards the mass adoption of cryptocurrencies, especially Bitcoin. (Bitcoin ETFs were approved by the SEC earlier this year).

This is not law yet and it remains to be seen how the bill progresses.

Food For Thought

If the US government create a Bitcoin strategic reserve should you do the same? Remember that Bitcoin is available to everyone and in very small quantities. The smallest unit of a Bitcoin is a Satoshi and 100,000,000 Satoshis make up 1 Bitcoin.

This is not financial advice

Idiom of the Day: The long and short of it

We talked about longs and shorts earlier in this newsletter. Completely unrelated to finance, there is an idiom in English ‘the long and short of it‘.

We use this idiom when we want to give a summary of a situation without going into details.

For example, imagine you have attended a 3-hour meeting and your colleague asks you what happened. You might say:

As you can see, it is likely that there were 3 hours of discussions before arriving at this point which the speaker does not discuss.

Can you use ‘the long and short of it’ in a sentence?