The Most Influential Short Squeezes in History

In the world of Wall Street, the words “short squeeze” are enough to send veteran traders running for the hills. Shorting a stock is when investors bet that a stock’s price will drop… but what happens if it doesn’t? That’s when you get a short squeeze, and they can wreak havoc with the stock market.

What Is a Short Squeeze?

A short squeeze is a quick increase in the price of a stock. The increase usually occurs because too many people are selling that stock short. This is something that most Wall Street insiders dread, but why is it so bad?

A short seller will borrow shares from a company and immediately sell them, with the intention of buying them back later at a lower price. Because the shares were borrowed, though, the short seller must return them to the lender at some point. They must also pay interest and dividends if required.

Of course, investing usually works when folks put money into stocks that will later be worth much more than they are now. However, there is another strategy investors can utilize: Selling stocks short, which allows them to earn a profit if the stock’s value decreases.

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Short selling isn’t always a bad thing. This strategy is useful in many ways. It can help investors to hedge risks in their portfolio, for instance. Furthermore, it’s been shown that banning the practice of short selling has had a negative effect on financial markets. So, what’s the problem?

Well, here’s the catch: Some investors will try to use short selling in unethical ways. They might undervalue a stock so that they’re able to buy up more of it. But when a short squeeze happens, these investors are forced to act.

Read on to learn more about short squeezes as we go through some of the most historic short-squeeze events in stock market history.

Herbalife

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Bill Ackman is an American investor. He is also the founder and CEO of Pershing Square Capital Management, which currently has about $13.1 billion assets under management.

Ackman was also a major player in the infamous Herbalife short. In December of 2012, Ackman issued a research report that criticized Herbalife’s multi-level marketing business model. He also announced that Pershing Square Capital Management sold Herbalife’s shares short starting in May 2012, which caused Herbalife’s stock price to decrease.

After some more drama, Ackman spent $50 million on a PR campaign against Herbalife. He did this with the intention of hurting Herbalife’s stock price even further.

Controversy surrounded Ackman at this time. Was he really trying to spread the truth about a sketchy company that seemed like it might be a pyramid scheme, or was he solely interested in the financial benefits he could receive from driving down Herbalife’s stock price?

Federal agencies began investing Herbalife. Lawsuits were filed and dismissed. Investors in Herbalife wondered if they were caught up in a pyramid scheme, while others were angry at Ackman for his PR campaign against the company.

At the end of the day, by July of 2016, Ackman had lost about $500 million throughout this entire saga.

Tesla Stock Price Rally

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At the end of August 2020, folks noticed that Tesla’s shares were worth nearly $450. This was a huge increase from where the prices were at the beginning of that month. At the start of August, Tesla shares had cost about $300, which was already the highest they’d been.

Where did this surprise stock price increase come from? It turned out that the primary reason the stock price surged was–you guessed it–short selling.

By mid-2020, Tesla had become the most shorted stock in the world. This is because Wall Street seemed to think the company was overvalued. The short sellers lost in the end–the damages turned out to be about $40 billion for them.

The Tesla short squeeze was helped along by Tesla’s slow, patient growth. The short selling losses gradually compounded as the months went by, so slowly that short sellers might not have even realized how much loss they were in for.

Piggly Wiggly

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Piggly Wiggly grocery stores are located all throughout the Midwest and the South. They’ve been around for just over a hundred years and operate stores in 18 states.

The success of Piggly Wiggly was influenced by Clarence Saunders, who developed the first modern retail sales model of self-service. He was responsible for opening the first Piggly Wiggly store, but he was also responsible for one of the most infamous short squeezes in history.

In 1923, speculators tried to bear raid the price of Piggly Wiggly stock because they bet that the price of the stock would fall. There were also a few independent Piggly Wiggly franchises that went bankrupt around this time, and this made investors worry that the usually solid stock might become vulnerable.

Saunders was reportedly furious when he learned about the short selling of Piggly Wiggly stock. He decided to take on the speculators himself by securing a $10 million loan. The loan in addition, to his own money, allowed Saunders to purchase a ton of Piggly Wiggly stock to drive up the price.

Saunders went as far as to put out newspaper ads to let the public know what his plans were in response to the bear raid. He continued to buy the stock, driving the price from $39 to $124 from 1922-1923.

The New York Stock Exchange declared that Saunders had cornered the market, giving the bear raiders five days to deliver the stock that was owed to Saunders. Essentially, the NYSE sided with the short sellers.

Unfortunately, Saunders didn’t make enough money back to pay back his loan, and he resigned as the president of Piggly Wiggly Stores, Inc.

Saunders had to turn his assets over to his creditors, including his Piggly Wiggly stock and the rest of his property.

Porsche and Volkswagen

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In 2008, Porsche and Volkswagen were embroiled in a Wall Street drama for the ages. This occurred in October of that year when Porsche attempted to drive up the price of some Volkswagen shares.

Porsche had owned a minority stake in Volkswagen for a long time. In the fall of 2008, the world was already in a financial crisis. Then, Porsche revealed they had bought up 74% of Volkswagen’s voting shares by purchasing most of the company’s circulating stock.

Porsche was able to buy so much Volkswagen stock because around 12.5% of the stock was already on loan to short sellers. The day after Porsche announced their takeover, the short sellers bought more stock and led the price to inflate.

In one day, Volkswagen’s price went from around $479 per share to around $711 per share. The short selling costs added up to the tens of billions.

Porsche’s attempted takeover of Volkswagen did not work. Notably, though, the CEO of Porsche at the time, Wendelin Wiedeking, allegedly left the company after this incident with about $69 million to his name.

Later, Wiedeking was charged with market manipulation for his role in the Volkswagen short squeeze that cost Porsche so much money. However, in July of 2016, the charges were dropped, apparently because there was little hope of winning the case.

GameStop

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We all remember hearing about the GameStop short squeeze at the start of this year, right? It had been a while since such a dramatic short squeeze had occurred, and most people didn’t know that such wild manipulation of the stock market could even occur. If we had learned about the Piggly Wiggly crisis in school, we might have been more prepared!

As a refresher, the GameStop short squeeze happened when members of a subreddit on Reddit, r/wallstreetbets, got together to short squeeze the American video game retailer’s stock.

The reason that the Redditors worked together to disrupt the market? They noticed that institutional investors were undervaluing the stock, perhaps in sketchy ways. Reddit decided to take on these short sellers using the concept of strength in numbers.

These amateur investors did what Clarence Saunders tried to do with Piggly Wiggly himself: Stop the short sellers from taking advantage of low prices. Saunders was not able to do it alone, but Reddit was able to do it through teamwork.  

The short squeeze was successful, and the value of GameStop stock has been utterly wild since this event. The short sellers ended up suffering major losses due to the short squeeze.

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For example, a London-based hedge fund called White Square Capital had bet against GameStop during the squeeze. They suffered double-digit losses and announced in June that they are shutting down operations.

The prices of the GameStop stock peaked in January, but the numbers are still bouncing around in unprecedented ways. Toward the end of February, the price of GameStop stock doubled in just about 90 minutes. In late March, the stock price fell by 34%. The following day, however, it rose again by 53%. In May of this year, the price of GameStop stock spiked once more.

Reports say that all the short sellers’ losses added up to about $6 billion due to the GameStop short squeeze.

GameStop’s short squeeze actually affected other companies that were experiencing an increase in shorted securities. These companies include:

  • Virgin Galactic Holdings, Inc.
  • National Beverage Corp.
  • BlackBerry Limited
  • Siebert Financial
  • Tootsie Roll Industries, Inc.
  • Nokia Oyj
  • Build-A-Bear Workshop, Inc.
  • Ligand Pharmaceuticals Incorporated
  • The Macerich Company
  • Bed Bath & Beyond Inc.
  • Naked Brand Group
  • AMC Entertainment Holdings, Inc.
  • AMC Networks Inc.
  • Koss Corporation
  • Palantir Technologies Inc.
  • Eastman Kodak Company
  • BB Liquidating Inc.
  • iRobot Corporation
  • Genius Brands International
  • Fossil Group, Inc.

If you’re betting on the stock market, be careful about short selling. Biting off more than one can chew has proven to be quite disastrous for many investors, as you can see.

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