A short squeeze is a very interesting concept in trading and knowing about the biggest short squeezes in history is even more interesting. Moreover, it isn’t only an interesting concept but also an enticing one because it can be highly profitable for you.
History is important in all aspects of life because it teaches you lessons. It teaches you lessons that prove vital in your life and trading history isn’t an exception. It also teaches you some vital lessons. Similarly, looking at the biggest short squeezes in history teaches you some important lessons. Therefore, we decided to help you know about the 10 major short squeezes in trading history that shocked the world. Let’s see how!
What is a short squeeze?
A short squeeze is a very important concept in trading. It happens to traders and investors who act on the assumption that the stock price of a company will fall. However, the stock price rises instead and traders suffer losses. How does it all happen? Let me explain.
As you know, shorting is a trading strategy that involves borrowing stocks from a broker, selling them now, and then buying at low. Traders sell borrowed stocks hoping that stock prices will fall. So, when traders buy at a lower price to pay borrowed stocks back, they make a profit. However, if things don’t go as expected, shorting causes huge losses. Therefore, it is a risky strategy and suits only highly experienced traders.
So, what if traders shorting stocks sell borrowed stocks hoping that share prices would decline but prices increase instead? This is a typical short-squeeze scenario. How does it happen? Suppose a group of investors know that traders are shorting stocks. They may buy a majority of stocks only to force short sellers to buy back from the group of investors. You will fully understand the short squeeze when we move to the next section.
10 biggest short squeezes in history
The trading history is very interesting in general and short squeeze in particular. The biggest short squeezes in history have made some billionaires. Whereas, some unfortunate players lost billions. Here is the list of the 10 biggest short squeezes in history.
Volkswagen’s short squeeze is perhaps the most popular one in trading history. Hedge funds that betted against VW lost nearly €30 billion in the famous incident whereas their counterparts made billions. Who were the counterparts and what actually happened? Let’s see.
Perhaps everyone connected with finance and the economy in any capacity knows about the great 2008 recession. VW was also in the midst of a huge financial crisis and near bankruptcy. However, there was another particular situation in the middle of all this. It was a Porsche. Porsche was reported to acquire VW. They had acquired 44% of Volkswagen shares by then and had an option to buy 30% more. Moreover, the German State of Lower Saxony also owned 20% of VW stocks. So, there were only 6% of shares available for investment.
Now, what happened? Hedge funds deemed it a wonderful shorting opportunity. Porsche was never going to buy a further 30% shares in a company that was near bankruptcy according to short sellers. Therefore, they shorted a total of 13% of Volkswagen shares hoping to buy back at a lower share price. What eventually happened? Porsche didn’t stay behind. They went on to execute their option to buy a further 30% of shares. So, there were not enough shares available for short sellers to close their positions. They had to buy shares from Porsche or the German State of Lower Saxony to close their positions.
It is also important to note that Volkswagen’s share price was €210 approximately before the short squeeze. When short sellers had no option but to buy back shares, the Volkswagen stock price skyrocketed to over €1000. Hedge funds that betted against VW lost €30 billion approximately. So, what is the lesson here in this story of one of the biggest short squeezes in history? The lesson is that a competitor may acquire a struggling company and ruin shorting plans. Therefore, short selling is highly rewarding but highly risky as well.
GameStop is another one of the biggest short squeezes in history. In January 2001, the company’s share price was trading at $2.57 per share. This videogame company was near insolvency because of market conditions. Therefore, hedge funds considered it a good shorting opportunity and placed short positions.
However, the stock price of GameStop started to rise because of investors like Ryan Cohen and Michael Burry. It rose from $2.57 to as high as $325 within a timeframe of 6 months. So, what happened to short sellers? They wanted to buy back shares at a lower price. However, it never happened because GameStop’s share price rose dramatically.
Short sellers found themselves entangled in a big short squeeze. They had to buy back shares to return to brokers but had to buy at a high price instead of a coveted low price. As a result, hedge funds lost nearly $2 billion in a very short period of time. GameStop’s short squeeze happened because Reddit and other famous investors invested in the company. So, what does this short squeeze case tell us? It tells us that the share price of an overvalued company may rise when other investors invest in the company.
3. Harlem Railroad
The Harlem Railroad is another famous one of the biggest short squeezes in history. Cornelius Vanderbilt was one of America’s wealthiest people during the 1860s. In 1862, he assessed the business potential of the Harlem Railroad. It was the only railroad entering New York City and yet it was suffering losses. Vanderbilt started buying Harlem Railroad stock at $8 per share. To cut the long story short, he acquired control of the firm. Harlem Railroad stock price began to rise and crossed $100 in a few days.
Daniel Drew was another key figure at the center of the Harlem Railroad short squeeze. He was one of Vanderbilt’s directors. Drew was also an old business rival of Vanderbilt. He designed a scheme and instigated the city council to repeal Harlem Railroad. The repeal scheme was to decline the stock price of the company. The city council members borrowed huge sums of money and began shorting Harlem Railroad’s stock. They also went on to repeal the company that forced the stock price to plummet from over $100 to $72.
However, Vanderbilt came to know about Drew and the city council’s scheme. He countered the scheme by buying all outstanding shares of the Harlem Railroad. As a result of fearless buying, the stock price began to rise and rose to $106 the very next day. However, this wasn’t the end. The stock price continued to rise and reached $179 in a short period of time. The city council beseeched Vanderbilt to stop but he was adamant to teach them a lesson. He eventually allowed Drew and the City Council members to buy back stocks at $180 per share. So, that settled the short squeeze that made Vanderbilt $5 million while antagonists lost millions.
4. Piggly Wiggly
Piggly Wiggly is the predecessor of the current era’s supermarkets and was owned by Clarence Saunders. It was the first self-service superstore in the US and the idea caught fire. Soon there were 1000 Piggly Wiggly stores throughout the US. The company also went public in 1922 and was expected to grow further. However, in the same year, some of the franchises went bankrupt and caused tension among investors.
As a result of the tension, short sellers began to short Piggly Wiggly shares. They had hoped for a dramatic decline in the share price. However, Saunders knew what would happen after this. So, he decided to counter short sellers and took out a $10 million loan to buy Piggly Wiggly shares. As a result of his fearless move, he ended up owning 99% of the shares. Stock prices began to rise and reached $124 after Saunders regained control. He didn’t stop there. What happened next?
Saunders started selling Piggly Wiggly shares to the public at a fixed price and also forced short sellers to pay back loaned shares. The stock exchange suspended trading and gave short sellers time to pay back loaned shares. That said, short sellers had to face huge losses. Saunders finally accepted to sell shares at $100 per share and thus made millions.
5. Reliance Industries Limited
Dhirubhai Ambani, the owner of Reliance Industries Limited, also faced quite a similar situation Saunders had faced. During the 1980s, short sellers began to short stocks of his company. Manu Manek was the main culprit of the shorting scheme. He is known as Cobra of the Bombay Stock Market because of his shorting exploits. Manek was among the most powerful stock brokers of that time. However, he wasn’t up against an ordinary businessman this time. Ambani decided to go against short sellers and teach them a lesson.
Ambani made preparations and started to buy shares from short sellers through the Friends of Reliance Association. Manek and others were successful in bringing down the share price of Reliance. However, when the time to pay back borrowed stocks came, short-sellers had nowhere to go. They had to buy stocks from Reliance itself or Friends of Reliance Association. However, it was never easy. Eventually, exchange authorities had to intervene to settle the dispute between the two forces. History shows that short-sellers lost INR30 million at that time.
6. Herbalife Nutrition Ltd.
A short squeeze involving Herbalife Nutrition Ltd’s stock is also among the biggest short squeezes in history. In 2013, regulatory authorities for fraudulent practices fined the dietary supplement company for. A $200 million fine was too heavy for Herbalife Nutrition Ltd. So it was quite possible that the company would go bankrupt. A short-seller Bill Ackman already knew about the situation and he shorted a huge number of Herbalife Nutrition Ltd shares.
Ackman was right at the time about his shrewd approach. However, Herbalife Nutrition Ltd not only sustained itself but also improved revenues and cash generation. Ackman had to suffer heavy losses for the next six years. Eventually, he had to give up on his short position. Moreover, Carl Icahn also hit Ackman and went long against Ackman’s short approach. He bought a 25% stake and played a pivotal role in the stability of Herbalife Nutrition Ltd.
KaloBios’ short squeeze is also among the biggest short squeezes in history. It is a biotech firm that was struggling in 2015 when the only drug it was working on failed. So, what happened? Yes, you are right. Short sellers jumped in to capitalize on KaloBios’ situation. They started selling shares. However, Martin Shkreli also involved himself in the scenario.
Shkreli acquired 70% of the KaloBios shares and the firm was able to sustain itself. The stock price began to rise. So what happened? Short-sellers had to suffer huge losses. On the other hand, Shkreli almost doubled his investment. That’s quite a gain. Again, this short squeeze also tells one thing and that is short selling is risky. Therefore, you have to be very sure about what you are doing when shorting the stocks of a company.
8. Northern Railroad
Northern Railroad short squeeze is another one of the biggest short squeezes in history and perhaps the most interesting one. Why is it an interesting one? Because it also caused stock market panic along with short-sellers. So, what actually happened that led to the Northern Railroad short squeeze? James Hill and Edward Harriman were two activist investors in the 1900s. Both had accumulated a fortune and both were interested in acquiring control of the Northern Railroad.
Hill and Harriman kept Northern Railroad shares available for buying. As a result of their buying spree, the stock price of the company continued to rise. Now, short-sellers deemed it a worthwhile opportunity to short Northern Railroad stocks. They began to short-sell stocks anticipating that the price would eventually decline. However, it never happened because both Hill and Harriman continued to buy Northern Railroad stocks.
Eventually, the Northern Railroad stock price rose from $150 per share to $1,000 per share. Why so? Because short-sellers had to buy shares to close short positions. However, the high Northern Railroad stock price forced short-sellers to sell other stocks from their portfolios to cover their losses. As a result of this huge sell-out pressure, investors started to panic. So, indexes and stocks began to go down because of the panic. That’s why the Northern Railroad short squeeze is among the most interesting as well as biggest short squeezes in history.
9. AMC Entertainment Holdings Inc
AMC Entertainment Holdings Inc. is among the world’s largest entertainment companies. It owns and operates movie theatres. AMC Entertainment Holdings Inc. was doing great business and was reporting high profits. However, the advent of streaming platforms and then the COVID-19 pandemic of 2021 caused problems for the big entertainment company. Investors had little faith in the cinema and theatre industry.
Yes, short-sellers began to short-sell stocks of AMC Entertainment Holdings Inc. This was a shrewd move because all odds were against the big company. There was little to no hope. However, retail investors betted against hedge funds and short-sellers. They continued to buy stocks and as a result of it, the stock price continued to rise. History books tell us that short-sellers and hedge funds lost $1.2 billion approximately in this short squeeze. This is what happens when a group of committed investors decides to go against giant hedge funds.
Elon Musk and his company Tesla have been at continuous war with short-sellers over the past few years. Short-sellers continue to bet against Tesla and hope that the stock price would eventually decline. However, it has never happened as Elon Musk and his company’s commitment to innovation pushes its stock prices higher.
David Einhorn and Michael Burry are two hedge fund managers. They are right at the heart of this never-ending tussle between Tesla and short-sellers. In fact, Burry has recently reported a $530 million short position in Tesla. However, Elon Musk and Tesla have always come on top. The company’s stock price never falls as low as short-sellers had hoped.