Short squeezes are a fun way to earn a chunk of money quickly, but what was the biggest short squeeze in history?
Do these events only happen in smaller or unknown companies, and would this limit your ability to participate in them?
As it turns out, no… and today, I’m going to walk you through the largest short squeeze in history to show you that these situations are open to a lot of investors despite portfolio size.
What Was the Biggest Short Squeeze in History?
The biggest short squeeze in history was the short squeeze that happened in Volkswagen shares when Porsche announced that it had acquired a large block of the company, leading VW’s stock price to skyrocket.
The Story Behind Porsche and the Biggest Short Squeeze in History
So, what exactly happened, and how much did investors make?
In October 2008, Porsche, the German automaker, disclosed that it had quietly acquired a controlling interest in Volkswagen. This revelation blindsided short sellers, who had bet heavily against the stock, leading to a frantic rush to cover their positions as the share price surged.
Ironically, at the time, the short interest in Volkswagen was not excessively high – just 12.8% – so there didn’t seem to be much risk on the surface. But, danger was lurking just out of sight.
Short interest in VW had been building steadily since 2006, coinciding with Porsche’s gradual acquisition of VW shares, which began that year. As Porsche increased its stake, VW’s share price rose, leading hedge funds and other investors to view the stock as overvalued, especially during the 2008 financial crisis when the automotive industry was struggling.
By late 2008, short positions had ballooned due to expectations of a decline in VW’s stock price amid falling car sales and economic turmoil. Short interest grew over roughly two years, with a notable acceleration in 2008 as the crisis deepened.
The thing that shorts had missed was that Volkswagen’s float (the number of shares that were traded on the open market) was very small. In October 2008, just before the announcement, Porsche had quietly acquired 43% of the company, 31.5% in options, and the state of Lower Saxony owned 20.2% of the company. This amounted to 63.2% of the company, with the right to acquire more at a cheap price if the stock should climb in price.
Other institutions also owned a significant number of shares. Altogether, major holders accounted for about 95% of shares outstanding.
With a short interest of 12.8% and just about 5% of shares available for trading, shorts were in serious trouble. The effective short interest was much higher than many people realized.
In late October, VW shares were trading for around €210 per share, up from €30 just a couple of years prior. With the 2008/09 GFC unfolding, car sales were sure to be hit, so hedge funds were confident that VW shares were incredibly overvalued.
On Sunday October 26th, 2008, Porsche announced its acquisition, sending short traders into a panic. The price of VW shares surged on Monday when the market opened, hitting €517 for the day. Shares kept climbing over the next couple of days, hitting €1070 on some trades – a whopping 376% increase in just a few days.
The crash was swift. After peaking on October 28th, 2008, Porsche announced on October 29 that it would release about 5% of its VW holdings by settling some options in cash, easing the squeeze by increasing the available float. This led to an immediate drop, with VW shares falling to €596 by the close of October 29th, a 37% decline from the previous day’s close of €945.
Over the next four days (October 29th to November 1st, 2008), the stock plummeted by 58% from its peak, and by one month later (late November 2008), it was down 70%, trading around €300.
The whole event was a calculated move by Porsche, who earned €6–10 billion from the event. Hedge funds, on the other hand, lost €20–38 billion in just a few days, and many fund managers ultimately lost their jobs.
The short squeeze moved a massive €253.5 billion in market cap – easily making it the largest short squeeze in history. Prior to the short squeeze, VW’s market cap was a sizable €62.2 billion, with a float of maybe €10 to 20 billion.
With a float that size, anybody could have participated in this short squeeze if they saw Porsche’s move before it was announced. So, your portfolio size should not be a barrier to capitalizing on these unique events.
How to Find the Best Special Situations
The question is not portfolio size, but really how to find attractive special situations before the opportunity is gone.
Investors can definitely spend hours digging around on the internet trying to find them, but it’s much better to sign up for a service that notifies subscribers of these sorts of deals beforehand.
And it’s even better when this service is free. That’s why we put together Event Driven Daily.
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