Shorting with a System — And Why C3.ai Is the Perfect Target

Everyone’s chasing AI stocks - I’m shorting some of them. Here's my shorting strategy explained.

Back in February, I published a widely read article about “shorting stocks”. For the first time, I explained that, in addition to my long-only strategy, which has proven itself over decades, I have started to manage another portfolio since late 2022. In this portfolio, I place selected bets on falling prices alongside my long-term stock investments. My long/short portfolio is published on the eToro platform under their “Popular Investors” program and can be copied by eToro customers.

Specifically, for months I have speculated that the AI bubble would burst. I took short positions in Tesla and Palantir, as well as the small caps C3.ai and SoundHound AI. Meanwhile, I held smaller short positions in Nvidia and Apple, which I have since closed.

A famous stock market saying from the British economist John Maynard Keynes goes:

"The market can remain irrational longer than a rational investor can remain solvent."

In recent months, I have been reminded of this to a painful degree, as my speculation on the AI bubble bursting, with corresponding falls in the prices of AI hype stocks, has cost me a lot of money in this long/short portfolio so far in 2025. In particular, I did not anticipate the irrational price developments at Palantir and Tesla.

I just did the math, and my short positions have caused a total negative performance of 10%. Instead of a solid positive return, the bottom line of my long/short portfolio since the beginning of the year is actually -5%.

eToro Performance

On the one hand, this is unsatisfactory. On the other hand, it was to be expected that such a strategy would perform relatively poorly in positive stock market times. It should demonstrate its superiority when the stock markets hit rough waters again. I am exercising patience, and I think it is time to take an even closer look at my shorts.

In this article, I would like to provide a few insights on how I implement my long/short strategy. I will also take a closer look at one of my successful short bets that I just renewed.

Why I Invested Long-Only for a Long Time

There are two main reasons why I have repeatedly refrained from betting on falling prices even during euphoric and overhyped stock market phases over the past few decades.

1. Limited profit opportunity

With a usual stock investment (Long), it is possible to multiply your investment in the event of success, not only in theory, but in practice as well. Anyone who has ever held a tenbagger in their portfolio knows the incredible feeling of having made the right long-term decision.

However, when speculating on falling prices, the profit is initially limited to 100% because a stock can only fall to zero. Unless, of course, you speculate with leverage, which I generally discourage, but this is another story.

2. Speculation against time

In practice, betting on falling prices has always been a game against time, as traditional short selling of stocks usually involves fees for securities lending and/or overnight fees. This fee structure makes it too expensive to bet on falling prices over a longer period of time.

Therefore, timing always was crucial, and short speculation was only suitable for traders with a short-term focus. This did not align with my generally longer-term approach.

When investing, I prefer to let time work for me. Ideally, this should also apply to my short positions.

eToro - My Setup for Success?

I came across the eToro investment platform a few years ago. Initially, I was very skeptical because eToro had a poor reputation in Germany as a CFD broker where inexperienced investors could quickly lose money with leveraged positions. However, I only considered opening a real money account with eToro once it started offering reasonable services for trading physical stocks. That is now the case.

No borrowing fees

When it comes to shorting stocks, eToro currently offers a very attractive service. For the stocks I've shorted, eToro hasn't charged any overnight fees in quite some time. At first glance, this seems paradoxical because we are used to paying borrowing fees for short positions.

Why doesn't eToro seem to charge overnight fees for many stocks?

At eToro, a short position is not executed by physically borrowing the stock but rather via a CFD (contract for difference). Investors place a bet on the price with eToro as the market maker, so no real stock needs to be borrowed on the market. In many cases, this eliminates the need for eToro to pass on borrowing fees to customers.

eToro earns money through larger spreads (the difference between the buy and sell prices) than traditional stock exchanges have, and it does not have to hedge every customer transaction on the market. Instead, it performs internal netting (offsetting longs against shorts).

Additional fees may also apply to particularly hard-to-borrow stocks if eToro itself incurs significant costs to hedge the position. In practice, however, most liquid US stocks can currently be shorted at eToro without incurring such additional fees. I was also able to open short positions on second-tier AI hype stocks, such as C3.ai and SoundHound AI, without any problems.

My interpretation: This could be because these stocks are popular with retail investors. They are therefore easy to borrow, and eToro earns enough from the trades without charging additional borrowing fees.

My only negative experience: So far, I haven't been able to open a short position on CoreWeave stock via eToro. I wrote in detail about this ticking time bomb here after its IPO.

Risk Management

For my own long/short portfolio, I have set myself the strategy of taking a total of between 0% and 20% unleveraged short positions in normal market times. The rest of the portfolio consists of my best investment ideas, which I also hold in my long-only model portfolio.

At eToro, short positions are usually liquidated after a 50% price loss. I work with relatively low weightings and staggered entry prices for short positions so that I can absorb a 50% price loss if a position is stopped out due to a sharp rise in the share price, contrary to my expectations. In this case, I immediately check to see if my assessment has changed or if the stock appears more overvalued after the price increase.

If so, I reopen the short position - at least for the amount of the original investment - meaning I have to double the position after it has halved. However, I only do this if I remain convinced that the stock is grossly overvalued! This is a psychologically challenging exercise that requires a fair amount of experience.

Take Profit & Re-Enter

On the other hand, if the short position develops in the right direction (i.e., the stock price falls), I repeatedly take profits, only to go short again immediately. This means that, even if I intend to maintain my bet on falling prices, I sell after achieving a 10-20% profit and open a new short position.

The reason for this: Let's assume that a stock falls from $100 to $50 as planned. If I hold the short position long term (strategy A), I earn 50% on the short. However, if I sell after each 10% price loss and immediately reinvest the entire proceeds in a short position in the same stock (strategy B), I earn over 85% (excluding transaction fees).

That sounds strange, right? But it's quite simple to explain mathematically:

• Strategy A (short from 100 to 50):

  Capital grows from 1,00 → 1,50, resulting in a profit of +50%

• Strategy B (sell at every -10% and immediately short again):

  Capital grows from 1.00 → 1.876, resulting in a profit of +87.6%.

Why does this happen?