I'm back here after a couple of years - nice to see the forums still busy! And thanks to Hawk for very quickly answering my message to get my old username up and running again.
Thanks to a period of unemployment (though now I've found a job, not starting until the New Year) I have time to enjoy this wonderfully-addictive game again. The other night (probably around 2am!) I was watching one of my Baldwin 0-6-0s crossing the giant viaduct I'd built across the valley just south of Poughkeepsie on Go West, while a Consolidation-headed express zoomed down to NY underneath, along the double track by the Hudson River, and I worked out what it is that makes this game so addictive for me. (IMHO Go West is not complete without a viaduct across the Hudson Valley. The board of directors might object, but I just tell them it's Art, which is beyond price.
)It's just like watching real trains. There's the fascination of the individual train - a weird, impressive huge thing that moves by itself. But there's also the context: where does that train come from? Where is it going? Why? What's it carrying? And RT3 brilliantly captures both these sources of fascination. Thanks to the ingenious economic model, you can sit back after winning Gold and not just enjoy watching a little train chug through the mountains: the system itself is unpredictable but self-organising. You catch one of your Any Freight trains hauling enormous quantities of Alcohol or Goods somewhere. Why? You look at the goods map, and it makes sense. You couldn't have predicted this, but it's happening by itself.
Anyway, on to the short-selling trick I've just found. I'm replaying Germantown on Normal. This scenario is all about dealing with rival AI companies - within the first few years I had 5 rivals. Most of them were (in usual AI fashion) complete non-starters. Should I short-sell?
Oilcan's RRT3 Handbook is my go-to reference. Oilcan generally recommends against short-selling (pp 126, 140), for good reasons (on Hard level, these reasons may be overwhelming - perhaps the AI "cheats" more on that level). But there's one important aspect of short-selling which I didn't get, which IMHO can make it a great idea. It's simply this: short-selling gives you immediate personal cash. Because I hadn't tried it out enough, I imagined that short-selling was only useful as stock-market manipulation trick, with the effect on your personal cash held in suspense until the position is settled (i.e. until you've later bought back the shares you selled short).
It turns out that this is not how it works. If you short-sell a stock, you get immediate cash for it. You do have to bear in mind that you'll need some of this cash to settle the position later: but if you call it right, this is essentially a free loan of money for you to use to boost your % holding of your own company (which is of course a good investment). Early days as a tycoon are all about not having enough personal cash (even if you follow the great advice I found somewhere here, and only sink 90% of your personal cash into your company at the start). I've often given into the temptation to over-buy on the margin, and been stung not by the dreaded margin call (I use a rule that my holdings in stock should never be less than 3x my cash debt), but by an ever-expanding personal debt, which is sustainable, but is very difficult to clear (interest constantly being added on) without giving up too much equity in your own company.
Short-selling can give you this important early cash boost without buying on margin. Here's how it works:
1. Identify rival company Mismanaged & Hopeless Railroad, whose stock is definitely going downhill and nowhere else.
2. Short-sell 5,000 shares of M&HR for let's say $30 each: immediate cash boost of $150k.
3. Use this to buy into your own company: say 2k shares at $70. (Buy in January or issue stock to bring the price down before you buy). >1K is a good quantity to buy if you can afford it, because it gives you more fine control, allowing you to sell back just part of your new holdings. You now have $10K cash.
4. A bit later, your company share price is up to $110K (perhaps you can buy back stock to boost the price, and/or wait until December). M&HR stock is down to $24. Sell 1K of your company (+$110K cash, bringing you to $120K), and use your $120K cash to buy back the 5K of M&HR stock you sold short.
5. Result: no movement in your personal cash position, but you have 1,000 more shares in your company.
The tricky part is, of course, 1: working out which AI company to target. Some AI companies do reasonably well: most don't. There's a financial measure called Earnings Per Share (EPS) which is your best friend here. You can tick it on the stock market screen, and it'll appear as a red line on the graph. (Don't confuse this with Revenue Per Share, which is based on turnover rather than profit - not such a good indicator). A negative EPS is a good indicator that the company is a good short-sell victim - but that's only part of the story. With EPS shown on the graph, you can easily see not just the EPS value but the direction of movement.
If EPS starts rising from negative to less negative, the share price will go up a bit. The financial analysts in the RT3 code seem to be sensitive to this measure, even during the year. So if you see EPS flatlining, sell short or hold on to your short position. If it starts rising, watch the company closely: either the company really is turning the corner (be prepared to close your short position urgently), or perhaps one of the AI's two trains has just arrived with a load, temporarily boosting profits from abysmal to only awful. It's worth waiting until the end-of-year process at the end of December to be sure what's going on, if your cash is not in a vulnerable state: if the company's EPS is still negative, the "analysts" will generally adjust the share price downwards at this point, wiping out the optimistic blips that happened during the year.
Using this method, I've often ended up holding on to a short position for much longer than I expected. Shares I sold short at $30 don't stop at $23, but go down and down (ignoring the blips) to $15 or even $10. This is because some (most) AIs are truly dreadfully managed (and, of course, you shorting their stock doesn't exactly help them
). Meanwhile, the cash I got for the short-sell is mine to play with.So this is an additional, fourth reason to short-sell:
1. To make personal profit in the medium term, from short-selling high and buying low;
2. To starve a rival company of access to capital by wrecking its share price;
3. To keep a rival tycoon on his toes by decreasing his purchasing power, forcing him to buy shares in the shorted company rather than targeting your company - or even forcing him to personal bankruptcy (though I've never managed this);
4. To get "free", immediate personal cash for your own PROFIT.
So, what can go wrong?
A. The company you short can recover
There's two problems for you here: first, if the share price ends up higher than the price you got for your short sell, you make a loss. Second, whatever happens, you may need immediate cash to settle your position, at whatever price: cash that you may not have. If you pick your victim well, and play at a slow enough speed, keeping an eye not just on the share price but on the EPS, the first problem should never occur: you'll see the way the price is going and do something about it long before it turns into a significant loss.
The second problem (cashflow) is harder. If you click on your own portrait in the Stock Market view, the list of companies on the left will helpfully show your exposure to the short-sold company, according to the current share value, as a negative stock holding $ value. This is how much cash you'd need to press the emergency button and close the position NOW. Make sure that you could raise this cash without causing too many problems: avoid getting into cash debt, keep your own company's stock price (and company cash, for an emergency stock buyback) high, and keep yourself in a position where you could sell the minimum amount (1,000 shares) in your own company to raise the cash without wrecking your PNW/% ownership goals.
B. The share price hits a minimum value
This is only a problem if you hold on to your short position for a long time, or short when the share price is already extremely low.
I'm imagining there must be a minimum share price, in comparison to CBV, for even the worst-run AI company. Say CBV per share is $40. Even with EPS (Earning per Share) highly negative, there must be a price (e.g. $10: share price/CBV per share = 0.25) at which the "market" decides that, however bad things are right now, it's worth snapping up shares in this company, even if only to wind it up and sell off its assets (I know that doesn't actually happen in RRT3). The share price won't drop below this price, because people buy them as a bargain. (The exception is if the company goes bankrupt: happy days for you holding a short position, because this can make an already low share price - e.g. share price/CBV per share = 0.3 - fall by another 50%).
I don't know what this level might be, but stock price slides do seem to slow down or stop at about 0.25 or 0.3 of CBV. Does anybody know?
C. The company becomes a target for a take-over/merger
This is a special case of B. Here it's not the investors at large buying in to an undervalued company: it's the tycoons. Specifically, in my current scenario, Jay Cooke, who seems to be a very aggressive stockmarket player. The logical result is the same as in B: the share price will stabilise or even rise, because people are buying the stock.
If your game is going well, your rival tycoons' Purchasing Power should be low - low enough to make it difficult for them to buy shares in your company at $60+. With their low purchasing power, failing AI companies priced at $10-$25/share will be the only thing they can invest in. In my current game this hasn't made that much of a difference: for a failing company, the "market" seems to pay more attention to the fundamentals (EPS) in setting the share price than to individuals buying in: a bad company's share price won't rise that much if at all in the medium term, even if Jay Cooke is targetting its shares.
So all that happened was that the price stabilised at about $10. I closed my short position, still making a profit, partly also because I didn't want Jay Cooke to get a majority holding in the company, so I had to start preparing to buy in myself. Perhaps if Jay Cooke's purchasing power had been greater, he'd have bought more shares, making the share price rise dramatically rather than just stabilising, and causing big problems for my short position.
Very interested in other tycoon's thoughts and experiences of this!
