Short squeeze with plywood

January 29, 2021. – The term of the week in the stock market is “short squeeze”. With a wood brain like mine, these are difficult terms to understand. That’s why I usually turn them to something physical, like plywood.

In “short selling”, I will borrow a pallet of plywood from my friend Sylvia. I expect the plywood price to decline. I fetch the pallet from Sylvia’s warehouse with my pickup truck, and drive to sell it immediately in the market. I get 2000 euros cash. I wait for two weeks for the prices to fall and then drive back to the market, and buy a similar plywood pallet by 1500 euros. I load it to my truck and return the pallet to Sylvia. I thank Sylvia with flowers and a smile. I made 500 euros.

A month later, I’ll try to repeat my transaction. In the meantime, other short sellers like me have discovered the same business opportunity. I drive to Sylvia and she borrows me a plywood pallet again. At the market square, I make a quick deal for 1500 euros. My hunch is that plywood prices will fall further. I drive home and open a beer.

To my disappointment, I see that the prices are not yet dropping. On the contrary, plywood prices seem to climb up. I decide to take it easy and wait a bit longer. Sylvia calls and reminds me about the agreed return date. I go to the marketplace and see other short sellers trying to buy plywood pallets. The last bid is now 2700 euros of standard plywood. Crazy. I’m forced to make an offer to minimise my damage. Finally, I get a plywood pallet for 3000 euros. I drive the pallet back to Sylvia. I cannot afford flowers this time as I made a 1500 euros deficit. Damn. The “short squeeze” got me.