In a Stock Sharks interview posted last month, Kevin O'Leary didn't hesitate to name a stock that had slaughtered him. "I shorted Yahoo. I got slaughtered. It got added to the S&P 500," he said. The inclusion sent the stock up, and his broker started calling. "They kept calling me on margin calls ... every four hours cuz I was losing three, 4 million an hour," he said. "It went from like eight bucks to $280."
The damage, by his telling, was close to half of everything he had. The trade "basically took my net worth down almost by, I can't remember, it was a huge percentage, 40, 50%," he said. He didn't put a dollar figure on it.
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The margin calls culminated in a phone call on a golf course. In his telling, his broker reached him mid-round and urged him to close the position before it got worse. His reply, which he rendered with an expletive, was that they were going to hang on to the end. He did not cover. "It was both my worst call and my best call all at once, but I never ever ever shorted a stock again," he said. "I'll never forget the emotion I had, the gut-wrenching feeling of watching my net worth get slaughtered, and then it came all back years later. The point is, you don't have to do that to yourself."
Yahoo's documented stock history explains both halves of that sentence. Standard & Poor's announced Yahoo's addition to the S&P 500 at the end of November 1999, and the shares jumped roughly a quarter in a day on the news, as index funds were forced to buy. The stock peaked in early January 2000 at around $475 a share, or roughly $118 adjusted for the two-for-one split that followed a month later. By the autumn of 2001, it had fallen more than 90% from that peak and was trading in the single digits. His "eight bucks to $280" is a memory of a trade from a quarter-century ago, and the exact figures in the record differ; the shape of the ride does not. A short seller who held through all of it would have been destroyed on the way up and made whole on the way down, which is what he describes; nothing here suggests he timed it.
What came out of it is the rule he now repeats on every platform he appears on. "No more than 5% in any one stock, no more than 20% in any one sector. So you have sectoral discipline," he said, before naming the stock the rule is most often tested against today: "Nvidia (NVDA) is never more than 5% of your portfolio and all of tech, all of it is no more than 20%." Earlier in the same interview, he said that 20 years ago he was not applying those rules, and that is when he got slaughtered. His Yahoo trade, as he tells it, is the whole reason this rule came about.
He gave one example of the rule in practice. He bought Tesla (TSLA) on a friend's pitch at about 1.5% of his portfolio, and then spent years selling it down as it grew. "I never added to the position again. I had to keep cutting it back to 5% of the portfolio. My cost base within 18 months was zero, and I kept riding that pony," he said. "Even to this day I have a zero cost base in my Tesla stock."
The Yahoo story is not entirely new. O'Leary told a shorter version in 2021, when The Motley Fool recounted it without the hourly loss, the net-worth percentage, or the margin-call cadence. The underlying lesson has not changed since then. A short position has a maximum gain of 100% and no maximum loss, because there is no ceiling on where a stock can go, which is why short sellers who bet against Tesla have been both obliterated and vindicated in the same decade depending on when they were measured. Although O'Leary manages money and has sold index products built on the diversification rules he describes, so the advice is also, in part, the product.
Strip the numbers out, and the line a reader keeps is the quiet one at the end of the story. He survived a trade that took nearly half of what he had, and he describes it as his best call only because it ended the habit. "You don't have to do that to yourself," he said. For most people, the 5% rule is the practical version of that sentence.
On the date of publication, Caleb Naysmith did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
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