Shorting the magneto does work if their is very little resistance.
But current draw is based on load resistance, any increase in resistance will increase current and in turn heat.
This heat builds up at the top of your coil and burns the insulation within a few inch's of the start of the blue wire.
The reason a diode is placed is to shunt half the voltage on the negative half thus preventing current and provides a constant dissipation on the positive half. Nearly everything with a coil needs to be shunted in one form or anther in electronics for stability reasons.
Here is one example circuit specific to our engine and their are plenty another examples on the internet.