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February 2, 2020
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February 18, 2020

Giga-Stupidity Has No Limits…

Don’t worry, this isn’t another detailed article on Tesla (TSLAQ – USA). I’ve permanently sworn those off. As far as I’m concerned, there are two camps of investors; those who think it’s a fraud and those who aren’t very good at math.

However, that doesn’t mean that Tesla cannot be a good long or short at the right moments in time—yeah, I know, hypocrisy; right? Well, at least I recognize it for what it is; TSLA is a ticker symbol without any bearing on the actual business fundamentals. You see, ever since the Federal Reserve stepped in this fall with their “not QE” the last vestigial tethers to fundamental underpinnings have forever been cast adrift. There’s a business in the abstract sense and then there’s the meta-narrative which often seems to derive a lot of its meaning from the stock chart. Since charts are mostly influenced by cross-ownership within ETFs, the circular loop of “up-to-the-right=ETF is forced to increase weighting=up-to-the right” can be self-fulfilling.

Taking a step back, I have always intuitively known that stocks can literally trade at any price, both far above or below fair value. In fact, the only reason I have been successful in finance, is because of my ability to recognize those moments and monetize them. However, I feel that over the past few years, the range of probabilities has widened dramatically. As David Einhorn put it this summer;

In our early training, there was a concept that news was priced in. This meant that for high-multiple stocks, expectations of good results were already baked into the share price, and for low-multiple stocks, bad results were already discounted. The high multiple would often provide a ceiling for prized stocks – such that it took genuine incremental positive news to drive them higher. Conversely, the low multiple on out-of-favor stocks would often provide a floor such that it took genuine bad news to drive them lower.

In this market, such ceilings and floors don’t seem to exist. Prized stocks continue to rise sharply based on the continuation of existing trends, without deviation, and there is no price too low for unloved stocks. 

Stocks now trade simply on charts, which themselves are primal emotions, tied to corporate messaging rather than fundamental values. Every equity name is just a ticker symbol; an esoteric derivative on a fanciful reality. If you aren’t prepared to accept that fact, you’re going to get abused by the “new normal” where facts increasingly do not matter.

I bring all of this up, as I got an email yesterday from a reader who thanked me on Tesla, which struck me as odd since I got the investment spectacularly wrong. “No Kuppy!! I lost some money, but you saw it for what it was and got out of the way in time to avoid huge losses. You saved me a fortune. People always talk about their winners, but no one talks about the intuition that saved them from a disaster. You should write about that. How did you know to get out?” I found his email interesting as no one ever does a victory lap about only losing a bit of money, instead of losing a fortune. It’s certainly not the sort of thing that sells newsletter subscriptions. Since I have nothing to sell you, I thought I’d delve in a bit and fill that gap in financial journalism.

So how did I know when to book the trade? Honestly, I didn’t know anything. Everything I do is based on two critical mandates—the first being to not lose money. While the second is to remember rule number one. If the odds are in my favor, I’ll press my bet. However, if the thesis changes, I get the hell out of the way. In terms of Tesla, I thought the stock would collapse due to a business that was imploding before my eyes. When it became clear that they intended to fudge the numbers and the market would cheer; what was my edge? If 1+1= whatever you want it to be; then this isn’t the sort of stock I can analyze. Lots of companies massage numbers, but when Tesla started making up numbers, I knew it was time to get out. I didn’t wait for a pullback; I was all out of my put spreads by 9:40 am and at a $295 basis. I simply had no edge left and I knew it. My skill was recognizing that my investment thesis had forever changed.

A lot of my friends stayed to fight the good fight—they got mowed over. When a stock triples, even a small short position becomes huge and the margin costs become overbearing. There’s a reason I almost never short and when I do, I use VERY tight stops. If I’m bearish, I may buy some put spreads, but shorting is the financial equivalent of Russian roulette—you don’t know when, but eventually you’ll have a career-ender. Nothing proves this better than the past month’s volatility in Tesla. If you want hyperbolic articles that delve into why Tesla went parabolic, there are plenty of opinions out there. Who knows why it traded where it did—the point is that it did and it traded tens of millions of shares there.

In a world where the global central bankers treat every mini-crisis as an excuse to print money, liquidity will eventually ignite in very strange places; EV automobile frauds, fake meats, government regulated celery and fake currencies. I have no idea why these things go up when they do; I just know that they sometimes do. The number of asset classes randomly going parabolic is directly tied to how aggressively Central Banks conjure up liquidity. My hunch is that these mini-bubble will become increasingly prevalent. As a public service message to readers of this site, please use stops. There is no limit to the stupidity of equity buyers. At least on the way down, as value investors, we have an edge as an asset cannot sell below zero. On the way up, the losses are infinite. A bunch of my friends learned that lesson the hard way this week.

Every year will have good and bad opportunities, your only goal as an investor is to ensure that you do not get taken out of the game on any one mistake. It is always smart to be careful on the short side—right now, be extra careful. Stocks can and will trade at literally any price, particularly if the Fed is focused on ensuring it happens.