Are you exploiting the power of negativity to its fullest?

As if a hundred short sellers screamed in agony* and suddenly fell silent

-“funding secured”

(*actually not, rather they celebrated, knowing the endgame had finally arrived; since knowing the facts rather than a wishful narrative, they understood the action was the last desperate act of a fraudster at the end of his rope)


Topic: why all the negativity?

Discussion: investors are on balance long biased and thus need an opposing view for balance

Conclusion: more pessimism (almost) always leads to a more balanced view

Bonus: a little tip regarding perspective, productivity and happiness (asking past friends for advice)


With a little help from my (previous) friends

You know the 150 people you actually know? They aren’t the same as they were 10 years ago. If you’re serious in your quest for a fresh perspective on things, write an e-mail and ask for your advice from your old network (I got the idea from the book about networking effectively, that Anna Svahn is writing as we speak).

Tip: start by expressing some appreciation and if possible provide something of value. Givers are more successful than matchers and takers. And appreciative people are happier.


The curious case of the lone genius giga fraudster

Let’s forget for a while that Tesla is burning a billion dollars every three months (e.g., cash flow was -1.3 to -1.4bn in Q2), and that it’s effectively running out of money by the turn of the year, unless it manages to raise new capital by then. Nota Bene, this isn’t controversial; it’s a financial fact.

Tesla has over 10 billion dollars in debt. Tesla holds a billion dollars in client deposits. Tesla has a negative net working capital of 3 billion dollars, giver or take. Tesla has 1 billion in convertible debt maturity effectively coming up by the turn of the year. Tesla has at least half a billion of its cash reserves where it can’t be accessed. Anyway, let’s forget about money running out in just a few months, since that’s not really an issue of cash flow turns positive.

Let’s forget that even though sales have increased at an impressive rate, so have losses and executive compensation. These are indisputable financial facts. If anything, the numbers are artificially positive due to creative accounting, not least by under reserving for service costs.

Let’s also forget about the quality issues with hastily manufactured tent “lemons”. Let’s also forget about Tesla’s failed attempt at disrupting the “stealership” model, consequently leaving clients to deal with maintenance, repair and spare parts themselves.

Let’s forget about the super high death rate of Tesla drivers.

Let’s also forget about all the weird and lofty claims Elon Musk spouts every opportunity he gets. I’m thinking about new car models, trucks, pick-ups, solar house roofs, solar car roofs, bricks, 1 USD/trip super-mach intercity hyperloops etc., without the necessary factory investments.

Let’s also forget about the hundreds of former Tesla fans, witnessing about poor to non-existent service, about cars being paid for but not delivered, about deposits not being returned on demand, about suppliers not getting paid or are asked to pay money back (!)


Before: several years of a monopoly-like situation + subsidies = increasingly unprofitable

Now: serious competition (BMW, Porsche, Volvo, Jaguar, Audi…) + no subsidies => profits?


Chart by Tesla Charts


Build it and the profits will come

At this point let’s just think about one single thing, since profits and cash flows are what ultimately decide the fate of a company:

Some of the bullish analysts and bag holders of Tesla stock are counting on Tesla and Musk finally turning profitable now that its subsidies are ending and a tsunami of competition (with subsidies) is entering their market.

Wait, what? Wut? Hqr sez wut?

Yup, that’s right, that’s what’s coming now according to bulls. Elon Musk has never turned a profit in any of his companies. The last fifteen years, Tesla has only increasing losses to show for its efforts to exploit its supposed first mover advantage and massive subsidies. But, now, finally, with a deluge of formidable competitors, with as deep pockets as experience in building and testing cars, Tesla is supposed to somehow reap the benefits of… scale, competitive position, increased margins?

Not only that, just as the available market is about to fall by 90% in the coming years, Tesla’s subsidies are going away. Tell me again how that is supposed to finally push margins into positive territory.


OK, back to the fraudster

The bigger the lie, the easier to get away with it, and Tesla is about as big as they get, just like Theranos, Enron and Madoff before that. Or Nick Leeson and Jérôme Kerviel.

Many fraudsters start out with good intentions, probably Elon Musk too. However, as reality catches up with dreams, losses and mistakes have to be swept under the rug. “It’s just temporarily“, they think, “for the greater good in the long term“, they reason, and go on to make bigger and bolder bets to cover up their little mishaps.

An idea about luxury roadsters and other premium cars making profits, that finance investments in mass-market car manufacturing that’s supposed to make even greater profits, instead turn into ever increasing losses and thus the necessity for side-shows of acquisitions and unrealistic innovations.

At some point the well-intentioned and benevolent disruptor realizes his predicament and steps over the fraud line. The genius has now become a fraudster; and with increasing vitriol and intensity he attacks everyone who expresses the least bit of skepticism, while coming up with ever more fantastic claims about breakthroughs that are on an “order of magnitude” above and beyond anything previously seen. At this point the smart money knows the game is up and starts pointing it out, but it takes years (Enron, CDOs, Allied Capital), sometimes decades (Madoff), for the Ponzi scheme to collapse into the surprised and devastated hands of the bag holders.


This is not about Tesla, but about balance and perspective

Why all the negativity? Because almost everybody else has a positive bias. It takes effort and guts to find and relay negative information to a herd of stampeding bulls. Very few bother, since everybody seems to hold nothing but contempt for short sellers, including SEC officials (who famously like to interrogate whistle-blowers and short sellers rather than investigate the actual perpetrators).

It’s simply humans being humans when bullish investors turn a blind eye to all the obvious negative facts, and instead pat each others’ backs, repeating their faith based narrative, “obviously corroborated by the stock price (bro)”. It’s not really their fault. The problem actually lies with bears being too silent, passively allowing gullible bulls to be had for a ride. Humans are gullible by nature; we like a good story and we tend to positivity. We want to believe in stories bout heroes. We want to believe in seeing ourselves becoming rich, in particular if it’s by supporting a good cause at the same time. Fraudsters (whether by design or mistake) take advantage if that trait.

That’s why bears armed with facts are so important. They perform an almost invaluable service in their quest of fact finding and creating balance in the otherwise one-sided bullish narrative. Humans are lazy and blind to other stories than their own. Nothing wrong with that, it’s just our nature. But that’s exactly why the bears are needed: to create perspective, to catalyze questioning and to provide facts and arguments that can be directly measured against whatever the bull story is.


It’s currently the most important story there is

But why Tesla all the time? You keep ranting about Tesla; why the negativity?

It’s because it’s the biggest and simultaneously most obvious house of cards out there. It’s the most unbalanced narrative there is in public markets right now, in terms of the bull story being the least factful and the bear story being the most tangible. There’s almost a hundred billion dollars at stake, not to mention bag holders car owners that have or have not received their cars but stand to lose any kind of warranty, pre-payments or access to spare parts or super-chargers.


Quite often, bear stories are more qualitative than financial in nature, i.e., less numbers based and more speculative regarding troubles ahead. Not too rarely, very high valuations feature in bears’ short stories, although most smart bears know that’s nowhere near what’s needed for a successful short.

Not this time though. This time the bulls are the dreamers, and the bears don’t even need to start talking about the valuation, since Tesla’s money is actually running out (and with no plan for raising new).

No matter how much bloggers, podcasters and successful investors try to dig out the true foundations of the bull story in Tesla, they come up empty handed. It’s all narrative and hope that the lone genius, who so far has accomplished nothing, will soon magically wave his cave dildo, display his magic beans, and create actual profits.

Occam’s razor would long ago just have labelled Musk a fraudster rather than a genius, and all his actions would be all that much easier to explain.

A genius wouldn’t manufacture lemons and losses. A fraudster could. A genius wouldn’t fantasize about products he could never afford to build. A fraudster might as a cover-up. A genius wouldn’t put himself at the mercy of markets (no cash, negative flow). A fraudster would claim funding is secured (even if the claim might prove to be securities fraud). Would an environmentalist genius have five large Bel Air mansions and the biggest private jet there is (G650)? He could, but a fraudster fits the bill better. A genius maybe should have produced profits some time in his history. A fraudster wouldn’t see why. Finally, a genius wouldn’t pump up numbers in collaboration with his brother in an unrelated company and push his board into accepting a takeover at the very peak of that company’s business. A fraudster? Hell yeah!

This last bit is admittedly speculative, but the perspective is still important. No matter, the bull-genius narrative has only dreams, hopes and fantasies in its corner; while the bear-fraudster story is based on facts about sales, costs, profits, production numbers, quality reports, traffic statistics and not least a much more likely and coherent overall picture.


Market perspective

By the way, how’s this for perspective: imagine a private investor, an amateur with less than a decade under his market belt, doing all his research after his ordinary job hours, without any real insight in the inner workings of either the financial industry or that of the stocks he invest in. Imagine that same person thinking he understands more than, oh I don’t know, e.g., Mark Spiegel, David Einhorn, Jim Chanos…, and me.

I know, I know, I know… why would decades of profitably navigating several bull and bear markets, including investing on both the long and short side in hundreds if not thousands of individual companies, no less with the help of a solid financial education, actually having investing as full-time profession, supported by many, many competent co-workers and with access to dozens of the top financial research firms, ever stand a chance against a lone amateur? Or, er, wait a minute…

 

That’s not how herds operate

 

Maybe, just maybe, the unquestioning bulls need to be shaken out of their confirmation bias bubble and start listening to the fact-finding minority. Sure, we are guilty of CB too, but I’m sure all experienced bears make a true effort of mapping out the bull case in as much detail as humanly possible. The bulls? I’m not so sure, that’s not how herds typically behave.

How about you? Are you long or short Tesla, and have you queried the other side for their best arguments and pitched your own against them yet?

Så investerar du smartast i teknologiaktier – GARP och hans värld

This post is in Swedish.

The message is that a technology company isn’t always what you’d like it to be (specifically in terms of growth, economies of scale, profitability and competitive advantage). Don’t accept the “tech” designation at face value.

Den här krönikan innehåller små klipp från originalet som finns publicerat i sin helhet här på Vontobels sajt.


Du är en GARP-person

Även om du inte tänkt på det själv så är du antagligen en GARP-person. De flesta är det, kanske alla egentligen. GARP står för Growth at A Reasonable Price. Tillväxtkomponenten i GARP gör att du får tiden på din sida i en investering, vilket utvidgar intervallet för vad som uppfattas som ett rimligt pris. Som kontrast är Deep Value-strategier i krympande eller rakt av döende företag beroende av en relativt snar likvidation för att ge positiv avkastning. Där är dessutom rimligt pris begränsat till en bra bit under de konkreta tillgångarna. Om du inte fyllt 40 än har du kanske inte ens kommit i kontakt med äkta Deep Value-strategier.

Investeringsstrategier som riktar in sig på Dividends, Value, Growth eller Tech kan faktiskt alla kategoriseras som GARP: tillväxt till rimligt pris. Om priset vore orimligt sk… (fortsättning)

En GARP-investerares ultimata investeringsobjekt växer nämligen ovanligt snabbt, uppvisar skalfördelar inom tillverkning, distribution, varumärke, teknikhöjd och investeringskapacitet samt helst utvidgar sitt försprång mot konkurrenterna och ytterligare stärker sin position i takt med tillväxten. Dessutom ska företaget vara… (fortsättning)

…I slutet av cykeln blir en allt mindre grupp snabbväxande teknikföretag successivt det självklara sättet att få maximal avkastning på sitt kapital. Idag är det FANG-aktierna, men inget säger att det är just informationsteknik som drar till sig intresset. Det kan lika gärna vara bioteknik eller läkemedel…  (fortsättning)

Den mest praktiska definitionen på ”teknikbolag” är att den handfull bolag som tar täten i marknadsvärdestillväxt på börsen är teknikföretag, oavsett deras faktiska verksamhet eller metoder och verktyg för att driva affären.

Japp, det är precis så dumt som det låter…  (fortsättning)

En strategi som kan fungera för mindre investerare är att bara följa eller t.o.m. försöka förekomma flocken i den här självförstärkande processen, där vinnaren definieras som teknikföretag och därmed drar åt sig ännu mer kapital och således blir ännu mer av en vinnare… (fortsättning)

Ett varnande exempel är bilföretaget Tesla som i dagsläget består av en rudim… (fortsättning)

…har erhållit mycket hög avkastning.


Hela artikeln finns som sagt på Vontobels sajt här. Det här är alltså ett samarbete där jag får betalt av Vontobel för att skriva en krönika med finansinnehåll åt företaget.

Intuition – what it is and how to use it (the curious case of the Tesla buyout)

Topic: Intuition is real, not just a guess or an irrelevant feeling. A hunch is always just the starting point of a formal investigation

Length: Short

Shorting Tesla: My intuition told me to investigate a short position in Tesla, but I’ve of course made sure to go over my best practices check list for investments before actually going through with the trade


Logic or Feels

How do you make your best decisions? Gut feeling, hunch, intuition, guess, expert pattern recognition, or logical conclusion after carefully weighing pros and cons?

Are you in the Pure Logic or the Gut Feeling camp? Don’t worry, you don’t have to choose. In the real world, they both complement each other and is some ways are the same thing.

An intuition is the result of the sum total of your experiences as pitched against the current situation. If you’re extremely experienced, that intuition might very well be the best possible basis for a decision. If you’re not, it might very well be the worst (psychological biases can be a bitch).


Golfers, physicists and investors

Just as a golf player deliberately practices parts of his swing and other aspects of his game, but relinquishes control to his subconscious when actually playing, a decision maker, an investor, e.g., needs extensive practice and experience in the nitty gritty details before developing a reliable expert recognition ability.

It doesn’t end there of course. The hunch, the gut feeling, the “blink” is emphatically not always right on the money. Just as often it can be completely off the mark. If your intuition tells you to buy this stock over that one, or go short rather than long, that can only be the beginning. Scientists, e.g., conjecture an idea about how the real world works. That conjecture, thoughtful guess based on extensive experience, then gets falsified or verified through experiment.


a super educated “guess”,

based on thousands or millions of data points,

his subconscious had combined

in ways his conscious mind never could


An investor does something similar; his experience and prior knowledge about the economy, interest rates, currency movements, about historical performance for various stocks, news flow, hypes and fads and so on, point him to a few promising ideas. No matter how convincing that first intuition is however, a serious investor then proceeds to try to falsify his investment case.

More often than not, a good and experienced investor will find that his hunch was right, that there is an overwhelming amount of facts in favor of his original idea. It was his expert recognition ability, his intuition that pointed him in the right direction, a super educated “guess” based on thousands or millions of data points his subconscious had combined in ways his conscious mind never could. Please note, that this is not a case of confirmation bias; remember that our thoughtful investor was actively trying to find counterarguments, not the other way round.


Not a guess

Just because you don’t have access to the computer making the decision doesn’t mean it’s not a logical conclusion. Just because your limited conscious mind can only handle variables in the tens or possibly hundreds, doesn’t diminish the ability of the brain/mind to effectively deal with inputs numbering in the millions or billions. Long before formal logic, the mind took account of touch data, smell data, visual and auditory data to record the totality of a situation and its consequences.

You might not have known there was a prey or predator around the corner, but you “felt” it. You couldn’t actively smell it, hear it, immediately realize the birds or monkeys behaved differently, that you stepped over a suspicious looking mark in the trail a bit back and so on. Your subconscious, however, did; and concluded you are being ambushed by a lioness. Our skilled hunter actually could stop to think about the alarms going off in his head and check certain variables against a check list: trail tracks, bird sounds, monkey business, maybe a faint smell of big cat, landscape form, ambush-friendly large stone or tree etc. and conclude it really is time to turn around.

That wouldn’t be a guess anymore, nowhere close to just a guess of whether there is a God or not.

I might guess that Elon Musk doesn’t have funding for a buyout of Tesla. I might guess that the stock provides a good shorting opportunity. My several decades long experience with similar situations on the stock market (although this one is as unique as they come) might scream this is as good a sell as there ever is. I would still, however, need to corroborate that guess with tangible information. And I have.

One thing is that Tesla is burning cash, has loads of debt, produces lemons at a higher rate than any other car manufacturer, that Tesla’s are four times as likely to kill their drivers as similar cars, that Tesla bought SolarCity at it’s very peak before sales collapsed (fake sales it turned out)…; simply that Tesla’s business is nowhere near of being sustainable or profitable.

Another is the constant lies, exaggerations and other funny business round Tesla and Elon Musk. Musk keeps saying Tesla will soon turn a profit, will soon produce X amount of cars, will not need to raise capital ever again and so on. In reality, the losses and cash burn only rise, and Tesla has raised capital through issuing debt and equity numerous times after his claims. There is no reason to believe anything he says now either — in particular given his obsession with “short sellers and their spreading negativity”, not to mention Tesla is all but completely out of cash (by December 31, Tesla is officially in breach of some of its loan covenants), and Musk himself desperately needs a higher stock price lest he will be forced to sell shares to cover his private loans.


Who’s guessing, longs or shorts?

On the long side, the only arguments you ever hear are “Don’t bet against Musk. Look at the stock price. Environment. Will soon make enormous profits”; never any explanations as to how those profits will be attained. My “guess” is that the Tesla longs in this case only play by ear, and their first uneducated guess, supported by an enormous amount of confirmation bias and desire for Musk to make magical progress and save the world.

The bears, including me, know we’re as usual up against very strong opponents: money printing, wishful thinking, unthinking bulls, cheap leverage, comatose regulators, short squeezes etc. That’s why we keep investigating, keep finding information supporting our case, while actively looking for bullish information that could derail the short case.

Yes, no matter how unlikely a sudden buyout, we bears actually give it some thought. Who could do it? Who would do it? How would it be done? What consortium, which banks, which law firms, how would it be communicated, what about the board of directors, how could Musk both make threats of a short burn, buy stocks privately and have information about an imminent buyout without committing securities fraud? We have to entertain the possibility. There is nothing in the short case but money to be made, so there’s no use fighting all the forces of the market if the odds are not ever in our favor.

Is a buyout at all possible? Of course. Is it likely? My experience, intuition and check lists all point to a resounding NO, there isn’t a 50% probability God exists just because somebody says he might:


Magical funding or mental breakdown

Tesla is a basket case, with inferior products sold at a loss, facing an acute liquidity crisis. You’d have to be incredibly ill-informed to take it over at prices anywhere near today’s market price, let alone at a premium. Besides, all the weird things Elon has tweeted the last 6 months, including how he wants to make a buyout of Tesla but hope all investors stay investors (what?!) and go private with him, speak volumes of Musk’s mental breakdown (much more likely than a 70bn funding materializing out of nowhere).

No matter how this ends, it seems the end is pretty close. And that end is one for the history books. My bet is that it will be very similar to the end of the Enron saga. What does your intuition tell you, and how does your best practices check list corroborate that view?

In any case, this blog post is not a recommendation to buy or sell financial instruments. Do your research elsewhere and trade carefully.