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.

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5 Comments

  1. The way I see it, and I could definitely be wrong, is now you’ve got your downside capped on your short. Now instead of (technically) infinite risk, the stock’s upside/your downside is capped at $420. Now you just wait until the drama on whether what Musk did yesterday draws the ire of the SEC, whether there’s a legit investor willing to take it out, what happens with the converts, etc.

  2. Are there any data behind the statement:
    “‪Tesla’s are 4 times as likely to kill their drivers as similar cars,‬”

  3. This case is now a question of credibility. Musk has now expended so much of it so the question is which buyers out there still trusting in him. Not only for today, but for several years. The brand Tesla is Musk. Musk is devalued. And therefore the brand Tesla is (should be) devalued. $420 fair price? Never!

  4. Private investors would be very unhappy if a CEO were to publicly demand a high price like that. They want secrecy. Not some grandstanding jackass who blows the deal. I think they would tell him to take a hike after this.

    LBOs work with companies that have lots of assets that have low book value, but high market value. Like long held real estate. Does Tesla have “silent” equity like this that can be levered up?

    That said, I will stand pat or at most buy a few puts. The market can be irrational longer than I can remain solvent. I don’t short until a market has shown breakage. Somebody else can be the hero. I’d love to see an article on how experienced hedgies short — the trading setup, not the fundamental analysis.

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