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I will cite this example in the future of the fact that the market can stay irrational longer than you can stay solvent. I find it incredibly fascinating that a
by areoform 6y ago
I will cite this example in the future of the fact that the market can stay irrational longer than you can stay solvent. I find it incredibly fascinating that almost all the "smart money" has done hedges and shorted TSLA, while the flood of casual pandemic investors has bought into it.
TSLA as a stock is a fascinating example of how price discovery can fail in times of irrational exuberance and that, in the short-to-medium term, markets aren't efficient nor rational.
In 2014, I saw the opportunity to short a broader sector of the economy, we wrote up a white paper and identified market targets etc that would correlate with my observed trend. But I did not pull the trigger as I lacked the necessary knowledge to understand and time the trades.
My prediction came true. But sadly I was unable to capitalize on it.
The TSLA situation is similar. It's clear that the valuation has become disconnected from reality. But how do you time the inevitable collapse of the bubble? How do you model something as bizarre as this form of irrational exuberance?
Do you induce it through a Pershing Square/Bill Ackman style campaign? Do you fund research into the flaws of the product, highlight it, and hope to induce the correction? Or, do you use other signals to time the purchase and mechanics of your short?
In other words, what do you do when the world around you has gone insane?
- vmception 6y agoThe trend is your friend Bet on winners Stop out quickly
- Hypx 6y agoAs Buffett once said how markets behave like Cinderella at the ball. Everyone tries to stay until right before midnight, except you have no way of knowing when it's midnight.
- qaq 6y agoStart a hedge fund ?
- fractionalhare 6y agoThe parent commenter's point is specifically asking how an investor (such as a hedge fund) should actually pursue the short so that it's successful. Most TSLA shorts are institutional; just starting a hedge fund is insufficient.
- bryanlarsen 6y agoA Tesla collapse isn't inevitable. It could simply stay flat as the company grows, becoming more reasonably priced over that period. Sort of like what Microsoft did between 2001 and 2011. Otherwise, Tesla will crash when the whole market crashes. If & when the whole market crashes, the Tesla crash will be a lot bigger than the rest of the market.
- stu2b50 6y ago>Otherwise, Tesla will crash when the whole market crashes. I mean the market as a whole did crash back when covid started, and this behavior was not really seen.
- jethro_tell 6y agoThat was a pretty short crash though. Things did go down, but it wasn't for long enough that it might affect things like ability to get credit or business function. If the market crashed for a prolonged period I would expect that to be more difficult to sneak through.
- slg 6y agoIt was totally seen, Tesla's stock simply wasn't that irrational at the time. Tesla's Feb-March drop was almost twice as big as the rest of the stock market drop. Tesla's stock is up nearly 900% since that low point. I don't think there is any reason to doubt bryanlarsen's point.
- Hypx 6y agoI think batteries will be annihilated by fuel cells in the near future. So in all likelihood the current business of Tesla will be wiped out. Tesla could only survive if it completely reinvents itself.
- cowmix 6y agoWhy do you think this?
- bzax 6y agoI think Trevor Milton could tell you exactly what to do in such circumstances.
- anonisko 6y agoCould you have written the same thing 6-8 years ago about AMZN? What you identify as irrational markets might actually be you simply being wrong.
- jdmoreira 6y agoThis is called selection bias. You are cherry picking Amazon in the present and going back in time to a past where there were many more e-commerce contenders. I'm sure you have heard about the dot-com bubble. Do you know what all those companies were doing? E-commerce. In some alternative universe Amazon is Pets.com
- goodluckchuck 6y agoSometimes the whole world goes insane, but sometimes I find it was just me. Perhaps they know something we don’t. I mean, if internal combustion engines are RAPIDLY outlawed faster than the other manufacturers are able to complete, and those companies go out of business, and Tesla buys them... then Tesla would prove to be massively undervalued. As more and more people put their money on that, it becomes less of an insane possibility and more of a certainty. I mean, why doesn’t Tesla buy the 2nd, 3rd, 4th, and 5th largest US manufacturers?
- rootusrootus 6y ago> Perhaps they know something we don’t. But how would that work? TSLA's valuation is entirely based on the collective 'we', not some secret only Tesla knows.
- bconnorwhite 6y agoknow something we don't = difference in how you price risk of various outcomes. Not necessarily new information
- bobthepanda 6y agoTesla would probably be a really bad culture fit with Detroit, German or Japanese manufacturers. Titans have crumbled after bad acquisitions with rocky transitions (AOL/Time Warner being one major tech example)
- dylan604 6y agoI just don't see this happening. Big Auto has waaaaay too much clout with Congress to allow them to be legislated into oblivion. Maybe I don't have the right kind of vision which is why I don't play these games.
- mortehu 6y agohttps://en.m.wikipedia.org/wiki/Phase-out_of_fossil_fuel_vehicles#Places_with_planned_fossil-fuel_vehicle_bans https://en.m.wikipedia.org/wiki/Phase-out_of_fossil_fuel_veh... Part of the auto market is outside the control of Congress.
- bconnorwhite 6y agoThe problem with Tesla is that the opportunity for FSD is insane. Either the market is mispricing the risk or the shorts are, but the asymmetric upside if Tesla succeeds makes it a risky short. Asymmetric downside.
- cma 6y agoAt battery day Elon said if they achieve FSD, their competitors will too in a couple years, and it isn't very valuable as a result. Now they said it all rides on batteries/energy storage and that's really their competitive advantage, a $218 million startup and another small one they bought with stock is now supposed to almost entirely undergird their $668 billion marketcap.
- djrobstep 6y agoThe personality cult around Musk boggles the mind. He's a very advanced form of charlatan. "Full self drive" is an obvious lie (and dangerously negligent at that) but Musk continues to not only promise it but literally sell it, and get away with it. I think one day the chronic lying will catch up with him - but at this rate, it won't be soon.
- Hypx 6y agoIt's sad that people don't want to hear this. He's like Trump in how much he lies and misleads people. But people want to be lied to.
- cowmoo728 6y agoI think Hertz illustrates your point better. They are a poorly managed company with mountains of debt. Their business model imploded short term with the pandemic, but they were on shaky long term footing without the pandemic. There is no hope of this company becoming successful in the near term. With all of this information publicly available, retail investors on /r/wsb decided it would be funny to pump the stock and try to flip it for short term gains, and a whole bunch of people who saw Hertz tending on the Robinhood app bought in. The demand was so big that Hertz, a bankrupt company that was about to be carved up and sold off to creditors, issued stock that sold like hotcakes. It's utterly bizarre. https://www.bloomberg.com/opinion/articles/2020-06-12/if-you-want-hertz-have-some-hertz https://www.bloomberg.com/opinion/articles/2020-06-12/if-you...
- howlgarnish 6y agoExcept the last part didn't actually happen: their plan to sell stock was cancelled after the SEC told them off. https://fortune.com/2020/06/17/hertz-stock-suspended-offering-htz-share-price-bankruptcy-sec-investigation-halted-trading/ https://fortune.com/2020/06/17/hertz-stock-suspended-offerin...
- dylan604 6y agoHow does the growth of TSLA compare to AMZN? For years, AMZN did not make profits as it built out and expanded. Were there people trying to short AMZN and predict it's doom? Nothing is new in the world, so are there other similar things in history to compare these decision indicators?
- bconnorwhite 6y agoTesla's rise this year is obviously extreme, but it also traded sideways from 2013-2018. Over a decade AMZN is up 25x, TSLA 150x
- areoform 6y agoFrom my perspective, these multiples aren't valuable. Metrics like Price:Sales ratio are, AMZN's P/S is 4.75, it has climbed sharply, but it has usually hovered between 2 to 3. https://www.macrotrends.net/stocks/charts/AMZN/amazon/price-sales https://www.macrotrends.net/stocks/charts/AMZN/amazon/price-... TSLA's P/S is 25.09. The P/S ration has increased exponentially from a historic low (for the company) of 1.74 to the 25+ territory, https://www.macrotrends.net/stocks/charts/TSLA/tesla/price-sales https://www.macrotrends.net/stocks/charts/TSLA/tesla/price-s...
- bryanlarsen 6y agoYou can't really compare the P/S ratios between different industries. A lower margin business like retailing should have a lower P/S ratio than a higher margin business like retailing. OTOH, a crazy high margin business like AWS should have a higher P/S than a manufacturer...
- antman 6y agoI will go the other way around and say that doom and gloom about Tesla's future has been prominent in news coverage in spite of Tesla's solid position. I will assume that short sellers not only lost the aforementioned amounts but also the amounts they used to promote their failing positions especially since those positions already were showing weaknesses.
- arcticbull 6y agoI recommend selling options a month out, way out of the money, in either direction. This way it doesn’t really matter. February 19th $1000 calls are selling for $18 a share today. That’s easy money.
- tenpies 6y agoUntil Elon Musk tweets that he's thinking of taking X public through an ESG SPAC and rolling out an update that will have idle Tesla vehicles mine Bitcoin. He does this during market hours and the stock doubles within two sessions. He, of course, faces zero consequences for this, even if it turns out to be 100% fraudulent. Enjoy your bankruptcy.
- arcticbull 6y agoThanks I will! :) you can always delta hedge. This isn’t a money making strategy I’d recommend to anyone who doesn’t know what they’re doing and has a very high personal risk tolerance tbh.
- pgwhalen 6y agoHe didn’t face zero consequences for it, but I’ll admit that $20m is close to zero for someone of his means.
- e9 6y agoWhat broker are you using? Most won’t allow you to do too much leverage on options.
- arcticbull 6y agoIBKR is extra generous with portfolio margin
- bananabreakfast 6y agoIf you are in a room and think everyone else has lost their mind, that means you are in fact the crazy one. You are so utterly convinced you are right that you refuse to except there are things going on that are bigger than a simple market analysis. Society is capable of willing into existence that which it believes needs to exist. Try driving a Tesla once. Then tell me it shouldn't be worth more than all car companies on Earth combined.
- kasey_junk 6y agoI’ve driven a Tesla and found it completely confounding why people like them. It was a terrible experience. The build quality was worse than cars half the price and the driving experience was terrible. I want electric vehicles to become mainstream and think Tesla is an important driver to that goal. I also have no direct position in their share price. But to suggest that the cars themselves are transformative experiences is just wrong.
- 11thEarlOfMar 6y agoI've put 65,000 miles on a Model 3. Before this car, I drove a BMW 328i for 20 years. I loved the BMW dearly. The Model 3 is better in every way. Crisper handling, punchier acceleration, and quiet. The electric part is wondrous: No gas stations. Electricity costs me 1/3 what the same miles on gas would cost. Maintenance? Literally 2 sets of tires. The battery? I bought the extended range with 310 miles. Tesla upgraded me, free over the air, to 325 miles after about a year of owning the car. 65,000 miles in and it still holds a charge good for 305 miles. I find the car itself to be transformative.
- thelittleone 6y agoThis an interesting view point and have to admit I've been in the situation where I thought everyone else in the room had lost their mind. Turns out they where on LSD and I was not.
- gamblor956 6y agoI have ridden all models of the Tesla, including the original roadster, and I believe Tesla should not be worth even a fraction of what any other car maker is worth.
- 11thEarlOfMar 6y agoTo me, short sellers are like undertakers. No body wants to be one when they grow up. That said, were I in your shoes, I'd spend a lot of time studying the theses of the shorts that have both profited and been buried by TSLA over the last 5 years. Tesla was savaged by them and endured one highlighted, publicized flaw after another. They are even well known and called into Tesla's quarterly calls, looking for responses they could use against the stock. If you're a player you might be able to get them on the phone and ask what did and didn't work. I've been long TSLA for 8 years. I can't tell you how many times I've said to my wife, 'we really should sell some now'. I said it at $100, $250, $500, and now $700. We still haven't sold. It's not rational, but even irrational behavior can have an explanation. 2020 was a hopeless year. Tesla, and it's older brother SpaceX, both engender hope and point to a better future. Maybe people need to buy in as a way to get through this time.
- dwaltrip 6y agoFor goodness sake, take some damn profit! Sell 15%, 30%, or 50% -- whatever you want. It will be good for you and you will feel better after you do it :) It's good mental training to be able to sell a piece of your holdings. You will still have skin in the game. You can still still keep tabs on new developments. But you will also have a more balanced portfolio.
- OJFord 6y agoI will cite this example in the future as 'a dumb headline' - we can't know the net positions of short sellers, some are required to disclose their shorts, but not vice versa. Yes short sells lost. Short sellers lost? Probably. But an unknown amount.
- nine_k 6y agoMay it be that TSLA won't crash spectacularly, but fizzle slowly until it matches the Tesla's performance better? Especially if Tesla improves its performance gradually, too. Now that it's got into S&P500, it has some amount of stock bought by conservative institutional investors, which are unlikely to do a sudden massive dump, to my mind.