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February 5, 2020 by Wall Street Playboys 20 Comments

Investing Lessons From the Tesla Short Disaster

Investing Lessons From the Tesla Short Disaster

While Tesla is currently experiencing “irrational exuberance”, we can’t help but laugh as we see people who have been negative since $40 claiming they got the stock right. It doesn’t make any sense but should teach everyone a valuable less, humans are *never wrong*. If you’ve studied mass delusions, you know that people will never admit to being wrong even if the facts continue to say they are wrong. This is because ego is an incredible drug. So, we’re going to outline a clear way to spot this madness and how you can avoid falling into the same trap.

Tesla Case: The financials are ugly, is it a software company, a battery company or a car company? Will the debt load be reduced, can Elon Musk always get funding? So on and so forth. What we do know is this. When you’re betting against someone it probably isn’t wise to bet against one of the smartest people in the world. There is no debate that he is one of the smartest people in the world as he succeeded with PayPal, Space X, Solar City and Tesla. Those companies have practically nothing in common. Not to mention his other smaller successes along the way. The first thing to remember? Never short sell a “famous” CEO. Steve Jobs was another good example and someone like Jeff Bezos is yet another. You can dislike them, but shorting them is a fools game as one “hype move” of 100% gains takes you to zero and you can’t recover.

The second thing to note here is that you could be wrong. The biggest thing we learned from Elon Musk has nothing to do with cars, batteries or PayPal. It had to do with risk tolerance. He had an interview shortly before launching Space X and he said he tied a <10% chance of it even succeeding. Yet he did it anyway. Why? Asymmetric returns. With Space X, he knew that in the <10% chance it succeeded the value created would be more than 1,000%+. This means risk reward said it was a good investment/bet to make. How does this relate to Tesla? Much and the same. He bought Solar City with Tesla and he could very well make an entire new market by himself. Laugh if you want, but this is what Apple did when the iPhone was released. Blackberry was taken out and Apple became a trillion dollar company. Off of one genius product. One.

The third and final thing to remember about short sellers is that they are emotional. You can tell that Tesla is one of the “un-shortable” stocks. It is the exact same way with crypto currencies and weed stocks back a couple of years ago. We’re not saying it won’t fail (it certainly could) but the amount of emotions it has is unparalleled. Bears are absolutely obsessed with him and the Company and even at today’s levels they think they are right (despite losing all their money several times over, only to lose all their money again).

How to Apply This? The application of this phenomenon is actually simple: crypto currencies. You have weird people who believe that Bitcoin will be the only crypto currency despite more and more and more coins being created every day. In addition, you have other weird people who think it’s going to go to zero. The chances that either one of these people are right is next to zero percent.

So how do you think about Tesla and Crypto? Simple. You either buy a small amount and forget about it… or you simply forget about it. You do not short any of them as a 100% gain (*extremely possible in any year*) can put a huge zero into your account. Even if you only shorted it with 2% of your networth, that’s a massive set back if you average 10% gains per year.

If you would like to go for the “loop” as we call it we recommend doing the following on any volatile investment: 1) find the biggest supporters, 2) find the biggest detractors, 3) find their expected price targets and then 4) find out their backgrounds.

You’ll find that Tesla and Crypto are basically the same (in terms of emotions nothing more). Tesla supporters think it’s going to be a half trillion dollar company, detractors think it is a zero and the backgrounds of supporters are generally smarter than detractors (just look at their tech backgrounds and no professional investors are not “smart” we’re referring to tech specialists only).

We go ahead and assume that Tesla supporters/detractors are equally intelligent. So 50/50 chance it goes to $0 or $500B. This means you’re going to get a 300% return or a 0% return… expected value is 150%! Do not short.

From the chart above if anyone was long-term bearish at *any time* below $400, they are not allowed to have an opinion anymore. By definition they lost over 100% of their position. The only exceptions would be  a genius who shorted in the $300s bought back or said cover by $200 or so. That said… Just go on Twitter and the you’ll the same bears at $733 were bearish at $40 or less. No credibility or decency to say they were wrong.

Do the same with crypto! Unsurprisingly it’s the exact same thing to a T. You have people who say Bitcoin will be worth $100K and others who say it is a zero. If you assume both are equally intelligent the implied return is about 500%!

You’d think we’d have some complicated way to think about it but that’s really all we do. If you look at high risk high return assets it almost never makes sense to short. Similar to biotechnology companies. Unless you have specialized testing data, it is better to just own a small amount or ignore it. One set of testing data can send it up 100%+ in a day.

This Is Risk Averse: People talk about “risk averse” and confuse it for “volatility”. They are not the same and will never be the same. By owning a small amount of these high volatility stocks you’re actually taking a risk averse decision. Why? You have to ask yourself “what if I am wrong?”

If you’re wrong on Bitcoin and you didn’t own say 1% of your net worth, that would have gone all the way up to 10% of your net-worth if a parabolic move occurs. If you’re wrong and it goes to zero, you lost just 1% of your net worth and your life didn’t change. So… Ask yourself, are you okay with your net worth potentially being 10% lower with the risk of a 1% hit? Chances are you’re going to end up buying a small amount. This same logic applies to a lot of other items: Gold/precious metals, asymmetric biotechnology stocks, Venture Capital investments and more.

How to Sell: Now the last trick is avoiding complete collapse and irrational exuberance. This is going to be psychologically difficult but we use the 33% rule for high risk high reward assets. We don’t use 50% as these types of investments usually make irrational parabolic moves when they go up.

If you invested $10,000 into a high risk asset and it goes to $30,000 we would then cut the position by $10,000 or 33%. It is really that simple. This way you get to keep your high risk investment without being upset if it goes up more or goes down for a period of time. The dollar number is less important relative to the percentage gains. If $10,000 is small for you, and it’s $100,000 then you’d trim $100,000 if it was at $300,000 (for fun, yes we’re saying we wouldn’t touch Tesla here until the volatility stops, three years ago we said buy small and forget or never short and unlike the crazy people on twitter rarely spoke about it for years).

Feel bad for all the Tesla shorts. Even if they believe it's going bankrupt it's never smart to bet against ceo's considered "godlike"

Jobs and Musk are just in the "unshortable" CEO lists – always find a way. Better to just not play if negative

— Wall Street Playboys (@WallStPlayboys) August 2, 2018

Simple Conclusions: Instead of trying to predict homeruns it’s a lot easier to expose yourself to potential home runs without the headache of constantly following it. The second major item is that you don’t bet against geniuses. Please spare us the “I did the homework” on the stock type arguments. Betting against geniuses just isn’t a good proposition and why anyone would want to see someone like that fail (a person risking everything he has to improve the world) is beyond us. No need to become a fan boy like many millennials but there is also no need to dangerously short a high volatility stock that can take you to zero within a month.

Newer Readers: For those that are unfamiliar with our blog we have three high quality products in order: 1) Efficiency, 2) Triangle Investing and 3) Spending for Maximum Return. In order, you learn how to make a good amount of money (a million liquid within 10 years or so), how to correctly invest it and finally how we’d avoid blowing it all with intelligent spending.

Filed Under: Wall Street

Comments

  1. AvatarChris says

    February 5, 2020 at 4:24 pm

    I thought you guys only held, never sold crypto, or are you advocating this for risk-averse readers only?

    Reply
    • Wall Street PlayboysWall Street Playboys says

      February 5, 2020 at 4:35 pm

      You are correct we only hold and we never short since we use cash flow to diversify. We’re using this for people who don’t have high cash flow

      Reply
      • AvatarAnonymous says

        February 6, 2020 at 11:24 am

        How do you get cash flow from crypto without selling? No dividends.

      • Wall Street PlayboysWall Street Playboys says

        February 6, 2020 at 11:51 am

        It means our cash flow regular earnings is high enough to never need to sell we just buy…

        If you are worth $10M but make $1M after tax… you can easily move your portfolio to rebalance within a year

        You buy asset A with a million, now that asset class is 1/11 more of your portfolio

        No need to sell if diversified.

  2. AvatarRobert says

    February 5, 2020 at 5:17 pm

    I feel as if the timing of your book and articles as of late are perfectly in sync with the events of my life!

    Had the same kind of luck with AMD.

    Long since 2015, now the share price is at around $50.

    One of, if not the, highest performing stocks over the past few years.

    Life is good.

    The short narrative is insane, but Dr. Lisa Su and her team are doing excellent work.

    Also, I finished the new book.

    Great work! I think enjoyed it the most of the 3.

    Reply
    • Wall Street PlayboysWall Street Playboys says

      February 5, 2020 at 5:27 pm

      Fantastic!

      Reply
  3. AvatarBrent LaClair says

    February 5, 2020 at 7:57 pm

    I wonder this be a bad time to get investment in a brick and mortar business like a restaurant and club but team with someone super succesful in the space considering the upcoming reccesion?

    PS just bought the new ebook on spending and its gold as usual!

    Reply
    • Wall Street PlayboysWall Street Playboys says

      February 5, 2020 at 8:27 pm

      Q&A later, wouldn’t put your info up on here not good for spammers and bots etc

      Reply
      • AvatarBrent LaClair says

        February 6, 2020 at 9:05 pm

        Its worth it considering every time I do I meet a few local people in my city who follow the blog and become great friends with.

        twitter: @BrentIn_Brazil

  4. AvatarAnon1 says

    February 5, 2020 at 9:48 pm

    very interesting. have been reading both your tweets/posts and mikael syding’s coverage of the tesla short too. there’s a wide difference of opinion

    v good point about not betting against geniuses

    Reply
  5. AvatarOP says

    February 6, 2020 at 4:21 am

    Think about how you express your short. Buy a put rather than short sell outright….
    Great story about Icahn vs Ackman on Herbalife. Icahn used options all along, thus limiting his risk. Explained below:

    https://www.cnbc.com/id/100465961

    Citron / Kerrisdale / Muddy Waters etc. solve the timing problem of shorting by ‘talking their book’ and pushing shares down by producing long research (that few people read, they just sell instead).

    If you are shorting for valuation reasons (tesla?), then you should also have some price/valuation level where you would go long.

    Another thing, be careful shorting when short interest is high. I was on a trading desk when VW got short squeezed …

    https://www.reuters.com/article/us-volkswagen/short-sellers-make-vw-the-worlds-priciest-firm-idUSTRE49R3I920081028

    Finally, Stanely Druckenmiller drives a Tesla and said that he never shorts a great product.

    Reply
  6. AvatarFuck the Cold says

    February 6, 2020 at 8:25 am

    Quick synthesis skills test for anyone working in tech: everytime WSBs writes about anything tech, can you cut through all of the rationalizations and figure out the “point” they’re trying to make, or do you nit-pick all of the little inaccuracies?

    I know if you show’d this to any regular software engineer, they’d have an aneurysm that you’re approaching Tesla (and Bitcoin) from a high-level, like they’re both similar asset classes. Or that you’re treating Tesla like just another company, instead of one of the messianic tech overlords.

    Whatever. Their loss.

    Reply
  7. AvatarBonVivant says

    February 6, 2020 at 10:21 am

    SolarCity was not a “success” it was bought out by Tesla because it went bankrupt. Tons of manipulation going on with this stock . Dangerous to advocate a position here.

    The only real advice here should be to never publicly announce a short position. Compare Bill Ackman’s disastrous short of Herbalife for comparison.

    Reply
    • Wall Street PlayboysWall Street Playboys says

      February 6, 2020 at 11:01 am

      It literally says we think it’s a short here in the top… that is not the point of the article at all.

      You should have sold 33% so no matter what you make money at this point. Even if Tesla goes to zero they are still wrong from a math perspective. Don’t see how people don’t get this.

      Oh and btw solar city was taken out in a stock deal so you’d still be up if you left it. Again proving the same exact point.

      Reply
      • AvatarBonVivant says

        February 6, 2020 at 1:17 pm

        TSLA just settled 60mm shareholder lawsuit over SolarCity purchase. Musk misled investors over the company’s insolvency. Pump and dump scheme, lots of suckers will be taken to the cleaners. Won’t end well!

      • Wall Street PlayboysWall Street Playboys says

        February 6, 2020 at 2:41 pm

        $60M! Alright man

        deal closed August 1, 2016… $2.6B, stock price of Tesla is now 3x higher, solar city shareholders now have $7.8B in value… but let’s look at 0.060B beyond ridiculous

        If price goes to zero we don’t care already made a ton of money on both assets. If it goes to zero tomorrow we would laugh as the shorts were still wrong. Beyond comical seeing this type of delusion

  8. AvatarJon says

    February 6, 2020 at 11:06 am

    You’re right, it runs both ways. Reminds me of a case I did at HBS. Cohodes liked to short companies and he stated more or less he always looked for terrible CEO’s that always failed because they never failed to keep the trend going so he could keep shorting them and make tons of the bets! This is more or less the other side of it, don’t short the CEO who has the trend of always pulling it off or you’re going to lose a lot! I guess if you’re a derivative trader perhaps you should be going long not short on them (figuratively speaking).

    Reply
    • Wall Street PlayboysWall Street Playboys says

      February 6, 2020 at 11:09 am

      Exactly

      Reply
  9. AvatarThrowaway says

    February 8, 2020 at 10:03 am

    Best fucking content on the internet. You have helped me a ton in all aspects of my life. In a world full of morons and bullshit your advice shines through like a bright star. Even though I live halfway around the world from the US, the same principles apply. Thank you, your content has literally changed my life. (throwaway account for privacy, hope you understand).

    Reply
    • Wall Street PlayboysWall Street Playboys says

      February 8, 2020 at 6:24 pm

      Totally understand and glad your life is getting better!

      Most people are too lazy to do anything!

      Reply

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