Excerpted from Whitney Tilson’s latest email to investors.
1) It’s a sure sign of a top when I’m getting random emails like this:
Hello, This is [name], I am a college student that started a trading account two years ago. Over the past two years I have generated over 30% each year in stagnant market conditions. I have given rise to a trading strategy that is low in risk, nevertheless unique in nature with a worldly view on financial markets and the efficient market theory.
At the beginning of 2016 I started off buying and selling oil futures. Over time, my trading style has matured. The Use of derivatives and uncorrelated value investments, technical markers with event driven placement is the literary overview of on world market hypothesis.
The current global market pricing theories see the world as a bunch of moving parts that make up one whole, my current trading strategy sees the world as one whole with an assemblage of moving parts. a wise man can tell the difference.
I am in the process of registering with that state of Rhode Island and FINRA to get started with a multi strategy hedge fund. I was wondering if you and your are open to me asking questions about the overall hedge fund playing field and gaining trust from investors.
2) Along these lines, a friend sent me this:
With companies such as Amazon, Netflix, Nvidia, Tesla, Google and Facebook trading at all-time highs — and I am not in any way suggesting that all of these companies are “the same” in terms of fundamentals or valuation — I am reminded of two conversations I had in February, year 2000.
The first conversation was in Boston. I was marketing with the big institutional accounts for a day, and riding around between these meetings in a cab. I was covering Internet high-fliers at the time, although not the large-caps. I was covering the recent IPOs, the $300 million to $1 billion, mostly, companies, which seems like nothing these days, but was a real business back then.
The salesperson — I think I remember who it was — told me: “I know it’s been easy this last year. You’re a star. Everyone thinks you’re a genius. All of these stocks are up 100%-400% in barely a year. It won’t last. If nothing else changes, you will be swiftly forgotten once these companies crash. They way you’ll be remembered is if you come even remotely close to calling the top, telling everyone to sell. Will you do this?”
I said no.
I think it was the week after this, on a business trip to Silicon Valley, that I was having dinner with a long-time elderly friend in San Francisco — a legendary private investor whom I had gotten to know a decade prior thanks to an almost random circumstance. He was one of the most fascinating people I have ever met.
We were having dinner at The Big Four on Nob Hill and he told me: “My friend, sell everything now. These valuations are insane. I’ve been in the business since the 1950s and I’ve never seen anything like it. There are simply not enough profits to support these prices. Maybe it can last a little bit longer, but it’s months — not years — away. These high-fliers will crash. Mark my words.”
In 2000, I had my investable portfolio almost exclusively in those small-ish high-fliers. In the 12 or so months that followed these two conversations, I lost at least in the ballpark of 85%, if memory serves me right. The crash started in March 2000 and by December 2000 it was as dark as it gets. $40 stocks were trading at $2 in many cases. My account was down to almost zero. It was so bad so fast, that 2001 actually wasn’t a bad year at all. The band-aid came off faster than I could blink.
History will not repeat itself precisely in every detail. A lot of things are different, including market belief regarding central bank intervention. We have been building up inflationary pressures since at least the 1990s. Actually, 1971. Actually, World War 2. Actually… 1913. You get the point — the pressure has been building for a century now, at least four full investing generations.
All that said, I think that we are on the cusp of having to go closer to market neutral by putting on some hedges, even if not selling (some of) these kinds of stocks outright. The question is which ones. Some of these companies are now very profitable, very cash-flow positive, businesses that — while not cheap or even market-average — aren’t trading in bubble territory. Some of these companies could do reasonably well, and if you have huge gains, may not be worth selling in order to prevent a 25%-40% decline. Better to hedge these things with some other instrument.
It’s pretty obvious to me that the biggest bubble in the market is Tesla. Why? Because it’s the company with positively the weakest fundamentals. It’s almost comically bad. Margins, competition, sales trajectory, capital requirements — any one of these individually would be reason to short it. This company would be bankrupt within approximately a year or two at the most, if it couldn’t access the capital markets anymore. Any meaningful decline in government subsidies could in turn trigger this, even aside from all the other market and technology-based variables.
It’s even more obvious when you talk to the bulls in the stock — from institutional investors to smaller players. Very few have read the quarterly SEC filings or are even proficient in financial statement analysis. Almost none have done comparative work on the other automakers, which may be Tesla’s biggest advantage with its investor base (“Look at all these robots! An assembly line! Unique!”).
However, we all know Tesla is up because of something else. This is a sexy product — a car — not some dorky behind-the-scenes cloud product. Buying the stock may even become a political statement for some. Last December, it became a Trump stock, and so the stock went up. Then, it became an anti-Trump stock, and — you guessed it — the stock went up because of that too. It’s all totally irrational, but nevertheless real. It could go parabolic before it goes to zero, which it will barring a miracle.
It’s been an insanely good 1-2 years — in some cases more — in these stocks. My mind is now focused on figuring out a way to lock in these gains, perhaps without selling the stocks outright. Maybe the answer is to simply short Tesla and ride out what could still be a painful 9-18 months? That’s the big question.
In the end, the history books will probably read: “Despite having seen the movie before, and having a rational argument to the contrary, he waited too long. Could have cashed in and retired, but chose the curtain and rolled the bullish dice one time too many. Rest in peace.”
3) Here’s a well-articulated case that the market has a lot more room to run, Bubble Watch, The Brooklyn Investor, http://brooklyninvestor.blogspot.ca/2017/05/bubble-watch.html. Excerpt:
Let’s put the CAPE aside for now and just look at regular trailing P/E’s. Back in 1999, that went up to 30x, and in 1987, it went up to 21.4x (this is