Whitney Tilson’s latest email to investors on Tesla Inc. (NASDAQ:TSLA)
This is what I’ve drafted for my mass email today. As always, comments welcome!
Tesla (TSLA) closed yesterday at $404.04, an all-time high. After nailing bubbles in cannabis stock Tilray (TLRY) at $300 15 months ago (it’s gone from $17 to $300 back to $17 in 17 months!) and alternative meat purveyor Beyond Meat (BYND) at nearly $200 five months ago (it’s gone from $25 to $240 to $77 in less than eight months), I’ve sure been wrong on Tesla.
Warren Buffett’s Annual Letter: Mistakes, Buybacks and Apple
Warren Buffett published his annual letter to shareholders over the weekend. The annual update, which has become one of the largest events in the calendar for value investors, provided Buffett's views on one of the most turbulent and extraordinary years for the financial markets in recent memory. Q4 2020 hedge fund letters, conferences and more Read More
That said, if you’d shorted it at $296 when I predicted on March 21 that it would be at $100 by the end of the year, and then covered when I wrote on October 24 that it was no longer a good short after the company surprised investors by reporting a profitable quarter, you would have been flat on the short position during a period when the S&P 500 was up 6%.
Here’s what I wrote on October 24:
Today, I am neutral on the stock. I think it’s a terrible long, but probably also not a good short right now, either. Over the next few months, the company will likely report positive developments regarding the launches of the Shanghai Gigafactory and Model Y. In addition, I suspect it has more kitchen-sink benefits it can use to spruce up its fourth-quarter earnings. So for now, I think the wisest course of action is to sit on the sidelines and perhaps look for an opportunity to short the stock early next year…
There are many lessons here related to short selling:
- Shorting is hard and dangerous;
- Shorting battleground stocks with high short interest is very hard and dangerous;
- Shorting the stock of a company with a product or service that its customers love with a burning passion is very, very hard and dangerous;
- Shorting an open-ended situation – in this case, the stock of a company going after multiple multi-trillion-dollar global industries – is very, very, very hard and dangerous; and
- Shorting a stock being promoted by a CEO with a cult-like following, who will say and do anything to pump it up, is very, very, very, very hard and dangerous;
In addition, it’s important to manage risk. This is especially true on the short side, where losses are unlimited, by sizing positions appropriately (meaning small) and trimming or exiting positions that run against you. I don’t use stop losses on the long side, but recommend them on the short side.
Lastly, as I discussed in my e-mail two weeks ago on commitment bias, it’s critical not to get emotional about any investment and to keep an open mind to disconfirming information. I was 80% confident that Tesla wouldn’t report a profitable quarter this year, but when it did, I immediately recognized that a key pillar of my short thesis had been blown to bits and changed my opinion.
Prudent investors always remember the old maxim, ““He who fights and runs away may live to fight another day.”