Thoughts on Investing

Why I would NEVER buy a single share of Tesla

My recent post got a lot of comments by Tesla Fans so I wanted to clarify further why I would Never buy a share of Tesla. If you are a Tesla shareholder or Fan take the time to read and understand what I am trying to say before you downvote. Thanks

This is NOT a recommendation to buy or sell anything and certainly not Investment advice.

So why would I not buy a share of Tesla?

I am an Investor and for every Investment I do I use a checklist. My Checklist is quite long and I won’t share the entire thing here but it includes things such as multiples for sales, cash flows etc.

So just for this reason alone I would never even consider buying Tesla. I would glance at the numbers for about 5 minutes and I would be done with my research. That would be it. It’s ok to miss out if something doesn’t fit your investment criteria.

But lets say it goes past my numbers screening ( or I ignore it) and I would enter the next part of my checklist. My checklist also includes things such as Warning Signs.

My goal is to maximize my gains BUT more importantly I also try to avoid losses. Losses can kill your portfolio and if you lose money its very very hard to get back to where you started. So I try to avoid losing money at all costs.

Warning signs for stocks include : Short seller reports, Media Attention, SEC Investigations, Lawsuits, Accounting irregularities etc.

The thing with Tesla is this: People that are MUCH SMARTER than me spoke out against it. This includes Jim Chanos and recently the “Big Short” Michael Burry as well. So for that reason as well I would just pass on the company. I don’t need to short it either all I need to do is skip it and look for another opportunity.

I would skip on tesla because to me personally I have a risk of capital loss. Thats all there is to it. I don’t need to care about their deliveries, their events etc. I don’t need to care. It’s perfectly fine with me if it goes up another 10x from here.

The markets are full of great companies & opportunities and its not worth it buying something that might hurt your portfolio. Also don’t get pressured into buying something you’re not comfortable with. Fomo is dangerous and can lead to bad decisions.

Thoughts on Investing

Short sellers are GOOD for the Market

Shortsellers are going after our favorite stocks to profit therefore we should despise them right? But are they all really bad?

Don’t just read articles and blog posts that confirm your view about a company. Right now a lot of $TSLA & $NKLA shareholders are mad about shortsellers going after their stock but in fact you should embrace it.

Shortsellers do research that you could never do on your own. In fact I would love it if someone would give me a 50 page report on everything thats wrong with any of my holdings. I know whats right about all the companies I own. What I want to know are the flaws, the accounting issues ( if there are any ) etc.

With Luckin Coffee Muddy Waters Research bought thousands of cups of coffee from different branches and kept an eye on the customers. Thats invaluable research and in the end they were right that the numbers don’t match up.

They probably saved a lot of Luckin Coffee Shareholders from bigger losses ( those who read the report). And of course short sellers should get compensated for this work. There have to be incentives to do this kind of work. Else nobody would do it. Don’t count on auditors which are incentivized to look the other way and keep a paying client.When you’re an analyst you can just say you think revenue will go up but you don’t need to back it up.

Thats it. But when you accuse someone of fraud then you better have a lot of evidence to support this view. Short sellers face potential losses & lawsuit. If they are wrong they lose a lot. Thats why they work hard and only release reports when they have enough to back up their claim. Also what do Companies like Nikola have to worry about ? If everything is fine then the Hindenburg report will turn out false and they continue to enjoy a rising share price. But what if the report is right?

If you are a Nikola shareholder then you should pay attention to it. Read it and work this into your thesis for owning the stock. Is it worth the risk? Maybe limit your exposure.But don’t ridicule the people that release those reports. There is a lot of hard work & money behind it.

Short sellers don’t do this for the fun of it. And if they are right they should be compensated for their work. I would actually say that many short sellers work much harder on research than a long analyst. After all they have to be right to make money. If they’re wrong they won’t be able to enjoy market returns. They would literally get wiped out.

Thoughts on Investing

Buying Low Pe stocks is NOT Value Investing

There seems to be a common misconception out there that value investors only buy low PE stocks and ignore high growth stocks. Here is something that might surprise you :

The PE by itself tells us nothing about value.

Here is a sample:
Let’s say a Stock A has a PE of 8 and Stock B has a PE of 15. Is Stock A a better value stock?

What if Stock A is growing its sales and profits at only 2% a year and Stock B grows by 10%?

Even worse what if Stock A is in a commodity business with dismal margins and ROIC of 3% while Stock B has an amazing 30% ?

All of the sudden Stock A doesn’t look cheap at all. In fact people could argue that Stock B is a much better Value stock

Even worse:
What if Stock A has a lot of debt ? The PE won’t factor this in at all. What if the company has a market cap of 1 billion but another 2 billion in debt.

All of the sudden we are looking at and enterprise value of 3 Billion. Can this company even pay it’s interests? When you look at PE you might overlook all the other issues with the company. A low PE could be a good start for your research but by itself its meaningless. 

Another sample :
What if Stock A has a PE of 3 and Stock B has a PE of 100. No real value investor would buy this PE 100 stock. Its obviously overvalued. But is it really?

What if they both had big one off events? Let’s say Stock A sold parts of its business and booked the proceeds as profits.

These proceeds won’t be there next year and the company will likely have a much higher PE once they return to normal. In fact since they sold parts of their Company it is even possible that they will earn less money in the future. All of the sudden that PE 3 stock doesn’t look so cheap anymore.

Same with Stock B. What if it made decent profits year after year and in one year they decided to make a big acquisition that messed up their normal PE.

A lot of people would say right off the back that a PE of 100 is expensive and overvalued. Is it? Next year the big expense won’t be there anymore and the company will likely earn more than before. All of the sudden the PE of 100 turned into a great opportunity

Value investing is a lot more than just running a scanner and looking for low Price Earnings Values. It can be a great start for your research but keep in mind that there are many more variables that should be considered.

As investors we need to create a whole picture out of many small puzzle pieces. PE is just a small piece