Wealth Strategies
Tesla And The Widow-Maker Trade

The author of this commentary, who has penned a number of articles for this news service, examines the eye-catching share price developments and business progress of Tesla, and suggests how investors might treat that company's shares in their portfolios.
The ascent of electric carmaker Tesla and the achievements of Silicon Valley rainmaker Elon Musk, are among the best-known in global capitalism. The gyrations of Tesla’s stock are also widely talked about. What should investors do with this, and similar types of company if they want to avoid getting burned? And what lessons should be applied to those running portfolios? To address some of these questions is Christian Armbruester, chief investment officer at Blu Family Office, the European house. The editors are pleased to share these ideas. Join the conversation if you have a response. The usual editorial disclaimers apply. Email tom.burroughes@wealthbriefing.com and jackie.bennion@clearviewpublishing.com
As investors, we look to the future to deliver growth and capital
appreciation. As traders, we look for things that are mis-priced.
In other words, no one would consider buying Vodafone if it were
trading at a fair valuation. Things must be either cheap or
expensive for us to make money. Good traders have elaborate
systems that alert them to stocks, bonds or commodities that are
trading at the wrong prices, given statistical
analysis.
For example, if Vodafone were to trade between a range of 100-120
pence per share for more than a month and all of a sudden dropped
to 75 pence, an alert of some sort would go off. We can then
interpret the move by looking at the performance of the sector or
the market during the time of the price drop. We could also
search for news, stories, or other corporate actions that may
have caused the sudden drop in price. All of this can be done in
an instant, and if none of the factors can explain what has
happened, you buy the stock and expect it to revert back into its
familiar range.
There are a lot of reasons why a financial security would trade
at the wrong price for short periods, including over-reactions to
perceived events, mis-valuations, liquidity, and even human
error. On that note, there is no such thing as a long-term trade,
there are only failed trades in the short term.
Remember, trading is all about getting in at inflection points.
Time is money, and if nothing has happened in your investment
hypothesis in over a month, you probably got your timing wrong.
Few people like to admit they are wrong, and hence stay in trades
for much too long, but that’s another story.
Trading Vodafone back and forth is of course one way to trade,
but it is much better to take that most random variable out of
the equation: market risk. It is estimated that 80 per cent of
our returns are attributable to general market movements, so
whatever we buy or sell, we need to sell and buy something else
against it. Trading is a relative game, whereas investing is
absolute. Big difference, and the trick is to isolate or
ring-fence the particular wrong price we wish to exploit. Think
of it this way, if you saw that one market stall was selling
oranges at a 25 per cent discount - cheaper than everyone else -
you could buy more in the hope of selling them on. However, if
you buy a lot of oranges and the market closes, you are left with
a lot of rotting fruit. Better to arrange the sale before you
buy, to avoid that risk and that’s what trading is all about:
know when to get out.
Having said all of that, let’s get to Tesla and see why the stock
has literally wiped out many a good trader in recent times. I
have to admit, I like the cars, and they are far ahead of any
competitor at the moment. Then, you also have the whole space
travel and it is easy to see why so much fantasy has been
instilled into the recent stock price move. However, now the
company is worth more than the entire global auto and aerospace
sector combined. From a fundamental perspective, that seems a big
bet and if Nokia is any guide, we have seen this before. A market
leader, far ahead of their time, that eventually falls victim to
competitive market forces.
Then there are the numbers. The recent performance of TSLA [Inc]
is quite frankly mind-boggling. Even after the recent fall of
more than 25 per cent, the stock is still up more than 400 per
cent since the beginning of the year. That’s a big move, and it
is no wonder why every statistical trading model in the world
started selling the stock. The carnage that ensued was even more
colossal. It is estimated that short sellers lost more than $25
billion on the recent move, regardless of how well they hedged,
as nothing went up nearly as much.
Chart: Tesla versus European Automakers
Source: Bloomberg
We are hearing that so-called “Robinhood traders” are pushing the stock, as they perceived a recent stock-split to mean that the price was now “cheaper” than the day before. Remember what we discussed about checking for things that may have caused a big change in the price? Whatever the reasons may be, the stock price is what it is and by every measure it is the wrong price, so how should we trade this?
Proceed with caution and whatever you do, always expect that it
can get worse. In other words, this massive, glaring,
super-humungous trade of the century, could get even juicer and
TSLA could keep going up for longer. Timing is a female dog, so
whatever you do, work with stop-losses. You can always get back
in, but if you hold on for too long, you can also pay the
ultimate price.
Chart: Volkswagen stock performance during Porsche
takeover attempt (2008)
Source: Bloomberg
Lest we forget, the last time we saw such a glaring mispricing of
this sort was when Porsche tried to buy Volkswagen, making it
briefly the most valuable company in the world. Word is, two
people committed suicide shorting the stock at 900 and getting
wiped out, before it settled back at around 200. Rather ironic
that TSLA and VOW have both become known as the widow-maker
trades. Maybe we should trade one against the other? I hear there
are rumours of a takeover in the air. Stay safe!