The Perils of Shorting: A Real Life Example

The author of "The Big Short" michael burry now has a big position in Tesla in Put options basically betting on the price of Tesla continuing to fall. He also has leveraged positions in US treasuries basically betting on inflation and that the fed will be forced to raise interest rates to combat it also very bad for Tesla. Of course he could be wrong and these are positions he can easily exit
 
Michael Lewis wrote The Big Short... Michael Burry was the manager at Scion Capital... One of the hedge funds which started betting against the mortgage market. He is in the book and film.

Scion holds the Tesla put options
 
EmmDee said:
Michael Lewis wrote The Big Short... Michael Burry was the manager at Scion Capital... One of the hedge funds which started betting against the mortgage market. He is in the book and film.

Scion holds the Tesla put options
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thanks for that clarification, i actually never saw the film just that Michael burry , the inspiration behind the "The Big Short" movies has these positions to profit from Tesla price falls and inverse positions on US treasury ETFs. Have you changed your opinion on Tesla yourself, do you think its over valued?
 

Burry was one of the shorts in the film but it also follows two other funds that had come to the same conclusion independently. It's worth a watch.

I don't think I had an opinion on Tesla. I can't say I have a strong one now... At least not an informed one. My feeling is that they broke a new market essentially but will struggle to stay ahead of the mainstream car manufacturers now that the penny has dropped with them. For example, I'm a potential buyer of a higher end Tesla but I'll probably wait a little bit for the German cars that are about to come out... better build quality. So I suspect Tesla has had its moment . But it's not really a strong opinion.
 
Hi EmmDee, that’s interesting. I’m in the market for something new and did consider a Tesla but I’m not convinced by full electric yet. But then I saw the ad for the new Audi RS e-tron GT (with Tom Hardy). Oh…my…God, I think I’m in love (with the car rather than Tom Hardy, hot and all as he is).

Gordon
 
@Gordon Gekko I remember you saying that Scottish Mortgage trust had a big investment in Tesla and you were indirectly an investor through that a year ago. Now they are saying they have reduced their holding in Tesla by 80% , obviously they have shown incredible skill in riding the wave . However were they really believers in Tesla or did they just seek to capitalize on the populatity of Tesla and benefit financially from the sentiment rather than from the stock?
 
I think that based on their constant messaging, they were believers in it.
 
I dug out my notes from a piece by the Baillie Gifford guys (who run Scottish Mortgage Trust):

- Arm-chair experts underestimate the scale of the opportunity

- Outside of technology, 90% of the world’s biggest companies are in the Auto or Energy sectors

- So there are multi-trillion dollar industries on both sides of Tesla’s opportunity space

- There are two main questions for investors in Tesla: Will electric vehicles become mainstream over the long-term? And will Tesla be a major force or player in that?

- The company has demonstrated that it can produce at scale and globally

- Investors must “tune out the noise” when it comes to Tesla

- ‘Battery Day’ - Tesla has a meaningful lead in this space and can now ‘double-down’ on it. The energy storage side of the business could end-up bigger than the auto business

- Let’s not forget that the ‘Model S’, which is old at this stage, is still ahead of most of the competition in terms of technology
 
Gordon Gekko said:
Investors must “tune out the noise” when it comes to Tesla
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Is elon musk not responsible for most of the noise himself what with his messing around in the bitcoin market. How is this guy getting away with all this. He got away with tell ing lies about the Saudi wealth fund looking to take tesla private in 2018, thereby falsely inflating the share price
 
I heard on the news this morning that Tesla sold piles of cars in Q1.

I think that it would be very interesting to get the thoughts of the OP at this stage. My sense is that here we have a very experienced businessman get the valuation completely wrong and it would be interesting to understand where the flaw in analysis occurred to capture any learning here.
 
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Hi JAS

I think Colm has recognised that he got it badly wrong.

As I did. I made money shorting Tesla and cashed out. Then I got in and lost more than I made before I closed out. I am glad I did as I would have lost even more.

I stopped following it when I no longer had an interest in it. But lots of things are overvalued and it's just astonishing at how long the overvaluation lasts and how high it goes.

Brendan
 
He spells it out here:
 
Tesla Net Asset Value was $28.5bn at end 2021. Its market cap is currently $1,100bn
Bitcoin Net Asset Value is zero. Its market cap is $970bn
For comparison, Ireland's GNP per annum is $313bn
Go figure
 
Hi Brendan,

Brendan Burgess said:
I think Colm has recognised that he got it badly wrong.
Click to expand...

I can't confess to reading all 640 pages of this thread so that may well be true. If the specific question has already been addressed, perhaps some kind soul would oblige me with the relevant post.

Brendan Burgess said:
But lots of things are overvalued and it's just astonishing at how long the overvaluation lasts and how high it goes.
Click to expand...

I guess this gets to what I'd like to understand. At the outset, Colm figured that Tesla was significantly overvalued at $63b - since then its valuation has increased by a factor of c. 18 - presumably meaning that its current price is probably of the order of 25 times what Colm originally valued it at.

So the questions that arise include - what value does Colm put on Tesla now and how does he reconcile the current and former valuations?
 
jasdpace@gmail. said:
My sense is that here we have a very experienced business man get the valuation completely wrong and it would be interesting to understand where the flaw in analysis occurred.
Click to expand...
You're right! I still don't know how I got it so wrong, but I'll try in this post to get to the bottom of the flaws in my analysis.
First of all, while I am an experienced businessman, my background is in finance. I know nothing about engineering or car-making. I gather that Musk is an engineering genius. I didn't realise how much this would contribute to his success.
The fact that so many believed in him - there is almost a Musk cult - helped enormously. It's hard to disentangle the cult from his objective genius as an engineer. I've just read the following in the FT this morning:
"In its darkest hour, the company went through what its Chief Executive Elon Musk called 'production hell': supplies were late or missed, cars came off the production line requiring extensive additional work. At one point, the company was turning out vehicles without seats and asking dealers to bolt them on in the showrooms. Tesla has emerged on the other side of the saga as a trillion-dollar business."
What other company could have retained the trust of investors - never mind that of prospective car-buyers - while all this was going on? Musk, through the force of his personality, his belief that he could get through, boosted by the unquestioning faith of his legions of groupies, managed to achieve the impossible. We never learned in actuarial school that charisma was so powerful! (Which reminds me of a joke: what does an actuary use for contraceptive? His/her personality.)
During my working years, I was involved with one company that achieved breakneck growth for a period, but it caused all sorts of long-term problems. I thought the same would happen with Tesla, but it hasn't – apparently not to date, anyway. That's a tribute to Musk and his management team.
The cult of Musk has helped in other ways.
I presume that, for most car companies, distribution costs account for a high proportion of the total sale price (as they do in the retail saving market). Musk seems to have eliminated a high proportion of that cost, allowing the company to reap a high proportion of the total margin. That does a lot to improve margins. I think that Musk has claimed that Tesla has the highest operating margins of all volume OEMs. That is due in large part to his ability to cut out the middle man, or at least reduce their drag on profits.
The Musk aura manifests itself in many other ways. Tesla's cost of capital is a fraction of the cost for other car manufacturers. That is very important, as car companies have massive amounts of capital tied up in factories, stock, etc. Tesla can issue shares to investors on the promise of megabucks decades into the future, but nothing until then. No-one else could get away with that trick. They’ve done something similar with bondholders, promising to repay them partly in shares, which everyone believes will keep increasing in value well into the future, simply because Elon Musk says they will. It can become a self-fulfilling prophesy. That cuts the interest they must pay.
The belief that the gravy train will last forever also helps Musk to attract top executives at a fraction of what other OEMs would have to pay for talent. All he has to do is promise hefty stock options down the line. He can throw them round like confetti. It all helps to reduce the cost base.

Having said all that, I still think Tesla is way overvalued, but my past performance is definitely not a guide to the future, so you would be best advised not to listen to my prognostications.
Nonetheless, here are a few thoughts to ponder.
The current share price is $1,085, while earnings in 2021 (diluted, of course, to allow for all the stock options) were $4.90 a share, up from $0.64 in 2020.
We must assume that the business will ultimately plateau. Musk won’t live forever and not everyone in the world will own a high-priced Tesla. When the business does eventually plateau, the share price will end up at around (say) eight times earnings. That means that earnings have to rise to around $135 a share to justify the current share price. That’s 27 times current earnings. Even Elon Musk will struggle to achieve that sort of growth in diluted earnings (remembering of course that he and his management team will be licking up much of the extra value by issuing shares to themselves for next to nothing and diluting the interests of ordinary investors). And by the time earnings get to that level, investors will want a much higher share price, to compensate for the lack of any sort of dividend on their investment. This makes the target even harder to achieve.
There are a number of other headwinds. There are low barriers to entry in the EV market and a host of new entrants joined in the last few years. The Musk aura will insulate Tesla to a large extent, but not completely. Its margins must eventually fall. Subsidies are also being cut. I see that China (a major market for Tesla) is cutting subsidies by 30% in 2022 and ending them completely on 31 December. The same is happening or will happen in other markets. Nevertheless, I've learned my lesson. I’ll be wary of betting against Elon Musk in future.
 
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Your analysis is faulty. A significant proportion of the additional valuation is because Tesla issued additional shares in the intervening period, in order to raise more capital. That's one of the "Musk aura" effects mentioned above. Of course, I'm in total agreement with your core point that I got it very wrong!
 
What do the experts say?
Let us first accept that experts differ. For example their target for the share price of Coca Cola ranges from 59 to 76, nearly a 30% difference.
Their range for Tesla is from 67 to 1,500, a range of +2,100%
 
Tesla's showroom is on Bracken Road in Sandyford, opposite the Audi centre. Look at the two of them on Google maps
 
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