After a brutal December, Dan Ferris rings in the New Year and addresses the question every investor is wondering: Where will the stock market go in 2019?
The best way to predict the future, he says, is to understand the present – and that starts with what he calls “the most expensive moment in the history of the stock market” which we saw just last fall.
It’s been costlier for investors than any equivalent moment in the Dot.com collapse or the 2008 crisis – and it’s the best indicator Dan’s seen of where stocks are right now. “If history rhymes… within two years, you see a big fat hairy bottom. Normal levels would be 60%.”
“There’s a lot of downside left if history rhymes.”
Later on, they’re joined by Mark B. Spiegel. Mark is the Managing Member & Portfolio Manager of Stanphyl Capital Partners and is a New York-based equity investor.
Prior to founding Stanphyl in 2011, he spent six years as an investment banker financing public companies. Prior to becoming an investment banker Mark spent a year working for a microcap Nasdaq tech company, and he began his career with 17 years in the commercial real estate industry where he experienced firsthand the opportunities and challenges faced by a wide array of client companies.
Mark believes that all these experiences– banking public companies, working for a public company and securing real estate for a wide variety of companies– combine to provide the kind of “real world” experience that’s extremely useful for an investor.
Managing Member & Portfolio Manager of Stanphyl Capital Partners
Mark B. Spiegel is the Managing Member & Portfolio Manager of Stanphyl Capital Partners and is a New York-based equity investor. Prior to founding Stanphyl in 2011, he spent six years as an investment banker financing public companies. Prior to becoming an investment banker Mark spent a year working for a microcap Nasdaq tech company, and he began his career with 17 years in the commercial real estate industry where he experienced firsthand the opportunities and challenges faced by a wide array of client companies.
NOTES AND LINKS
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1:01: Dan gets to the first thing that’s on every investor’s mind at the start of the new Year: what the stock market will do for the year. “There’s no way I can not talk about that.”
5:35: Dan explains how history is pointing to 2019 being “not a great time for stocks” and why he plans to be in the market anyway.
11:45: Big market routs may not feel like good news – but Dan explains why they’re ultimately natural, healthy, and how markets are supposed to work. “Can you imagine if they were just like a casino – you know, 2018 up through September, all the time?”
12:35: Dan introduces this week’s guest Mark Spiegel. Mark is the Managing Member & Portfolio Manager of Stanphyl Capital Partners and is a New York-based equity investor. Prior to becoming an investment banker Mark spent a year working for a microcap Nasdaq tech company, and he began his career with 17 years in the commercial real estate industry where he experienced firsthand the opportunities and challenges faced by a wide array of client companies.
14:20: Dan asks Mark about Tesla, and Mark explains why it’s “maybe the most interesting stock that I’ve ever seen.” No one, he says, has ever seen such a mammoth, blue-chip, widely covered company get away with so much nonsense.
19:40: Mark calls Tesla’s profit in 2018 “phony” and predicts, “They’re going to revert to massive losses in 2019… I have zero doubt about that.”
25:10: Mark compares Tesla’s insane market cap with more reasonably-valued companies like GM, and he and Dan chew over the numbers on how Tesla could possibly be valued at $7 billion more than stalwart car companies like GM.
30:20: Mark predicts that 2019 will mark “the demise of this nonsensical bubble stock,” and Dan asks him how he’s managed to stand firm during his short of Tesla for four years – even during the stock’s spectacular run.
42:31: Mark games out the specific event that could sink Tesla stock like a stone overnight. “This thing will drop down $200 like you could snap your fingers.”
45:29: Mark games out his typical hold position, and why it’s anywhere from six months to four years. “I know where I’m going to sell that stock the day I buy it.”
Announcer: Broadcasting from Baltimore, Maryland and New York City, you're listening to the Stansberry Investor Hour. Tune in each Thursday on iTunes for the latest episode of the Stansberry Investor Hour. Sign up for the free show archive at investorhour.com. Here are the hosts of your show, Buck Sexton and Porter Stansberry.
Dan Ferris: Hey, everybody. Welcome back to another episode of the Stansberry Investor Hour. I’m your host Dan Ferris. I’m the editor of Extreme Value, a value investing research service published by Stansberry Research, and we’ve got a few things to talk about this week, this year I should say. Happy New Year. It’s January 2019 already. Man, what happened to 2018?
So, look, the first thing on everybody’s mind, every investor’s mind at the beginning of the year is what’s the stock market gonna do this year? I can’t not talk about that. There’s no way I cannot talk about that. Thing is, if you’ve been listening to podcasts that I’ve been doing here for several weeks already, you know that I really don’t like to make predictions. I don’t like to say, “The market is gonna fall 22 percent in 2019” or over any other period of time.
However, if you’re an equity investor, you can’t not think about the future, and I think the best way to think about the future is just to ask where do we stand right now. That may be a familiar question to you if you’ve read Extreme Value or anything else that I’ve written about this topic, because it’s a phrase often used by a guy named Howard Marx who wrote a book called The Most Important Thing that I recommend all the time, I think it’s a great book, it’s a quick read and it’s deeply insightful. I highly recommend it.
And Howard says, “Hey, don’t make predictions. Just ask where do we stand?” And I think that’s a brilliant distinction to make, so, no prediction. I’m just gonna tell you where we stand, and if history which tends to rhyme, not repeat, it doesn’t repeat verbatim, it rhymes, if history rhymes, then I’ll tell you where I think we’re probably headed in the next couple years here.
So, where are we right now? Well, the S&P 500 is right around 2,500. That’s about 14 to 15 percent blow its all-time peak in September of 2018, just above 2,900. So, look, that was the most expensive moment in the history of the stock market in the United States including the very top of the dot com bubble in early 2000, and the very top of the market in 1929. Those were the two big most expensive moments, and September of 2019, from late August really through September of 2019, the market was more expensive than that.
We stand 14 percent below that. If you’re gonna go – we’re gonna talk about cars later on in the program with our special guest today, so I’ll stick with that theme. I’ll start off with that theme. If you walk onto a car lot and the guy says, “This is the highest price this thing has ever sold for, but for you, I’ll take 14 percent off.” It’s like, eh, 14 percent? I mean, I’ll take it, but it’s just not a whole lot. And from the most expensive thing.
Just think of the most expensive thing you’ve ever bought, the most expensive house or diamond or anything and then you take 15 percent off, and does it really mean anything to you? So, that’s where stocks are right now. Moving forward, whenever we’ve been like this in the past, the reasonable expectation, if history rhymes, over the next usually about two years or less, we had the episode from 1973 to ’74 just within my lifetime, and we had there was a top from like ’80 to ’82, and of course 2000 to 2002, from October 2007 to March 2009.
You get the picture. Generally speaking, very roughly speaking, once you get one of these massive tops, within two years you see a big, fat, hairy bottom that from these levels, normal would be about -50, 60 percent. So, from 2,900, somewhere just above 1,000, 1,100 or so on the S&P 500 and we’re 2,500. So, there’s a lot of downside left if history rhymes.
Thing is of course, history doesn’t have to rhyme, but that’s the reasonable expectation, okay? Not great news for stocks in 2019, but again, if I find a good long, if I find a really attractive situation, I’m going to recommend buying it because that’s what you have to do. I’m a value investor, so I’m always gonna look for stuff that tends to be cheap no matter what the overall market is doing. That is where we are, and that is what I think you can expect.
Just looking elsewhere in the news today, you can see some of the kind of – you can see some of the degradation that’s already begun. General Electric, a favorite topic. You might even call it a whipping boy of us at Stansberry, lost $23 billion last quarter. Fourth biggest decline in the S&P in the Standard & Poor’s 500 index in 2018. Only three stocks did worse.
The thing that I’ve been watching, you may recall from previous podcasts, are the bonds, and the GE bonds when I first started looking at this I thought, the bond market isn’t saying that this thing is gonna really blow up too badly, and now it is, because back then, if you just go on Bloomberg and you grab – there’s like 450 or so bonds listed on Bloomberg, almost 200 of them are trading below 90 now, and back then it was very few. There was like one below 70 and now there’s like a dozen or so. There were very few below 70, and now there’s like a few dozen.
It’s definitely deteriorated, and when you get into the 60s and the 70s, par is 100. That’s a healthy bond price, par or very near it, 98, 99, even 95. Anywhere in the 90s is a heck of a lot more healthy than the 60s and 70s and even 80s that we see now in almost 200 GE related bond issues, and those are asking prices on Bloomberg. So, it’s deteriorating. It’s ugly.
Also ugly is of course Sears. Sears has been ugly for a long time. Look, it was like six years ago when I said in Extreme Value you don’t wanna buy this thing because there was a big flaw in that company. Eddie Lampert, the CEO, was this well-known successful value investor, and he thought he was gonna run Sears similar to the way Warren Buffett ran Berkshire Hathaway, but Warren Buffett had insurance companies at the core of Berkshire Hathaway, and Sears is a retailer.
You just can’t do the same thing. You can’t put a retailer like that at the core of an investment operation. Of course, somebody will say, “Hey, what about this company or that company?” And maybe there’s an exception, but I’m just saying it was a real bad idea, and most of the time when somebody tries to do that, it’s not gonna work out that well.
Of course, Sears declared bankruptcy and they weren’t the only one in 2018. Mattress firm was owned by a South African company called Steinhoff, which I used as an example of their bonds crashing. They had a big scandal. David’s Bridal, Brookstone, there were plenty of bankruptcies in 2018.
And of course, sort of on the upside we saw breakouts in the price of – there was some good news. There’s some good news, folks, okay? I’ve got some good news, and the good news is gold especially is the one I’ve kind of watched closer than silver. Silver has broken into the mid – it was down around 14 I think and has broken into the mid-15s. Gold was trying to punch up through $1,200.00 an ounce and is now closer to $1,300.00. Last time I looked, it was in the $1,280.00’s, like $1,284.00, $1,286.00, something like that within the last 24 hours.
So, that’s real good. I fully expect that to continue happening and I can’t tell you on the podcast, but I think in Extreme Value we have the number one best business to own if you wanna be long gold because they take a little piece off the top of a huge cache of millions of ounces of gold that is sitting above the ground, so they don’t have to dig it out of the ground. It’s already above.
So, that’s really where we stand I think. I think I just kind of summed it up, right? The stock market is still unattractive. We’ve seen this deterioration in a lot of other places, but I just kind of picked on GE and Sears because they’re the big names that really crashed hard and had a really bad 2018. The auto industry had a not-so-great 2018. Ford and GM are stopping production on a whole slew of vehicles. So, it’s been a rough 2018.
Unfortunately, if history rhymes, I think we’re gonna have a rough 2019 as well. But you know, in the end, it’s really healthy because the market can’t be crazy irrational overvalued forever. That’s unhealthy because you can’t go into the market and just buy something just ‘cause you think it’s gonna go up. There has to be rational investing happening. There has to be people doing fundamental analysis and investing in companies that they can hold for a long time.
Can you imagine what the stock market would look like if it was a constant casino all the time? It would be like 2018 up through September all the time, extraordinarily overvalued companies, crazy stuff that is just garbage businesses, Bitcoin and pot stocks and god knows what else valued like it’s gonna go to the moon. That would be truly insane. There would be no investing possible in such an environment.
So, that’s where we are, and it’s time to get on to our guest, and man, I love this guy. All right, everybody, it’s time for our guest. I’m very excited about this today. Our guest is Mark Spiegel. Mark Spiegel is the managing member and portfolio manager of Stanfill Capital Partners and is a New York-based equity investor. Now, prior to founding Stanfill in 2011, he spent six years as an investment banker financing public companies.
Prior to becoming an investment banker, Mark spent a year working for a microcap NASDAQ tech company and he began his career with 17 years in the commercial real estate industry where he experienced first hand the opportunities and challenges faced by a wide array of client companies. Mark tends to believe that all these experiences – banking public companies, working for a public company, securing real estate for a wide variety of companies – combined to provide the kind of real world experience that’s extremely useful for an investor, and I would tend to agree quite a bit. Welcome, Mark.
Mark Spiegel: Thank you. Great to be here. I really appreciate the opportunity to talk to you.
Dan Ferris: Yeah. You and I met very briefly after – maybe you don’t remember, there was a lot of people around – after Whitney Tilson’s short selling conference, not the last one, I think the one before that.
Mark Spiegel: Yep.
Dan Ferris: I was very excited to meet you and to hear what you had to say. Just for our listeners’ benefit, if you wanna know about Tesla, this is the guy to talk to, and that of course is mostly what we’re gonna talk about today.
Mark Spiegel: Until you get sick of hearing about it, I’ll talk to you about Tesla.
Dan Ferris: That’s right. We tend to talk quite a bit about Tesla at Stansberry, and I think we’re pretty much on the same side as you are. Of course, Mark is -
Mark Spiegel: Tesla is maybe the most interesting stock that I’ve ever seen, and I hear this from guys you’ve heard of who have been in this business for 40 years who are well known guys, because no one has ever seen a company that gets this much public scrutiny with this much market cap getting away with pulling off so much nonsense. This is the stuff you see on pink sheet Canadian mining companies, or nanocap biotech press releases, and they’ve gotten away with it so far. Of course, we all know how this ends because it always ends the same way, but that’s why it’s such a fascinating stock for so many people, especially the shorts.
Dan Ferris: Yeah, and there are some folks on the long side who have kind of spoken out and are not idiots or anything, so it’s interesting -
Mark Spiegel: Well, that’s your opinion.
Dan Ferris: Well, maybe I don’t know them as well as you do. So, you actually alluded to someplace where I kind of wanted to start, which is how the heck, maybe start with the worst of what you think they’re getting away with, and then we’ll talk about how the heck they’re getting away with it.
Mark Spiegel: Okay. So, in fairness, I spend a lot of time or people short Tesla spend a lot of time talking about Musk’s nonsense. I mean, the blatant 420 security fraud that he got away with a wrist slap for, and then he shoved the middle finger in the face of the SCC by appointing an “independent chairperson” that he literally said in an interview he controls and she does what he wants, and then his car racing, plane owning, massive CO2 emitting buddy Larry Ellison is the other new independent board guy, right?
Dan Ferris: Right.
Mark Spiegel: And acknowledges to be a good pal. But really, that’s sort of a distraction. It is a distraction. It’s an amusing sideshow. I mean, the fact is, the auto industry is a horribly competitive, capital intensive business. Every major OEM is coming out with terrific electric cars starting now and really accelerating over the next 24 months. They’re actually a generation more advanced than Tesla’s cars. They’re far better built than Tesla’s cars.
It’s the competition that’s gonna put this company out of business, and that’s been my thesis since I first got involved with it, really, in size, was over four years ago at this point, and that’s what’s gonna do it in, and the Musk stuff just is gonna sort of accelerate. Well, it’s a weird situation. On the one hand, normally Musk stuff would accelerate the demise, right? When you commit security fraud and do the stuff he does. But on the other hand, the fact that he’s there, he’s got this core group of true believers and that’s what sort of supported the share price.
That’s why it didn’t collapse a long time ago. But with any charlatan out there, eventually the core group just kinda drifts away. There’s an old movie, I don’t know how old you are, it’s before my time, but I saw it on TV. It’s called A Face in the Crowd with Andy Griffith when he’s this preacher and he’s got this massive following, and then they find out that he’s full of crap, and they just sort of gradually drift away when he’s giving a talk and then it’s over. That’s what’s gonna happen here. I mean, today the stock is getting slammed. It’s maybe getting rerated as a car company, not as some hyper growth fantasy stock.
Dan Ferris: And Tesla just announced this morning that they delivered a total of 90,700 vehicles in the final three months of 2018, which the analysts were expecting 92,000, so 1,300 short, and they’re also lowering prices $2,000.00 on the model S, X, and 3 to offset the cut in the federal tax credit for electric vehicles.
Mark Spiegel: Yeah, so the important takeaway there is traditionally they’ve ended a quarter saying, “Well, we’ve got 8,000 more cars in transit that have been sold.” Well, now they only have 1,000 of them. On the back of the envelope it looks as if they’ve got 7,000 or so unsold model 3’s sitting in inventory, and of course the $2,000.00 price cut is meaningful in two ways.
First, it’s meaningful, as you said it’s offsetting part of the loss of the tax credit, which shows that there’s a demand issue and they know it, but the other part is that’s a huge impact on margin. $2,000.00 a car is a big deal for a company that barely scraped out what I call a phony profit in Q3 and will scrape out another probably smaller phony profit for Q4, and then they’re gonna revert to massive losses in 2019, I have zero doubt about that.
Dan Ferris: What’s phony about the profit, Mark?
Mark Spiegel: Well, multiple things. For one thing, by the way, when I say phony I don’t mean they literally made up the number, but they grossly overspent on SG&A and R&D which are the things they need to do to keep the car company going. A massive amount of it were from Zev credits from California, price of which is steadily going down as more people have electric cars, and even more than that what are called GHG credits, which is a federal credit you can sell, but you can only sell that on cars sold in the U.S.
And now the model 3 sales are gonna shift over to Europe until they go through that backlog, and Asia, so that number is going way down. They just underspent in a lot of ways that are not a sustainable way even to maintain the company’s current size much less to grow the company. Oh, and then not part of phoniness, but model S and X sales, which are by far their highest margin cars, those are gonna absolutely collapse this year as other luxury competitors come in.
They’re already getting slammed in Europe by the Jaguar iPace. The Audi E-Tron debuts in Europe actually literally this week. Mercedes has its first all-electric SUV mid-year, and then of course the Porsche Takon at the end of the year. So, that’s gonna deduct another, I don’t know, couple hundred million dollars a quarter from profitability.
Oh, and then so this actually is phony, and I consider it fraudulent. They grossly under-reserved the warranties on these cars. They’re spending far more on warranty repair work for these cars than they reserve, and the way that works is you set a reserve which actually comes out of the gross margin of the car. If you reserve about $2,200.00 a car, which is roughly what they did, and over the lifetime of a car it’s more as if they’re spending $4,500.00, well that’s another $2,000.00 or so per car in false profit that they reported in Q3.
So, you add it all up, these guys are gonna lose hundreds of millions per quarter in this coming year, the year we just began, 2019, and maybe over a billion because of all the lawsuit liability they have from that 420 tweet. There’s over 400 lawsuits against this company, all kinds of stuff, lemon law, labor stuff, unfair practices. There’s a guy who’s compiled a site of them. It’s unbelievable.
I mean, this could be the most sued company of any size anywhere in the world. It’s just amazing. Other than maybe Johnson & Johnson or whatever has all these baby powder lawsuits. Last quarter is the best quarter you’ll ever see from these guys in terms of profitability.
Dan Ferris: Right. And to be fair, the 90,700 vehicles that were delivered, that’s a record, right? That’s the most they ever delivered.
Mark Spiegel: Correct, it is a record. We can’t even figure out how they got to that number when we measure the amount of activity and trying to monitor production at the factory. So, if that’s a real number it’s not a particularly good number. It’s not a hyper growth number. Maybe one day we’ll find out how accurate those numbers actually were.
Dan Ferris: You have got me on the edge of my seat. Do you have spies at the factory? How do you do this?
Mark Spiegel: Well, anecdotally, and you can find this stuff on Twitter, there’s a great – none of us know each other. Some of us have met each other subsequently who came to the same conclusion about this company all around the country, actually all around the world, and we monitor lots all around the place. Guys went out over this past weekend and took photographs and said, oh yeah, there’s 80 model 3’s in inventory here, there’s 60 here, they’re trying to hide 100 of them on this lot around the corner they’re hoping nobody will see.
So, we knew about all this inventory. It wasn’t a secret. It was all over Twitter. The other thing noticed was a lot less activity at their delivery centers in December than there was in that big month they had in September when they had all the volunteers and the army of people. And so, it’s strange credibility that they delivered that many more cars this quarter than they did last quarter, unless there was some kind of a fleet sale, which is possible. They supposedly did a fleet sale to Enterprise. But, you know, we’ll see.
Listen, it doesn’t really matter. If the numbers are inaccurate, that’s just a bonus if you’re short the stock. The bottom line is, it’s an egregiously overvalued car company. I mean, this is a company now that has, I don’t know about today, but as of last week had the market cap larger than GM, larger than Ford. GM sells I think it’s 9 million cars a year or something like that and Tesla is on a run rate of 350,000 cars a year.
Tesla has a – again, I haven’t checked this morning, but had a larger market cap than Daimler and BMW, and those guys just mint money, right? By the way, they’re both coming out with all kinds of electric cars and they know how to build them. So, this is gonna be a stock for the history books is what it’s gonna be.
Dan Ferris: Yeah, so today, just to kind of update to the minute here, I’ve got $47 billion market cap for GM versus $53 billion for Tesla. Do you think this is a zero, Mark?
Mark Spiegel: Correct. So, it’s actually even more expensive ‘cause you will see a higher enterprise value for instance for the larger OEMs, but that’s almost all due to their financing arms, their leasing arms. If you exclude that, those guys have net cash and Tesla has this massive amount of net debt, so it’s ridiculous. By the way, you mentioned at the beginning of the conversation, “Well, they’re smart people.”
If you see any of these people interviewed, they don’t have any specifics. They couldn’t tell you really anything about this company. All they say is, “Well, Elon is great. Elon will figure it out.” Larry Ellison who should know better after getting taken in Theranos, Larry Ellison says, “Who are you to” – and he literally said this, I’m paraphrasing – “Who are you to criticize Elon Musk? He lands rockets on barges.” Now, putting aside that that has nothing to do with the car business, people have known how to land rockets on barges for 40 years, right?
If that were a profitable business, don’t you think Lockheed Martin or Boeing or Grummond would be landing rockets on barges? It turns out it’s not a profitable business. It’s cheaper to actually use disposable rockets, right? And of course, all these years Musk and Space X were claiming Space X was profitable, then it turns out it’s not profitable. The Wall Street Journal ran the story. Musk is a pathological liar is basically what it is, and I have no hesitation in saying that because I can cite instance after instance of his pathological lying, and why people who should know better invest in this guy is just beyond me.
They must be thinking, “Well, Elon may be a liar, but he’s our liar. He’s lying on our behalf.” Well, guess what, guys? If the guy is gonna lie on your behalf he’s also gonna lie against your behalf. The only behalf that a pathological liar lies on is his own behalf, right? So, it’s an amazing stock. It’s incredible to me that guys running billions of dollars would be long this thing, you know?
Dan Ferris: Yeah, so, getting back to that question I asked before, how are they getting away with it? It sounds like it’s news flow and the sort of constituency of shall we call them ultra-naïve long longs, owning and buying the stock is maybe the answer. Is that right?
Mark Spiegel: Yeah, well, look, you have small people who really are just dummies like this woman Kathy Wood from Ark who has her $4,000.00 price target and says, “Tesla is leading everybody on autonomous driving” which is completely absurd. If you speak to any expert in the industry, they’ll tell you Tesla is a joke.
First of all, you can’t do it without lidar, and second, their cars cross lines and crash all the time. Tesla is just more reckless in putting probably the worst major OEM product actually on the road. Other guys are smart enough not to put it on the road. They’re not reckless the way Musk is.
But then you’ve got guys who are running real money, like this guy at Bailey Gifford or T. Rowe Price and you see them interviewed. They don’t have any specifics at all, and I guess one thing I think will get them to finally throw in the towel, well, a few things. One is news such as the news _____ today which is guess what, guys? This isn’t a hyper growth story anymore.
But the other thing is, and look, I’ve never met this Bailey Gifford guy so I don’t know if he belongs to a country club, but I’m speaking metaphorically here. The guy pulls up to his country club one Sunday morning in his Tesla if he has one, and he sees everyone else is driving much cooler i-Paces and E-Trons and Takons, and he says, “Holy shit, these guys at Tesla don’t have any special sauce. What I own is Palm Pilot, and the iPhone and the Blackberry just came out, or I own Blackberry and the iPhone just came out.”
Dan Ferris: Right.
Mark Spiegel: So, they’ll wake up. To me, this has been obvious. That’s why I’ve been short this for four years because all these great EVs coming out now, the OEMs have been talking about them for the last three or four years because it’s a five-year cycle to develop a new car. So, I’ve known about this and I’ve thought wrongly of course in hindsight, I’ve thought, oh, well this is obvious. In four or five years, Tesla’s priced for perfection for 10 or 15 years from now, but in four or five years they’re gonna get swamped with better cars.
Everybody will see this and the stock will stop going up and it’ll work its way down and that’ll be the end of it. Well, apparently nobody cared, right? But now those cars are staring them right in the face and they’re like, “Oh, what do I own here when Porsche is making a better EV than Tesla and it’s only $3,000.00 more?” That’s what’s gonna go on in 2019. 2019 is the demise of this nonsensical bubble stock.
Dan Ferris: You know, I wouldn’t disagree with that. I think 2019 is gonna be the demise of a lot of stocks. So, you’ve been short the thing for four years, and four years ago it had a “1” on the front of it, and now it’s over 300.
Mark Spiegel: Right. So, I first got short Tesla in a tiny position, really a meaningless position in the high 90s in 2013. And then I got short Tesla really in size when it broke through 250 whenever that was. I think it first broke through 250 – I’d have to pull up a chart, I don’t have it in front of me – maybe in 2014 at some point.
That’s when I got short in size and I’ve maintained a sizable position since then. Now, what’s cost me a lot of money, I mean if you look as we’re talking the stock is a tad over $300.00 and that’s actually not that much more than $250.00 over four years, right? It way underperformed the NASDAQ or whatever.
But what killed me on the stock and what cost me a lot of money is the whip sawing, and this is why I don’t recommend that anybody ever short a stock. Let me just say that up front. I know you probably have a disclaimer, “This is not advice”, blah, blah, blah. My advice is unless you’re insane the way most short sellers are, just don’t short stocks. Just say, you know what? That stock is a joke. I’m just going to avoid that stock.
Chances are you’ll be a lot happier and a lot better off, but what happens when you short a stock, let’s say you wanna make this some percentage of AUM. Let’s say you wanna make a stock 10 percent of your portfolio and you short it at 250. Well, if it goes to $300.00 you gotta cover some of that stock, right? And then if it goes back to $250.00, then you put it back on to get it back up to 10 percent, and then it goes to $350.00 and then you have to cover it all the way up. And then it comes back down to $290.00, and then you put it back up.
It’s the whip sawing that will kill you in a short position until it finally collapses on you, and that rip sawing has cost me a lot of money, but if you’re gonna be short in meaningful size at the beginning, there’s really no way around that, unless you’re willing to be short meaningful size and then find yourself short twice meaningful size ‘cause you don’t cover any. If I didn’t cover any on this thing, it would be a relatively minor loss for my portfolio. As it turned out, it cost us a lot of money. I mean, I think we’ll make it all back on the way down, but it’s certainly been frustrating.
Dan Ferris: So, Mark, when you’re covering, is a broker telling you, you have to, or is it just basic portfolio management?
Mark Spiegel: Oh, no, this is me as a portfolio manager. We’ve never had any kind of a margin call. We don’t use margin in the fund. I guess we use margin because we’ve got a bunch of shorts that tend to offset the longs, but it’s never been a liquidity issue, it’s been a, hey, this is – I’ve averaged this. First of all, just to back up, I run a very concentrated portfolio, okay? So, my average number of positions is ten, and I’ve had as few as three and as many as 15. My typical position size might be 10 percent. I’ve averaged probably around a 20 percent position size for Tesla.
That said, if the thing doubles or goes up 2.5x, I don’t wanna wind up with a 60 percent position size. So, that kind of whip sawing is what has killed us. And you could say, well, you should just buy puts, which is true, but the premium on puts has been super expensive. In fact, one of the best things we did, best so far anyway, we’ve sold hugely out of the money Tesla calls and collected amazingly fat premiums on them.
Like, I’ve sold some calls that expire in January 2021, so two years from now, with strikes in the high 600’s, and just collected massive premiums on them. But again, I’m not recommending anybody do that either because if the stock goes to $1,000.00 you can lose a lot of money that way. I think it’s absurd that it could happen, but I can’t tell you that it won’t. So, along with my advice to never short stock, I advise that you never sell naked calls either.
Dan Ferris: Yeah, so the call selling sounds like it helps you keep your outright short of the shares on.
Mark Spiegel: Well, and that’s lately. I hadn’t done that for a while, and then actually one of my LPs who’s a mathematically brilliant options trader who’s in my fund because he would like some sort of old-fashioned fundamental stock-picking exposure. He called me up one day and he said, “You know what? I’m looking at these out of the money calls. In my entire life on the street” – and this guy is a brilliant guy who, I’ve never seen this kind of option premium, he goes, “you might want to think of selling some of those; I have.” And he was right, and I did. I did sell some of them.
But again, this is not advice. Do as I say, do not do as I do, please, if you’re out there.
Dan Ferris: Yeah. Don’t try this at home, right? For professionals only.
Mark Spiegel: Don’t try this at home. I try this in my home office, but I recommend you don’t.
Dan Ferris: I think that’s great advice. I recommend the same thing to readers all the time. So, Mark, we’ve got about five or ten minutes here. Let’s not talk about – although there is one last question I do have about Tesla before I move on here. Do you think that Elon Musk smokes too much pot or not enough?
Mark Spiegel: Well, I don’t think it’s just pot. I mean, he’s admitted to doing LSD and there are a lot of rumors and people who know people who say he does many other things, but I’m not saying that that’s true. I mean, I am the first person to say I have no personal knowledge of that, but you know what? If he is, NASA may get to the bottom of it because they did publicly say that they’re doing a top-to-bottom analysis of the culture at Space X.
You know, it’s one thing to, which Musk does, to recklessly put 5,000-pound unguided missiles out on public roads with this nonsense he calls auto pilot. By the way, I don’t know if you saw this on 60 Minutes. On the one hand, Tesla says, “Oh, the driver must be attentive at all times, and if there’s ever an auto pilot crash, it’s not our fault. The driver effed up.” And then he goes on 60 Minutes a few weeks ago and says, “Hey look, no hands” on autopilot on national TV. I mean, the guy is just so full of crap.
But anyway, it’s one thing to put these cars on the road and oh, it’s a crash, but it’s another thing to blow up astronauts. So, NASA is very, very serious I think about a no-drug culture, and supposedly according to Wall Street Journal they’re doing a top-to-bottom investigation of the culture at Space X, and I wouldn’t be surprised to see Space X lose a lot of government contracts going forward.
Dan Ferris: Yeah, that makes sense to me, too, and I should also say for the benefit of anyone who may ever listen to this, I have no knowledge of Elon Musk smoking anything, and I am simply referring to his crazy behavior. If you’ve heard him on conference calls for example, there are times when he just sounds like he’s high or drunk or something.
Mark Spiegel: Well, you certainly have knowledge of him smoking and drinking. We don’t know how much. I mean, he was on that podcast smoking pot, and then he put out a video of himself drinking hard booze on the roof of the Gigafactory once, and he’s admitted to taking LSD. So, what we don’t know is if there are any other powders he’s ingesting, although there are rumors of that. We’d have to drug test him or speak to a dealer to get to the bottom of those rumors.
Of course, I couldn’t care less what a guy – I mean, look, I’m a libertarian. I don’t care what people do in their personal lives. I think drugs should be legal, frankly, and if you’re gonna do ‘em that’s your problem. But you can’t design space capsules and so-called auto pilot cars on public highways under that influence. It could be very dangerous.
Dan Ferris: I agree with you. On the subject of drugs, I am a full-on libertarian as well, and I’m just talking about the craziness and the fact frankly, too, that this guy is one of the most – the longs think he’s a genius, but he strikes me as one of the most overcommitted people. He’s got all these big projects going at once and he think he can do anything, and I think that’s part of his problem. He’s just kind of a megalomaniac.
Mark Spiegel: Well, yeah, you know what’s interesting on that genius thing? A guy wrote an excellent blog post about this the other day and it’s so true. People who don’t know anything about a specific topic or industry here must pontificate on it and think he’s a genius, but anybody who’s actually an expert in that particular field will tell you, and it doesn’t matter what the field is, that he has no idea what the eff he’s talking about. So, he could get out there and talk about AI and, “Oh, he’s so impressive, he knows all about AI.” You talk to the experts in AI, they’re like, “This guy has no idea what he’s talking about.”
He’ll talk about his neural net to the brain connection. He’ll talk about tunnel boring. Talk to contracting companies that actually have been doing tunnel boring for years, right? So, he’s just a charlatan and he’s got this core group of people who fall for that crap. But you know what? As I said at the beginning of this conversation, they’ll drift away over time and one day he’ll find himself standing on a soapbox preaching to nobody, and then one day after that he’s gonna probably find a pair of handcuffs slapped on him and we won’t hear from him for a certain number of years, you know?
Dan Ferris: Right. So, the drifting away over time makes sense to me, but also, tell me if this doesn’t make sense to you, the kind of action you would see in this stock. It would be typical for this thing to just lose major huge double-digit percentages in a single day or even a single minute once the story kind of starts breaking down.
Mark Spiegel: That’s 100 percent true, and that’s another reason, a lot of people have said to me, “Oh, well, why don’t you just shoot it in the back” is the expression. That’s an expression, I picked that up from Bill Flackenstein. I think I heard him say it. He wasn’t talking specifically about Tesla I don’t think, but he was like, “Don’t show it strength. Shoot it in the back.” But them problem is, if you’re not in it, you may not win it.
I mean, this thing could drop down $150.00 one morning, and on the other side of the coin, this stock was, I don’t know, it was in the high $200.00’s in 2016, maybe higher, I’d have to pull up the chart, and then it plunged to like the $140.00’s. And then you say, well, okay, is it safe to short now? I’d be shooting it in the back. Well, guess what? It just rocketed back up from the $140.00’s to the $370.00’s over the next year and a half or whatever. So, you just kinda have to have your position on and make it a position that you can sleep at night.
By the way, to backtrack, I’m not giving this advice to anybody, nobody should be short this or anything, but my attitude has been I have to have a position on it. It has to be big enough to be meaningful but not so big that it’s gonna put me out of business, and that’s it. Because what you just said is 100 percent right. The DOJ is investigating Tesla, right? This is known. This is talked about. What happens if the FBI shows up and slaps a pair of cuffs on this guy one morning? This thing will drop down $200.00 like you could snap your fingers, you know?
Dan Ferris: Right. Yeah, I get it. You kinda have to have the cohones to do a position like this and the experience and the willingness to endure some pain, but if you can, you wake up one day and you’re like, wow, what just happened? I just made a bunch of money.
Mark Spiegel: I mean, look, there’s no question this has been painful, but the reason I’ve been able to endure the pain is I know this company so well, I’ve studied it so closely, I’ve studied the competitive environment, and I just absolutely know I’m gonna be right here eventually. And look, that doesn’t mean I’m gonna be right. I could be wrong, but I have an incredibly high level of conviction, but it’s not blind conviction. I continually stay on top of what’s going on out there in the EV market and with Tesla and with Musk.
If you have a high level of conviction, I mean look, I’ve made all my money being long deep value microcap stocks. Tesla is almost an anomaly in a way. I mean, I’ll buy those things. The only time I can buy them in size is when a friend of mine calls it drinking from a firehose. They’re pretty illiquid, and the only time you can buy them in size, you’re sitting there, whoa, I’m the only buyer. Talk about companies sometimes with a $30.00 market cap.
What does everyone know that I don’t know? And you’ve just got to have conviction and you’ve got to say, look, I’ve looked at this thing inside and out and it’s cheap and I don’t know why they’re selling but I’m gonna buy it, and if it gets cheaper and nothing changes, I’m gonna buy more. This is just a general observation. If you don’t have an incredible amount of conviction in your position then you’re gonna get blown out of it because you will never, ever short something at the top, and you will never, ever buy something at the exact bottom, right?
If you set yourself a stop at 8 percent or 10 percent below your cost if it’s a long position, I’ve had plenty of companies go down 15 and 18 percent, and if you boil yourself out like that, you’re not gonna own. So, I tell people it’s really hard to just trade on hunches or even on charts or whatever. If you have a lot of conviction and you’re right in your conviction, I think that’s the way to make money in the market long-term as a fundamental investor as opposed to a computer.
Dan Ferris: Right. So, you’re talking about long-term many years of holding, and the guy who would be stopping out a lot if he knows what he’s doing is like a short-term trader, but I hear you.
Mark Spiegel: Yeah. My typical hold position on a long is anywhere from six months to four years. I know where I’m gonna sell that stock the day I buy it, unless something changes with the company. So, I _____ company and say this is worth $5.00 a share, a lot of times the day I buy it at $2.00 I put in a _____ to cancel sell order for at least some of it at $5.00. I’ll put in for a small part at least just to alert me, “Hey, it hit $5.00” so I’ll get the update, “Oh, you just sold some stock at $5.00.” So, if you don’t know what something is worth the day you buy it then how could you possibly know if you’re paying a good price for it?
Look, there are exceptions to every rule. I’ve never owned Amazon, and it’s impossible to come up with a fundamental justification for Amazon, but it’s certainly been a tremendous stock. I suppose there are some companies that you could say, look, I don’t know what the hell this thing is worth, but I just know that one day it’s gonna be worth a hell of a lot more than I’m paying for it.
Okay, fine. That’s not my style. I have to say this is worth $10.00 a share, so I’m buying it at $5.00 and that’s what I’m doing. The day I buy it is the day I already have a sell price in mind.
Dan Ferris: That sounds good to me, man. Some of the stuff you said sounds like it’s straight out of The Intelligent Investor, even like chapter 20 of The Intelligent Investor if I can be even that specific, and I totally agree. Especially the last thing in chapter 20 is “have the courage of your convictions”, one of the last things.
Mark Spiegel: Yeah, it’s funny, I never read Graham. I certainly read enough about Buffett and read some of his letters, so maybe it’s been imparted that way, but I’m not reinventing the wheel here, you know? It is what it is, but a lot of times people who don’t do this not even just professionally, but there are plenty of great serious amateurs out there, man. I was a serious amateur before I ran money and they all get this.
But the casual stock market, a friend will casually say, “Hey, I just bought some XYZ today. I paid $20.00. I think it’s a great price.” I’m like, “Oh, okay, really? So, what do you think it’s worth?” And they just give me this dumb look. I’m like, “Listen, would you go out and buy a new Mercedes without knowing in advance what it’s worth?” I mean, do you go into the car dealer and just say, “Hey, that’s a pretty cool car. I’ll pay whatever you want for it.” But people do this with stocks. You have to know what it’s worth so that you know if you’re paying a good price for it or not, you know?
Dan Ferris: Right, and we know how people behave in the stock market. It’s crazy. They’re despondent at the bottom when everything is cheap and attractive, and they’re elated at the top when everything is priced for horrible returns and even losses, and I think -
Mark Spiegel: So, that ties exactly into the necessity of doing enough work on the company to figure out what it’s worth, because that’s your buying chance, right? When stocks are crashing, look, I don’t buy relative value. I don’t say, oh, well, Netflix is 150 times earnings, so I’m gonna buy this other streaming company for 110 times earnings because it’s a bargain, right? When it collapses, they all collapse together.
I only buy absolute value and, look, the downside about that is it’s probably been 18 months or something like that before I added a new name to my book, to my portfolio, because everything had gotten so expensive. It turns out in sort of the crash or the big correction we had in December, I was able to add like four names to the book because I just sit and wait and wait and wait and wait and oh, this is cheap enough.
Look, it’s not easy pulling the trigger if the S&P is down 75 points, and you’re sitting there and you’re the only bid on some microcap company which I was. A, that’s your only chance to buy them, and B, that’s where conviction comes in. if you did the work and you figured out what it’s worth, at least you can say, all right, maybe when I’m done buying it’ll drop another 18 percent, but at least I know it’ll pass back up through this level and go a lot higher eventually ‘cause I did the work and that’s what it’s worth.
I saw a great quote from Stan Druckenmiller recently. Maybe it was an interview he did or something, where he said he’s never, ever put on a large position without feeling sick to his stomach while doing it, you know? Because he’s buying when the blood is running in the streets, or he’s shorting when the streets are pristine and the blood isn’t yet running, right?
If you’re a contrarian investor, which is sort of a cliché, I mean, what contrarian investor really means is, and this goes back to I guess Ben Graham, you’re buying a stock – he would say a security – that’s mispriced, or you’re shorting one that’s mispriced. If Tesla is selling for $350.00 and you say it’s worth $5.00 then that’s your opportunity, right? Or if some stock is selling for $5.00 and you figured out it’s worth $20.00, you’re definitely a contrarian because you think the market is mispricing it.
I shouldn’t say this, I guess there are guys who make a lot more money than I ever made who are trend followers or whatever. Okay, fine, but if you’re a fundamental investor, by definition you have to be a contrarian, otherwise he can just buy the whole market and it’ll go up at some pace over time when it’s not correcting, that’s okay too. Individual stocks by definition you have to be a contrarian.
Dan Ferris: Mark, we’re out of time. We’ve actually gone a little over, and I’m happy to have done it, and I think that’s an excellent place to leave off. I hope everybody listened very closely, and thanks so much for being here. It’s been a very exciting talk. Thank you so much, Mark.
Mark Spiegel: Thank you for having me on. It was a lot of fun and the last thing I’ll say is if you’re out there, don’t short stocks. Do as I say, not as I do. Thank you.
Dan Ferris: All right. Bye-bye, Mark.
Mark Spiegel: Bye-bye. Take care.
Dan Ferris: Wow, that was really exciting as I knew it would be. Mark is just full of fantastic ideas and one of the most well-informed, one of the most deeply informed investors that I’ve ever come across, which I guess you have to be if you’re running a concentrated portfolio of 3 to 15 names. That was great.
So, hey, this concludes. Since we don’t have a mailbag, you guys aren’t writing in, I guess you’re taking off for the holidays. That’s cool. If you wanna email us with a question or a comment, just send it to [email protected] and we read them all and we try to respond to as many as possible, even the ones that hurt a little bit, okay? So, write in and let us know what you’re thinking.
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