Speaking of green, let's consider what's happening at tesla. Their first quarter was a bit off. They had a Shanghai shutdown. It was the winter lull. The stock went went up. 19q4 production numbers were 105k units with Fremont only. Now they get to 82k units after being shut down for just over half the quarter and the price ran up 20%. When did this start,that a 30% reduction in output while increasing debt load and salaries is good for a 20+% gain? There were no technical breakthroughs. The only thing of significance that happened is the model Y started shipping in limited quantities. Wow.
If any value investors are interested: The WBI is currently 148.1. BEA numbers show the GDP down 5% on the year. https://www.bea.gov/news/2020/gross...d-estimate-corporate-profits-1st-quarter-2020 The June unemployment rate shows 13.3, down from 14.7% in April. Does anyone trust these government numbers? How can they possibly be remotely accurate?
The runaway Tesla valuation has pushed it up into relevancy in our portfolio. I have no plan to sell it. It's sufficiently mature as to be trustworthy with a chunk of our nest egg. Two years ago, I'd be selling down if it was at the current ratio of our holdings. The WBI is now at 150. There are dozens of major corporations on the cusp of bankruptcy. Unemployment is still at wild levels, regardless of which numbers you believe. Suffice to say, I won't be buying S&P 500 any time soon. I don't know how long we will have to wait with re-investment halted but we're prepared to wait a long time.
Since early last year, we have made several major trades. We picked up a ton of Tesla when it was so low, last year. Later in the year, we sold two power companies, sold an energy company, and sold two REITs when the market was on fire. In March, we on-boarded a ton more stock with about 2/3 of our cash. That's almost like day trading, to me. That is a decade of activity compressed into about a year. I follow market pricing and our portfolio weekly; sometimes daily. I'm aware Tesla is in the stratosphere; don't care. I'm aware our two financials are rocking; don't care. Our REITs are doing pretty well, about where they were at their peak but not higher and still distributing beautifully; don't care. We are at record highs. I believe the market is about to tank on Q2 earning reports. My response is to do the most difficult thing possible: nothing. I'm going down with the ship. We still have considerable cash reserves with which to live, buy companies at a discount, or both. I feel good about that. Our cash is down to 18%. I haven't spent a dime but the portfolio has gone up a lot so the ratio is reduced. WXYZ has a very active thread in which he post every day. I appreciate his effort and enjoy reading it. For my part, I don't have nearly that much material. I very rarely make any sort of move. I expect to be active again, later this year, but then expect to do nothing of significance for months or years. Being a long term, value, investor is excruciatingly boring. That makes it nearly impossible for the vast majority of people. If this blog goes silent for weeks on end, rest assured, I'm busy doing absolutely no significant acquisition or disposal of companies. I might occasionally expand one position a bit or buy some corporate bonds with loose cash, when these mechanisms are attractively priced. The rest of the time, I will let the cash build. How high I let it build will depend on the WBI and the availability of discounts on stuff I like. If the WBI hits 165% again, I will let our cash build to 50% (would take years to reach or require the sale of a large asset like real estate). It would take an amazing deal to get me to buy in those conditions. Good luck with your trading.
Learning to be happy with less is learning to be happy. We could have retired long ago. Not because we had massive sums of money, we certainly did not, but because we are efficient with our money and know how to be happy on very little of it. As time has gone on, we are in a better position to waste money but I see no value in it. I'd rather donate it upon our passing than waste it while we're alive (we have no children).
Here is a quick look at some detail on how I time the market. This might be of interest to value investors. Please keep in mind, this is a micro-optimization and not our primary strategy. We could ignore the WBI and still be successful value investors. WBI I believe in the WBI but I believe in it in a very specific way. It is simply two very large numbers compared. There is no direct link between the total market value and the GDP. The Wilshire 5000 essentially represents the market value of all outstanding shares. How much should publicly traded corporations be worth, compared to the GDP? Answer: I don't know. What I do know is that market capitalization is, at times, highly volitile. Surely, the real value of publicly traded companies is not that volatile. I do not believe a company could be worth $100B one day, $60B the next, and then back to $100B in a few weeks. If the market is always right, the WBI is meaningless. If the market sometimes gets it wrong, it seems likely the WBI has a clouded window into these times. I happen to believe the market is wrong, sometimes. I believe caution needs to be exercised, with regard to how much value to place in the WBI. It is neither sensitive nor absolute indicator. I've put some effort into trying to objectify the accuracy and strength of the WBI. I'm not prepared to share that work but it has become clear that micro fluctuations in the WBI are entirely meaningless. Let's have a look at a WBI chart. We can see major market events in the WBI at the extremes. The rest of the time, it's is a cute bobble. My system has essentially two modes. When the WBI is below 110%, I see no need to have any cash on hand of any kind. At least, I didn't during our growth years. Retirement is different. I will make sure we have 18 months of cash available at all times. When the WBI is over 150%, I turn off re-investment (DRIPs). The point is, these are only responses to WBI extremes. I expect the WBI to factor into our reinvestment approach about 10 years out of every 100. It's a canary in our investment coal mine. The vast majority of the time, the WBI is within a reasonable window and I reinvest using value principles. I estimate that I could completely ignore the WBI and it would not make an appreciable impact on our investment result. There is a huge difference between selling and not buying more stock. I consider our core companies as partners. I would not sell them during a wild market upturn any more than I would sell my business if given an attractive offer. You're either in business or you are not. I am. Our non-core holdings are a different story. Our two power companies were sold in 2019 and 2020 because the valueations were 2x calculated value and I do not love those companies. The reason I don't love those companies is because they seem reasonably well run, but not great. One of them paid executives record bonuses in 2009 and that CEO is still there. It's clear a lot of the money they generate is absorbed at the executive level and is neither reinvested in the company nor returned to the shareholders. They are still decent businesses but they are not partners. I expect them to distribute at 3~4% annually and grow at roughly 5% annually on an average year. We are fair weather friends with these companies. I always hope non-core companies can evolve into trusted partners but it's only happened twice in my investing lifetime. If a company shows signs of not respecting the shareholders, it is not going to start respecting the owners in the future. Can the WBI trigger a market sell-off by itself? Yes, but it rarely does. The dot-com bubble is an example but it's rare. A high WBI makes the market nervous. During these periods, there are enough nervous value investors (like me) that it's easy to find an excuse for a sell-off event. If we hadn't been hit by the coronavirus, there would have been another event spammed on the news that would have caused market movement. These sell off events would impact the market regardless of the WBI but their impact varies with the amplitude of the WBI. When people are nervous, they have stronger responses. The meaning of the WBI is evolving over time. It's important to consider that mergers and corporate buy-outs are changing the meaning of the WBI. A lot more of America's net worth is connected to the stock market and, therefore, indicated by the WBI. In this regard, it's OK that it's substantially higher today than it was in 1980. This is not cause for alarm. I haven't been able to objectify how much higher it should be. Also, in a low interest rate environment, the WBI should be substantially higher than when rates are high. Lastly, I am extremely sceptical of BEA numbers in recent times. That is a massive hit to the value of the WBI as an indicator. https://www.bea.gov/data/gdp/gross-domestic-product At this point, I'm essentially flying blind. It's not a problem, as the WBI isn't a primary driver of our portfolio. A nice WBI reference. https://www.gurufocus.com/stock-market-valuations.php
Let's take a shot at valuing Tesla. This isn't how I value it in my portfolio but it uses the methodology I use on every other stock I research. Tesla is a slippery fish of a valuation, so this is by no means an approach I endorse with this particular company. Also, I've air-brushed out massive amounts of detail but the general method is what I often use. If anyone would care to share your valuation approach, I would be deeply grateful. Car company Tesla is just barely a car company but let's value it as such. Where possible, I try to find a similar business for reference. In this case, let's have a look at BMW. BMW makes 2.5M cars per year and a market cap of roughly $60B. Right now, Tesla is capable of producing about 700K vehciles per year (500K Fremont, 200K Shanghai). This is a conservative number but should be pretty close. Tesla haters would do some long division and conclude Tesla's real world value to be around $17B. Of course, this would be moronic. Tesla is a growth company so it's appropriate to value Tesla based on a 5 to 10 year projection. How many cars will Tesla produce in 2025 (5 years)? Fremont -> 600K Shanghai -> 600K Nevada -> 200K Berlin -> 300K American south -> 150K There will probably be other factories coming online on or about 2025 but I doubt they will account for more than 100K vehicles, or so. It takes time to ramp a factory. Resonable projection: 1.85M Stretch projection: 2M Based on the BMW comparison, they would be around $55~60B. Tesla is on track to have significantly higher margin than BMW in 2025 but I will use the BMW analog. Supercharger Network A reasonable comparison here might be Exxon. They have 8000 stations and a market cap of $160B. Tesla has 2000 Supercharger stations today and should have about 5000 by 2025. That would equate to a value of about $100B. Power Company Tesla is starting to accumulate PPAs (power purchase agreements). I won't break this down further but I guestimate they are worth about $35B as a power company. Energy Storage There aren't any direct comparables so let's use a wild guess of current energy storage business value of $4B at 2.5GWh and apply some linear projection at 50% growth per year. That would have them selling about 20GWh of energy storage and a business value of $30B. FSD Elon has been promising full self driving will arive this year, for the last three years. In March, Elon said the price of FSD will go up as it approaches fruition. At the time, he cited an ultimate cost of $100K. This is a tough one to quantify. I'm skeptical about the $100K pricetag and I'm skeptical about the timeline for regulatory acceptance but I am pretty confident we will have FSD in 2025. Let's guess it will be worth $20K per copy in 5 years when they are building about 2M cars. That's $40B of annual revenue. A software company that can produce $40B of annual revenue would easily be worth $250B. Other stuff This valuation leaves out a ton of detail, including Tesla's distributed power plant architecture, solar, ride network, etc. All of these things are potentially massive enterprises on their own. And a little math..... $55B (cars) + $100B (superchargers) + $35B (PPA) + $30B (storage) + $250B (FSD) = $470B That would be a 5 year share price of $2500. If we assume 25% dilution, that brings us to a share price of $1900. Here, we see clearly why people are talking about Tesla evolving into a software company. Is Tesla worth $1500/shr? Not to me. Based on a 5 year valuation, it is not worth the current price when you factor in risk. A 10 year valuation essentially goes to infinity, so there is a very reasonable argument to support the $1500/shr price and even beyond, even if you account for risk. Would I buy at the current price? No. Fortunately, I don't have to. Do I think the price will go up? Yes but it's not particularly relevant to me. Do I do this for every company I own? Yes, and I also do it for a great many companies I do not. My position in Tesla is going to hinge on profitability and the potential for distributions. In 5 years, if Tesla is still not distributing and a value opportunity on a well distributing company comes up, I am almost certain to exit my Tesla position.
Sorry about the length of the previous post and also this one. The reason I owned three oil production companies until early 2019 is because I find them the easiest corporate type to value and predict. If I were to exclusively invest in oil production, I would have done much better than I have. I scrutinize the assets and usually have a reasonable idea of their productivity and overhead, based on lease locations. Lots of other metrics but that's one of the keys. Oil field services companies are far more difficult to value. I've owned these but they value based on the human factor. There are clues I look for, because I'm trying to find an old school, debt adverse, hard-ass who is running the company. Those guys can make money in oil field services at almost any oil price. Power companies are somewhat easy to value but power companies have a habit of buying toys they don't need (generation in other countries, on different continents, etc.) and they have a significant appetite for operating capital so the downside can be pretty steep. Still, we've owned a few over the years but not at present. If you've read me opine about consumer retail, your eyes have deceived you. I know zero about retail. Hence, no Amazon in my portfolio. Great company but I understand it about as well as my first wife. I worked in the financial sector for much of my career but have zero confidence in my ability to value a bank. The lack of confidence comes down to complete mistrust of banks asset inventories. Valuation is highly dependent on asset quality and I expect there isn't an honest asset list in the industry. Still, we own two financials, neither banks, and they have done very well over the years. I feel confident in my ability to value some REITs. REITs I cannot value with confidence are not considered. I have enough experience with commercial real estate to have a clue on valuing assets. If a REIT cites a building as $100M in value, I find it on Google Street View, and suspect it's worth $15M, that tells me what I need to know. I try to value, at least, 10% of the assets before starting a REIT position. There are locations, like Manhattan, where a garden shed could be worth $150M so I ignore those as I don't have the local knowledge to value them. These valuations are a reality check, not a hard value. I first give a sanity check to the asset list and then decide to trust the cited assets, or not. From there it comes down to debt load, occupancy, location, management efficiency. It's not that difficult to value companies but it takes time, effort, and a little bit of knowledge. The most important aspect in being a value investor is knowing my limitations and staying away from companies I do not understand. There are many great companies I wouldn't dream of owning. That's more detail into my value approach than I should probably share. If anyone else would consider sharing their approach, I would consider it a personal favor.
While I'm giving away the store, I might as well talk about how much value I need. lol! If I value a company at $10B and the market cap plus debt is $10B, I do not buy it. I need a certain level of value that I won't disclose but I wouldn't buy a stable company that doesn't show value. Growth companies are valued with a completely different process than stable companies. I also wouldn't sell a company unless it was a lot higher than my valuation. If it's a core company, then not at any price. The wide buy/sell window is an acknowledgement of the inaccuracy of my own value estimation and my mistrust of the market's ability to value a company.
OK, time to ramble on further about market timing from an investor's perspective. How come I do short term things, such as selling options, while promoting long term investment? Is this hypocritical? Indeed! I don't gamble, generally. I don't find it interesting or stimulating. A few weeks ago, we met friends at the casino for breakfast. We ended up joining the Player's Club to get a discount on breakfast. Membership was free and they also gave us $5 with which to gamble. Even though I don't gamble, I gave the ticket to my wife to try her hand at whatever she wanted. There was no risk, as there was no downside. Therefore, it was not gambling. That's how I look at options. Let's say I own a bunch of companies, most of which distribute cash to me on a regular basis. As a value investor, I reinvest that cash into the company I find to have the most value. What if none of my companies show value? What if the company closest to my valuation is Old Guy REIT which is currently trading at $10.75 but I value it at $10? Many years ago, I would have done nothing. Just wait until something showed value. These days, I would sell a $10 put on OGR for the shortest period that has a reasonable contract price. I don't see a risk, as I would buy OGR at $10 anyway, with the intention to hold it for 10+ years. If the contracts sell, I end up picking up several hundred dollars that would be more than dividends from OGR over the contract duration. I might also end up with the shares I wanted, at the price I wanted to pay, plus have an extra several hundred. If the contracts do not sell, it's no different than if I had done nothing. At that point, I can either try to sell more put contracts, cut a 90 day limit buy order at $10 , or push the cash into an HISA (or whatever other near-zero return guaranteed investment). The point being, this specific option position has only upside with no downside. I don't look at it as trading and I don't see any risk in this approach.
Do you think the market softness of the last few days is directly related to Kanye West stopping his campaign?
Back to politics and market impact guestimations.... Election: Best=0, worst=-5%, duration=3 months - impact over in November Trump win: Best = +5%, worst=-5%, duration=2 months - impact over in February Biden win: Best = 0%, worst=-5%, duration=3 months - impact over in March The key here is that from March 1, 2021 onward, I don't foresee any impact from the 2020 election cycle. We are heavy with cash, at the moment. If I find a great value, we will certainly buy it but I don't anticipate returning to aggressive buying until after March 1, 2021 or whenever things seem to settle down. That's roughly when we will be at max cash, based on my own arbitrary limit and assuming the market remains puffed up like a balloon. If the market returns to a more sane valuation between now and March 2021, we will re-engage our reinvestment program.
I will point out that I'm concerned about inflation, in the face of unprecedented activity by the Fed. We have a lot of cash but the risk of inflationary erosion is not lost on me. Place your bets.
This surprises me, as I believe you've talked about being in a depression. I am honestly shocked that you see a worse case -5% no matter who gets elected. I guess I'll think it through real quick. Trump win: Best = +5%, Worst = -10%, duration end = March 31, 2021 Biden win: Best = -5%, Worst = -25%, duration end = June 30, 2021 Now I guess I clarify with some thoughts. It's possible we're using a different "impact from the 2020 election cycle" though. If Trump wins for example, I expect the fed to back off a bit. They propped it and made it unhealthy long enough to get the current administration re-elected, but need to relax a bit to allow the market to work it's way back to reflecting reality slowly. There's less to talk about with a Trump re-election because it will be a continuation of what we're seeing right now. If Biden wins, I think the market bites the dust pretty quick. The fear from those up top will be that things will be jumbled up throughout the country. New people in power, etc. The fed will be directed to back off because the fake market will set us up for huge problems down the road if it's not corrected, even if it means the beginning of Biden's term is marked as a "failure" in terms of the stock market. Long-term it will be more healthy though. I think there will be more federal direction around the pandemic. I think there will be less tension around protests. I'll be clear to make this as apolitical as possible that I think a lot of the race issues around these protests are not Trump's fault. It's a systemic issue that's always existed, his lack of caution with his words just doesn't help. That's why a lot of people like him though and he's been consistently a "straight-shooter", so I'm not going to act like we should expect anything else. I get why that attitude got him elected and why people still like him for that point. Says what's on his mind. So to sum it up for Biden, the fed will back off the market quite a bit (bearish for market short-term), the federal pandemic response will be more in line with the rest of the world which is improving (bullish for market), and the protests should be a little less 'fueled' by the rhetoric out of the white house (bullish for the market) - which again is not the main reason for the protests. Assuming there's no vaccine of course, I am not going to be shocked if there's a 25% pullback in the market to reflect more of the situation the American economy is actually in.
When Obama was elected, there was a market pull back that lasted about 3 months. I considered that pull back, and also how time is accelerating, when making my guess. From there, I mixed in the idea the Earth could plunge into the sun and I don't think markets would dip more than a percent or two and I wonder if a 5% hit is me being hysterical? Perhaps political problems and revelations will cause market gains and new record highs, like the current recession. lol! As for a depression, I was wrong about that. I consider a depression to be a sharp lack of money circulating through economy. Money dries up. During the 1930s, it wasn't difficult to get a job; you simply couldn't do it. No jobs. No money. No thought there might be some jobs next month. The economic pump lost it's prime and was completely dead. Major projects stopped. Minor projects stopped. Over time, what little money there was became even less. That doesn't look like it will happen again, for a while. We prevent it on a regular basis with quantitative easing in what amounts to a Charlie Sheen homage to John Keynes. Were it not for QE, we would be in a depression right now. The US could be at $40T of debt, by the time this stabilizes. No problem, apparently.
I'm not against diversification, although we are not currently very diverse. What I think is a bad idea is buying stocks because they belong to a given sector. It's like people view the stock market similar to Pokemon Go and they're trying to collect more symbols. From my perspective, it makes more sense to buy companies I know, like, and believe in long term. This is a rule for me. If I want diversity for stabilization, I buy an index. This is one of the rare times I have not owned an index.
Bond talk. Full disclosure: I'm not a big fan. How are bonds different than stocks? They seem like two entirely different worlds and yet they are not so different. Stockholders have a claim to part of the business. Bond holders do also, but that claim ends on the maturity date. Some bonds don't mature so they become extremely similar to stock but with less upside and a return that doesn't go up with inflation. Many stocks don't pay a dividend but those that do, become similar to bonds. If you buy an REIT that distributes 6% to common share holders, you are more likely to take a hit during an economic disaster than a bond holder. It's not black and white, however. Bond holders take haircuts more frequently than some folks seem to realize. We hold a REIT that is paying 6.8% to common share holders. We also hold bonds issued by that REIT which pay 5.5% and mature in 2024. The dividend is holding strong through the COVID recession. These common shares far out weigh these bonds, in our portfolio. We also hold a leasing company that cut it's dividend in March 2020. This company doesn't have any outstanding bonds but, if it did, the bonds would be more friendly to retired people who need the income. Even here, I'm reasonably confident this company will restore it's dividend in 2021. The company was distributing at 7.8% in February. It went way up in March, as the stock crashed, and announcing no April dividend caused the stock to sink further. Time will tell if buying more was a mistake. If this leasing company restores it's dividend in 2021 and the market cap returns to February 2020 levels (it's still significantly down), we will have lost 8% that we will never get back. This is our best case. I'm OK with that scenario and still want to own the company. Perhaps the point is that during a big financial event, we are all going to take a hit. The globe is losing wealth. I try to look at as +/- and I also consider carefully how it fits into our life. Distributing companies are a significant part of what enables us to retire so, even with occasional problems, I'm happy to own them. I don't feel that bonds fit into our life better but I do have a bond ladder with a few holes in it. My recommendation to the folks who think bonds are great is to evaluate some scenarios and consider how bonds will perform in these scenarios. I would not take Internet bond behavior descriptions for granted. Also, I would have a very close look at bonds versus bond funds. They are not nearly as similar as you might expect.
Is anyone else following NAWA Technologies? It's a French company that has built a world beating super capacitor, apparently. It's not traded on any exchange, that I'm aware. Last May, they were working on mass production of a product that is said to be well tested and ready to be productized. In an article from early May, they said they would have mass production online in less than a year. I'm not worried that it's taking longer. Even without the virus, mass production isn't an easy thing to do. I'm more concerned about the radio silence. Perhaps they have their head down, working on the big machine that will change the world? If this turns out to be real, it will be bought out by a big player. That it hasn't happened already makes me suspicious. I know this is a long shot but, does anyone know anything?
