I am going to tell you a story about buying Tesla at $37. Before you dismiss this as yet another trader regaling you with stories about his great trades, I urge you to press on and see why this trade is more of an embarrassment than a source of pride.
It was a little more than a year ago that I began to understand the potential of Elon Musk and his electric car company. In hindsight it is obvious what a terrific opportunity Tesla offered, but at the time its fate was not so certain. Here was this audacious Silicon Valley tech guy trying to compete with the big automakers. The road of would-be-car tycoons was littered with the dead bodies of many entrepreneurs who tried before. The last new successful car company was founded decades earlier. No one had managed to break into the established auto companies’ market in a very long time.
But as I learned about Elon – I thought to myself that if anyone stood a chance – it was this guy.
I also believed that the Fed’s excessively easy monetary policy created an environment that was very prone to financial asset bubbles.
Therefore putting two and two together, I speculated that if Elon was successful in capturing the imagination of the investing community, his stock would be an ideal bubble candidate. It had all the perfect ingredients. A sexy growth story. New technology. A massive market. A successful charismatic founder. It had bubble potential written all over it.
So I decided that it made sense to buy a little Tesla with the idea that it was either going to go up, or blow up. I said to my buddies, “I am buying Tesla because it is either going to $1,000 or it is going to go to zero. I am buying it and putting it away in a drawer.” It was early Spring of 2013. I stamped my blue ticket and purchased Tesla at $36.
TSLA trading last year</a> </div>
So far so good, right? Well, this is where my colossal mistake occurs.
In the ultimate error of mixing trading time frames, I got nervous about the stock market. Instead of just shorting S&Ps and leaving my Tesla alone, I decided that I needed to wind down risk across the board. Therefore I sold my stock positions. All my stock positions… including Tesla. It had recently moved from $36 to $45 and I viewed the 25% gain in a few weeks as “too much too fast.”
Well, this proved to be the ULTIMATE MOPE MOVE!
TSLA chart since my trades</a> </div>
A few months later, when TSLA had moved from $36 to over $100, my buddy who I had recommended the trade to, phoned me up to congratulate me on my great call.
“Yeah, thanks” I said, “but I sold it…”
“When?” my buddy asked.
“$60 dollars ago,” I answered.
There was silence on the other end of the phone as my buddy tried to comprehend why I was such an idiot.
Here I was with this great call, but I completely botched the execution. Yes – my theory was correct, but being correct without making money doesn’t mean shit. It is like my grandmother claiming she was once quite a dish – it might have once been true but it doesn’t count for much…
The MacroTourist’s Grandma</a> </div>
Why I am telling you this story?
I have this theory about the current financial environment. The last couple of times that we have had excessively easy monetary policy there were two bubbles – the Dotcom bubble of the 90s and the real estate bubble of the 2000s. Between these two disasters Wall Street managed to destroy much of the wealth and confidence of the middle class. Therefore there has been very little public participation in financial markets since the 2008 credit meltdown.
This has resulted in an environment that is dominated by professionals. The markets of today are much quicker. There is no slow dentist getting word from his broker to buy two days after the announcement. There is also a more limited ability for bubbles to get supremely stupid. Professionals are not immune to participating in bubbles, but they aren’t going to be quite as naive as the public. At the end of the day, a portfolio manager managing pension money has to be able to justify his purchases of bubble like stocks whereas the dentist buying tech stocks in the 90s didn’t have to answer to anyone – so extreme valuations were more commonplace.
My theory is that given today’s ultra-easy monetary policy, the markets are no less prone to financial bubbles – they have just sped up. We now have these series of rolling bubbles as the tidal wave of easy money directed by the legions of hedge fund managers chases the latest hot fad.
We have had the rare earth bubble, the gold bubble, the bio-tech bubble, the clean energy bubble, the social media bubble – there are almost too many to name. It always starts the same way. Some smart portfolio managers figure out the next great investment. They start buying, which attracts more investors. It goes up more, which attracts some momentum players. The price rise feeds on itself and eventually investors are buying just because it is going up. The easy money creates these mini-bubbles that eventually pop, but then investors move on to chase the next bubble like fad. It is in essence a bubble of bubbles.
And if you think about it – this makes complete sense. The easy money has to go somewhere. This is the perfect environment for this sort of speculation.
Which finally brings me back to my Tesla story. I correctly identified a potential bubble stock ahead of time. I traded it like an idiot, but my theory was right.
These rolling bubbles are by no means finished and maybe I can redeem myself by trading the next one with a little more finesses.
As you know, I am a big oil and natural gas bull. One of my colleagues likes to keep my honest and often questions some of my assumptions. My bull energy thesis is based on the concept that demand from the developing world will overwhelm supply. But what if I am missing another potential new energy source? What about solar? Couldn’t that be the surprise that the energy bulls are overlooking?
After all, have a look at the competitiveness of solar energy during the past couple of decades:
Well, my response to solar competitiveness as an alternative to fossil fuels is – bring it on! We are going to need all the alternatives we can get to feed the energy thirst developing world.
My colleague questioning my theory didn’t shake me off my energy bull thesis, but it did cause me to think about instead of dismissing solar as not able to replace fossil fuels, it might be a great addition to my energy long.
But how do you go about investing in solar?
Well yesterday one of the hedge fund managers that I respect most announced that he had taken a big position in a solar stock. David Einhorn’s letter to investors revealed that he had taken a big position in SunEdison.
Remember my theory that mini-bubbles always start with smart investors buying something with value?
I have been mulling over solar stocks as a potential candidate for the next rolling bubble and the fact that Einhorn has started a position in the sector was the trigger I needed to climb aboard.
I have to finish up this post as the market is about to open, but yesterday I bought some SUNE. I am also going to once again go with Elon Musk and buy some of his SolarCity Stock – SCTY.
I am hoping that this is the next rolling bubble, but that I am not going to trade it like such a mope this time!
I don’t have time as the market is now open and I need to go trade, but yesterday I also shorted some Nasdaq futures. This is the start of a bigger position that I am going to ease into over the next couple of weeks. More on this tomorrow.