Tesla short pays off today: stock down to $500

My investment advice is almost as good as Nobel laureate Paul Krugman’s. On February 8, I implied that Tesla stock was overvalued. It was trading at around $700 then. Today it is only about $500. Now I can start an expensive subscription investment newsletter!

More seriously…. In a mostly static world where the average person has a car that will last another 15-50 years (depending on what travel and business restrictions his/her/zir/their state governor decides to order), how is this company worth $400 billion? Is it the incredible lameness of Tesla’s competitors? (Do any of them have Dog Mode yet? That was an obvious idea in 2003. Tesla introduced it in 2019.)


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COVID-19 kills the malls

Some of our recent helicopter flying has been with a photographer tasked with getting pictures of shopping malls in the context of highways, cities, etc. What are these for? “Everything is for sale now,” he said. “They’re all going bankrupt.”

Is it actually too late for these spaces? If schools need more square footage to do in-person learning, why not rent the vast department stores to local school districts? Because the schools aren’t actually willing to pay? In Shanghai, a typical mall might have half the space devoted to after-school programs for children, e.g., dance or English-language instruction. Perhaps that can’t work in the U.S. because at any time a governor can make it illegal to operate the after-school program.

Readers: What else can be done with these spaces? If retail and most other forms of gathering are outlawed, what is the value of a lot of climate-controlled space?


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Isaac Newton, investor

“Investors Have Been Making the Same Mistake for 300 Years” (The Atlantic) is an interesting article by Thomas Levenson, teacher of science writing at MIT.


Already [in 1720] a wealthy man, Newton was usually a cautious investor. As the year began, much of his money was tucked away in various kinds of government bonds—reliable, uneventful investments that delivered a regular stream of income. He did own shares in a few of the larger companies on the exchange, including South Sea, but he had never been a rapid or eager market trader.

That had changed in the past few months, though, as he bought and sold into the rising market seemingly in the hopes of turning a comfortable fortune into an enormous one. By August, he’d unloaded most of his bonds, converting them and other assets into South Sea shares. Now he contemplated selling the rest of his bonds to buy still more shares.

He did sell nearly all of them. It was a disastrous choice. Within three weeks, the market turned. By Christmas, it had utterly collapsed. Newton’s losses reached millions of dollars in 21st-century money.

Even someone smart enough to steal credit for being the first to invent calculus was not smart enough to resist the Vegas-style appeal of the stock market.

I recommend this article, a rare break in the continuous stream of Trump-hatred from the Atlantic (owned by someone smart enough to have sex with a rich guy, thus illustrating a much more reliable path to wealth than trying to beat the S&P 500).


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Covid paranoia will lead to inflation

Franklin Templeton manages about $700 billion in assets. What does their Chief Investment Officer for Fixed Income think Covid-19 will lead to? Inflation!

An article by Sonal Desai:

Americans still misperceive the risks of death from COVID-19 for different age cohorts—to a shocking extent;

The misperception is greater for those who identify as Democrats, and for those who rely more on social media for information; partisanship and misinformation, to misquote Thomas Dolby, are blinding us from science; and

We find a sizable “safety premium” that could become a significant driver of inflation as the recovery gets underway.

How can a virus drive inflation? I think that her argument is that Americans with money will spend like crazy to protect themselves from the virus, e.g., buying first class airline seats or choosing airlines with blocked middle seats. Meanwhile there will be contraction in supply. We’ve already seen this in real estate. The rich are spending even more for country estates and for fixing up country estates. It is impossible to get a contractor because they’re already hired and the additional workers they might want to hire are relaxing on $600/week (but maybe that will change soon?).

These misperceptions are destroying our economy:

This misinformation has a very concrete adverse impact. Our study results show that those who overstate deaths among young people are more cautious about making purchases, more reluctant to travel, and favor keeping businesses and schools shut.

I.e., the Swedes who gave the finger to the virus are likely to do relatively better than Americans (but we stole a bigger piece of land from the Native Americans than they did, so we might still be richer).

What does the cower-in-place nation look like, emotionally?

How did the misperceptions arise? Facebook Shutdown and Mask Karens: “People who get their information predominantly from social media have the most erroneous and distorted perception of risk.” Traditional media was also responsible, says Desai:

Fear and anger are the most reliable drivers of engagement; scary tales of young victims of the pandemic, intimating that we are all at risk of dying, quickly go viral; so do stories that blame everything on your political adversaries. Both social and traditional media have been churning out both types of narratives in order to generate more clicks and increase their audience.

Stories that emphasize the dangers of the pandemic to all age cohorts and tie the risk to the Administration’s handling of the crisis likely tend to resonate much more with Democrats than Republicans. This might be a contributing factor to why, in our survey results, Democrats tend to overestimate the risk of dying from COVID-19 for different age cohorts to a greater extent than Republicans do.


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Coronavestment Ideas? Is the market like Wile E. Coyote?

At least with the only people who matter, the most popular TV show in our household is Wile E. Coyote and the Road Runner.

Rule #1: the Road Runner cannot harm the coyote.

A big topic of discussion among friends is how the stock market can be so far out of sync with their perception of the health of the real economy. Is the market, like Wile E. Coyote, already doomed, but it won’t actually fall until someone looks down?

From a Harvard MBA friend, forwarding some content from a discussion group among investment bankers:

This is the standard “bull trap” rally. We saw this in 2007-2009 crash. It took 17 months from top to bottom and along the way there were multiple rallies lasting up to 8 weeks. The end result was a 58% drop in the S&P-500. 58% from January would bring the S&P-500 to around 1500.

The market was already way overvalued whether by Shiller’s CAPE, Buffett’s indicator, price-sales – all were in nose-bleed territory.

The 1929 crash lasted over 3 years with big rallies every few months. 80% of workers do NOT work for S&P-500 cos. They will be sleeping in their cars, defaulting on mortgages, etc., etc. Treasuries will look awfully good compared to stocks.

She also sent “Stock Market Collapse An Avalanche Waiting to Happen” from April 5, which relies on more recent data.

My response to her was that investors are not betting on the health of the U.S. economy, but rather on the tendency for U.S. politicians, of both parties, to want to stay in office. Their reelection would be at risk if the stock market goes down in nominal terms. Maybe a share of the S&P 500 will buy less in terms of Shanghai hotel stays or African safaris or beachfront property on Nantucket (i.e., indexed for inflation in the goods and services that people with money actually spend significant money on). But even the Democrats can’t afford to have the S&P 500 be lower than it was in 2016. The government did not have the tools and willingness to intervene in markets back in the 1930s that it does today.

She responded that her company is cutting pay, that she sees all of the small businesses that her big company supplies going under (being acquired for pennies by bigger competitors and/or simply disappearing), and that everything looks like a full-scale Depression. I reminded her that she is biased by being part of the private/market portion of the economy, which is only about half of the U.S. economy, the other half being direct government spending or government-regulated and taxpayer-subsidized (e.g., health care).

Readers: (1) Who is right? Her Harvard MBA friends who say the market will collapse to match the collapsed U.S. economy, or me who says that the government will rig the market until the numbers look good? (2) what is worth buying right now?

Turning our attention to what is worth buying right now… my friend’s MBA husband (example of assortative mating that exacerbates income inequality; the working class can bust into this, though, with a bit of creativity in states such as Massachusetts) wanted to find some airline stocks to buy. A mutual friend said that the credit default swap rates on airlines showed that investors expected a substantial probability of bankruptcy within five years (and remember that bondholders are ahead of shareholders; “[CDS rates] were around 20% in early April, which implies a 20-25% default probability per year for the next five years”). I personally hate airlines as an investment because if they do well, the union workers will take the profits, but if there is a downturn, the only way to get out of the union contract is a bankruptcy that wipes out the shareholders.

How about private prison companies? With millions of Americans currently on unemployment and not all of them eligible to transition to a lifetime of welfare, there are going to be a lot of residents of the U.S. with no way to get money other than stealing. The U.S. also has millions of inflexible alimony and child support orders (see “Litigation, Alimony, and Child Support in the U.S. Economy”) that can’t be modified without what might be years of court procedures and $100,000+ in legal fees. If the defendant in a family court lawsuit is ordered to pay money and doesn’t have it, the standard American solution is prison (because the defendant has violated a court order to pay) and additional debt to the plaintiff continues to accrue while the defendant is imprisoned. When the economy was basically stable, and the typical defendant was likely to keep earning whatever had been earned previously, roughly 1 in 7 child support defendants were eventually imprisoned. That number has to go up, which should increase demand for prison cells.

(See “What to do if you’re struggling to pay child support or alimony during the coronavirus crisis”:

Those obligations are calculated based on your income and assets at the time the amount is determined, and the agreement can stretch for many years. And typically, unless there’s been a material change in your income, it can be hard to alter.

Additionally, with many court systems either shut down or running in a limited capacity, getting immediate relief from a judge’s ruling could be challenging, depending on where in the country you’re located.

“The court will look not only at your income stream but also your assets,” said Shaknes. “If you’re sitting on a $2 million brokerage account, even if it had been at $3 million, you’re not getting relief.”

If you have filed for unemployment, be aware that those benefits are considered income — meaning not only is it subject to certain taxation, it counts toward your ability to pay. In some states, depending on how your support payments are typically paid, they may automatically come out of your unemployment benefits, Shaknes said.

Meanwhile, during the financial crisis of 2008-2009, courts were not that forgiving when it came to requests for support modifications, Shaknes said.

“A lot of people who suffered job losses or severe income reductions tried to get their obligations reduced and were not successful,” Shaknes said. “We kept hearing ‘go get another job.’”


How about Silicon Valley firms? I am negative on those due to the “sell on good news” philosophy. The “good news” of mass home imprisonment of Americans has already occurred, so Netflix, Amazon, Zoom, et al. should already have gotten whatever boost they’re going to get.

Although I generally dislike commodities on the theory that nearly all previous arguments about scarcity and price bumps have proven to be wrong in the long run (example), what about copper? If we want to make a plague-proof country, don’t we need to coat almost all surfaces with copper?

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Move to avoid estate tax before coronavirus kills us?

Now that the grim reaper seems to be among us, is it time to move away from the 12 states that assess estate taxes? Massachusetts, for example, deprives heirs of 10-16 percent of the value of their inheritance, for estates valued at over $1 million (i.e., for anyone who dies while owning a decent apartment or house in the Boston area). The highest state tax rate is reached even for those whose estates aren’t worth enough to be taxed at all by the Federales.

What about income tax? A lot of us will have to work from home for the next two years. Why not do this from the Ritz Dorado Beach in Puerto Rico and cut income tax to 4 percent via Act 22? Puerto Rico seems to have eliminated its estate and gift taxes in 2017 so even if 183 days per year of heat and humidity don’t protect you from coronavirus your savings will be protected.

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Investing in the time of plague?

Thought experiment: What stocks will go up in response to the coronavirus plague?

One idea: Comcast and similar cable TV stocks. If people are stuck at home they won’t mind paying for premium channels and will be less likely to cut the cord.

Second idea: airlines and hotel stocks. “Buy on bad news” is the theory here.

Readers: better ideas?

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Self-made rich bastards: don’t leave all your money to charity

One self-made moderately rich friend (lawyer/entrepreneur) related that he’d told his daughters that their expenses would be paid through college, but after that they were on their own. He and his (nurse) wife would be spending all of the money that they’d earned on luxury consumption, extra leisure time, etc. They expected their daughters to achieve comparable levels of success to what the parents had achieved.

Another self-made rich guy (specialist physician/health care business executive that the plaintiffs of Massachusetts neglected to mine out) said that he was going to leave all of his money to a charitable foundation that he’d set up and was passionate about. “My daughter is 28, lives in an apartment with her boyfriend, and says that she doesn’t want to have children or own a house or car.”

To the doctor, I wrote the following:

Pew talks about the trend toward later births, but constant total fertility (i.e., American women have the same number of kids as before, but later in their lives). If your daughter does have kids, she will need an inheritance!

Due to population growth, it costs a minimum of $1 million to live in a decent neighborhood anywhere in the U.S. and surely this price will rise as the population trends toward 400 million (via immigration, if not high fertility). Young people today are extremely unlikely to have the kind of success that you and I had. I was Class of ’82 at MIT. 50% of applicants got in. When I was growing up, any dentist who worked full time could afford a house on the beach near a big city (e.g., Cape Cod if he or she lived in MA). Now the lot alone would be $3 million. Hardly anyone in crowded societies, e.g., Europe or China, can afford a comfortable lifestyle without a big input from parents.

See this nytimes article. Young folks today are living in what were garages to hold the cars of people our age.

His response:

I was also admitted to MIT in 1980 and it didn’t seem that difficult to get in. I bought my first house in 1984 and always had career possibilities that exceeded the cost of living. It’s definitely a different world.

Readers: What do you think? Is it reasonable to tell children “You have to make it on your own because I did”? A friend who is active in the MIT alumni organization told me that he learned that the current average applicant to MIT is as qualified as the average admitted student for his class (1999). If not, how much money should one leave a child in order to put them in the same relative position in U.S. society that those of us born in the 1960s have enjoyed?

(Separately, if you do leave children money, make sure that it is in a discretionary trust that is difficult for a child support or alimony predator to attack. Otherwise, there is at least a 50 percent chance that the money put aside for your children will end up in the hands of a plaintiff stranger.)

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Behavioral economics says we can beat the market

Misbehaving: The Making of Behavioral Economics, by Richard Thaler, is an interesting history of this new-ish subfield from the inside. It also contains some potentially useful guidance for investors!

Thaler points out that the rational beings on which the theories of Econ 101 rest do not exist in the real world. None of us make rational purchase decisions, for example. Aggregating a huge group of irrational people does not make our decisions somehow more rational:

the premises on which economic theory rests are flawed. First, the optimization problems that ordinary people confront are often too hard for them to solve, or even come close to solving. Even a trip to a decent-sized grocery store offers a shopper millions of combinations of items that are within the family’s budget. Does the family really choose the best one? And, of course, we face many much harder problems than a trip to the store, such as choosing a career, mortgage, or spouse. Given the failure rates we observe in all of these domains, it would be hard to defend the view that all such choices are optimal.

The book contains a good introduction to all of the big issues in behavioral economics, e.g., that people are loss-averse and also that they demand fairness (which is why we must all vote a Warren-Sanders ticket for president!).

Perceptions of fairness also help explain a long-standing puzzle in economics: in recessions, why don’t wages fall enough to keep everyone employed? In a land of Econs, when the economy goes into a recession and firms face a drop in the demand for their goods and services, their first reaction would not be to simply lay off employees. The theory of equilibrium says that when the demand for something falls, in this case labor, prices should also fall enough for supply to equal demand. So we would expect to see that firms would reduce wages when the economy tanks, allowing them to also cut the price of their products and still make a profit. But this is not what we see: wages and salaries appear to be sticky. When a recession hits, either wages do not fall at all or they fall too little to keep everyone employed. Why? One partial explanation for this fact is that cutting wages makes workers so angry that firms find it better to keep pay levels fixed and just lay off surplus employees (who are then not around to complain). It turns out, however, that with the help of some inflation, it is possible to reduce “real” wages (that is, adjusted for inflation) with much less pushback from workers.

Speaking of fairness, note that Uber has eliminated its “surge pricing” annotation. When the price is higher than usual, customers see a higher quoted price, not a screaming “surge pricing” banner. Restaurants and theaters would rather have a long waiting list than charge a market-clearing price. A chef is quoted as saying that he didn’t want to charge so much that customers would leave feeling that they’d been overcharged.

Stock markets are irrational and predictably irrational as far as Thaler and colleagues are concerned. Companies shouldn’t pay taxable dividends, for example, when they can buy back shares and compensate investors with a higher stock price:

Shefrin and Statman’s answer relied on a combination of self-control and mental accounting. The notion was that some shareholders—retirees, for instance—like the idea of getting inflows that are mentally categorized as “income” so that they don’t feel bad spending that money to live on. In a rational world, this makes no sense. A retired Econ could buy shares in companies that do not pay dividends, sell off a portion of his stock holdings periodically, and live off of those proceeds while paying less in taxes. But there is a long-standing notion that it is prudent to spend the income and leave the principal alone, and this idea was particularly prevalent in the generation of retirees around in 1985, all of whom had lived through the Great Depression.*

Gambling on the ponies is irrational. Betting on the even-money favorite will return 90 cents on the dollar. Betting on the longshot will return 14 cents and the returns get worse at the end of the day. Surely professionals investors are not as dumb as folks who gamble at the track? Thaler summarizes research suggesting that investors are actually just as dumb!

Thaler says that the equity premium (excess returns of stocks compared to bonds) is higher than it should be, even after economists pointed out that the equity premium is too high. The idea that professional investors are irrational is an old one, going back at least to Keynes:

Keynes thought markets were more “efficient,” to use the modern word, in an earlier period at the beginning of the twentieth century when managers owned most of the shares in a company and knew what the company was worth. He believed that as shares became more widely dispersed, “the element of real knowledge in the valuation of investments by those who own them or contemplate purchasing them . . . seriously declined.” … Keynes was also skeptical that professional money managers would serve the role of the “smart money” that EMH defenders rely upon to keep markets efficient. Rather, he thought that the pros were more likely to ride a wave of irrational exuberance than to fight it. One reason is that it is risky to be a contrarian. “Worldly wisdom teaches that it is better for reputation to fail conventionally than to succeed unconventionally.”

The simple “value investing” idea put forward by Benjamin Graham, i.e., buy stocks with a low P/E ratio, continued to work 50 years after its conception:

It was not so much that anyone had refuted Graham’s claim that value investing worked; it was more that the efficient market theory of the 1970s said that value investing couldn’t work. But it did. Late that decade, accounting professor Sanjoy Basu published a thoroughly competent study of value investing that fully supported Graham’s strategy. However, in order to get such papers published at the time, one had to offer abject apologies for the results. Here is how Basu ended his paper: “In conclusion, the behavior of security prices over the fourteen-year period studied is, perhaps, not completely described by the efficient market hypothesis.”

Both the best companies and the worst tend to revert to the mean:

Finding evidence of mean reversion would constitute a clear violation of the EMH. So we decided to see if we could find that evidence. Our study was simple. We would take all the stocks listed on the New York Stock Exchange (which, at that time, had nearly all of the largest companies) and rank their performance over some time period long enough to allow investors to get overly optimistic or pessimistic about some company, say three to five years. We would call the best performing stocks “Winners” and the worst performers “Losers.” Then we would take a group of the biggest Winners and Losers (say the most extreme thirty-five stocks) and compare their performance going forward. If markets were efficient, we should expect the two portfolios to do equally well. After all, according to the EMH, the past cannot predict the future. But if our overreaction hypothesis were correct, Losers would outperform Winners. Such a finding would accomplish two things. First, we would have used psychology to predict a new anomaly. Second, we would be offering support for what we called “generalized overreaction.” Unlike the Kahneman and Tversky experiment in which subjects were overreacting to measures of sense of humor when predicting GPA, we were not specifying what investors were overreacting to. We were just assuming that by driving the price of some stock up or down enough to make it one of the biggest winners or losers over a period of several years, investors were likely to be overreacting to something. The results strongly supported our hypothesis. We tested for overreaction in various ways, but as long as the period we looked back at to create the portfolios was long enough, say three years, then the Loser portfolio did better than the Winner portfolio. Much better. For example, in one test we used five years of performance to form the Winner and Loser portfolios and then calculated the returns of each portfolio over the following five years, compared to the overall market. Over the five-year period after we formed our portfolios, the Losers outperformed the market by about 30% while the Winners did worse than the market by about 10%.

Can the non-behavioral economists fix this? No! says Thaler.

The efficient market hypothesis could be reconciled with our results if the Loser stocks had high betas and thus were risky according to the CAPM, and the Winner stocks had low betas, meaning they were less risky. … By whatever measure one used, “value stocks” outperformed “growth stocks,” and to the consternation of EMH advocates, the value stocks were also less risky, as measured by beta.

The practical advice from the book is to buy value stocks and small cap stocks. A portfolio of “blue chip” large cap stocks would be almost certain to underperform in the long run (see GE!).

Can we get good advice for day-to-day trades from economists? Nobel laureate Paul Krugman predicted a dramatic and persistent stock market depression after the Trumpenfuhrer was sent to the Reichstag in November 2016. Nobel laureate Bob Shiller predicted a stock market crash in 1996, according to Thaler. The S&P 500 was 1,050 when they sounded the doom horn. The stock market did crash starting in 2000. It fell from 2,100… to about 1,150. In other words, if you’d gone short in 1996 and then perfectly timed the bottom of the stock market in 2002 you still would have lost money (plus another 3 percent per year in dividends that you’d have had to pay out). Thaler credits Shiller with prescience and says he was too early, but does not point out that Shiller was actually wrong based on the numbers.

Real estate seems to be one of the most irrational of all markets.

My conclusion: the price is often wrong, and sometimes very wrong. Furthermore, when prices diverge from fundamental value by such wide margins, the misallocation of resources can be quite big. For example, in the United States, where home prices were rising at a national level, some regions experienced especially rapid price increases and historically high price-to-rental ratios. Had both homeowners and lenders been Econs, they would have noticed these warning signals and realized that a fall in home prices was becoming increasingly likely. Instead, surveys by Shiller showed that these were the regions in which expectations about the future appreciation of home prices were the most optimistic. Instead of expecting mean reversion, people were acting as if what goes up must go up even more. Moreover, rational lenders would have made the requirements for getting a mortgage stricter under such circumstances, but just the opposite happened. Mortgages were offered with little or no down payment required, and scant attention was paid to the creditworthiness of the borrowers. These “liar loans” fueled the booms, and policy-makers took no action to intervene.

In other words, it seems likely that the short trade that made John Paulson a multi-billionaire will work during the next bubble.

A fun corner of the book is a discussion of office allocation in a new building for the economists at University of Chicago:

Two other rules of interest: offices could not be traded and, after one senior faculty member inquired, the deans emphatically ruled out the possibility of buying an earlier draft pick from a colleague. This ruling, and the fact that the school decided not to simply auction off the draft picks, reveals that even at the University of Chicago Booth School of Business—where many favor an open market in babies and organs—some objects are simply too sacred to sell in the marketplace: faculty

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Financial Planning 101, v2.0

Dan had worked 80 hours per week in the family business since finishing high school. Due to the long hours, at age 45 he was still single and still living at home with his father.

His father’s health was failing, unfortunately, and it was clear that the man did not have long to live. Dan knew that he would inherit a fortune upon the death of his father and decided he needed to learn about investing.

One evening, at an meeting run by Morgan Stanley, the presenter asked attendees to talk about what they were hoping to get out of the seminar. Dan said “In a year or two, my father will succumb to his cancer and I will inherit roughly $200 million. I’d like to figure out if index funds are the best option or if, with this size portfolio, there are higher returns available from alternative investments, such as hedge funds and direct ownership of assets.”

Sitting next to him was a beautiful woman in her 20s. She complimented him on his taste in clothing and asked for his business card. Dan was flattered that a woman two decades younger would take an interest in him.

Three weeks later, she became his stepmother.


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