I Have No Idea What Tesla is Worth, Do You?

  • Posted by on March 5th, 2014 at 11:24 am

“Where can I get into this trend at a low risk spot?” Brian Shannon

This is a little late, but having made some notes from a late February CNBC segment I made time to share a few. There are so many of us that would be, could be, should be consumers of financial TV but the medium just doesn’t get it. When a sharp guest comes on and is willing to share his/her process, let ‘em talk! It takes about 3 episodes to pick up on the biases of most regulars, and with little substance to fill the day, airtime gets dominated by these worldviews.

Enough venting, let’s discuss what can be learned from the above segment. My friend Brian was discussing his analysis of $TSLA, carefully putting it into the context of a short-term trader. My bias will come through because I’ve enjoyed his work for years, but the drivers were as follows:

1) Headline risk is now behind, as the big earnings event has already occurred

2) Present supply looks low as those who worried about earnings(or bet on them) have mostly sold

3) Potential demand looks high in the form of heavy short interest

Then, instead of sharpening the discussion with helpful questions such as “Where will you consider yourself wrong?” or “What is your likely holding period?”, a panelist chose to discard the entire method of analysis. I’m assuming it must have just been his turn to play devil’s advocate, because he rattled off a number of wiring flaws that would work against anyone seeking profit in the markets. Let’s run through a few:

1) Being Right vs. Making Money- particularly on a show called Fast Money, the idea of debating the enterprise value of Tesla is comical. Brian wants one thing out of it, to quickly go higher with minimal heat; where it stands in the distant future has no bearing. Our ego loves nailing the $20 earnings pop, but is that really any better than a $210-$230 post-earnings drift?

2) Knee Jerk Contrarianism- it’s up too much, so it’s likely to come back down. We all know there are 3 ways to view price in context with its past. It can show a) Positive correlation in continuing its recent path, b) Negative correlation in reversing its recent path, or c) No correlation as seen in random movement. And the correct answer is d) ALL OF THE ABOVE, which is why I value cognitive flexibility in those I follow.

3) Misattribution of Risk- if a security has a fixed maturity date and price, then a case can be made that paying a higher price equals a poorer reward:risk ratio. That may be true of a bond, but Tesla is far from a bond; it is a dynamic entity with an asymmetric but unknown payoff structure. Unless one plans to hold until it’s acquired or bankrupt, buying at a higher price does not automatically add risk and reduce reward. As explained in this high quality earnings preview, the greatest risk(or reward) lies just before the news, not after.

Let’s be honest, whether this stock goes to $0 or $500 is not relevant for this discussion. I remember Brian’s Tesla to $100 piece when the stock was in the 40s, and am willing to bet he sold long before the current $200+ price. Why? Because that’s what he does, he looks for his kind of opportunity to make a profit in his timeframe. He was very careful to share that personal context, vs. the panelist’s desire to mock his approach or dispute his analysis or whatever.

The one goal of market speculation shared across all styles and timeframes is to seek the maximum reward per unit of risk. More discussion of this, and less about “what’s going to happen” or “why I’m right and you’re wrong” would be attractive to those wanting(needing) to learn. In the meantime, thank God other media outlets exist to allow us to curate our own consumption efforts.

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