Here’s What I’ve Learned from Making These Bad Calls

The problem with writing an investment newsletter for 15 years is that there’s nowhere to hide when you’re wrong.  But that’s nothin’ compared to being wrong when you’re managing money for some of the largest institutions and wealthiest people in the world like I have for the last 25 years.  Believe me, I’ve got the bumps and bruises to prove that I’ve had skin in the game for the last 25 years.  But while I wear them proudly, that doesn’t mean they sting any less.

Nobody is harder on me than me when I make a bad call.  I have broken more than my share of telephones in my day in frustration at how the world refuses to see things my way.  But when I am acting like a two-year old and trashing another iPhone or, in the old days, a land-line, I know I am angry at myself.  I missed something that I should have seen and took a pounding because of my own failure.  Even if the only thing I failed to see is other people’s myopia or irrationality, I still blew it.   John Maynard Keynes taught us a long time ago that the markets can stay irrational far longer than we can stay solvent, but the job of a manager or anyone making investment recommendations is to live to fight another day.

This is a tough business and if you don’t learn how to own up to your mistakes and how to learn from them, you aren’t going to last very long.

Here’s what I’ve learned from making a few bad calls in the recent past – and what you can learn, too…

First You Have to Eat Humble Pie – Then Fix The Problem

Recently, we saw some famous managers blow themselves up because they refused to admit they made a mistake.  Bill Ackman, for example, doubled and then tripled down on a multibillion dollar position in Valeant Pharmaceuticals International Ltd. (VRX) and ended up vaporizing $4 billion of his investors’ money, including $1 billion in a single day!  He didn’t do that because he is stupid – he is a highly intelligent individual who made some great calls in the past.  But in this case, he allowed his ego and his emotions to lock him into a stock that his brain should have told him was doomed to collapse had he only taken an objective look at its overleveraged balance sheet and unsustainable business model.

But Mr. Ackman wasn’t the only high profile manager to blow up over VRX. The Sequoia Fund and many hedge funds made the same mistake:  they rode a bad position down to nearly zero because they made two cardinal errors.  The first is that they made a bad investment. The second is that they didn’t know when to take their losses before they spun out of control.

As I look at my recent recommendations in Sure Money and Zenith Trading Circle, I see some good calls and some bad calls.

What Worked, What Didn’t – And What We Should Have Done

Most of the stocks I’ve recommended as shorts are lower in price today than when I made the recommendation but some of the puts have expired worthless because they were too short-dated.  We should have recommended longer dated puts to give our thesis more time to work in what remains an overheated market. Out of the money short-dated puts don’t work well unless the stock collapses quickly, which rarely happens. (Of course, there are exceptions – like our recent success with LB.)

On a sector level, the calls that worked were based on the correct view of an industry such as retail, which is collapsing and taking down a lot of stocks with it:  LB, SHLD, M, FIT, GNC, GPRO, TGT, AAP, KSS.  The calls that didn’t work were primarily in the restaurant (CMG and PNRA) and energy industry (LNG, MTDR).  CMG and PNRA are particularly frustrating because both companies are egregiously overvalued and PNRA was acquired by a European company at 18x EBITDA, an absurdly high multiple that I did not foresee.  NVDA is starting to work as more analysts are downgrading the stock and its sky-high valuation is starting to work against it.

Finally, TSLA remains a poster child for what I continue to believe is a stock market bubble with one analyst recently raising his target to $368 per share while lowering is earnings estimates (which are actually loss estimates) and telling investors that rational valuation arguments don’t matter.  Sooner or later the Tesla cult will go the way of the Jonestown cult.  Tesla trades at $700,000 per vehicle, 100x Ford’s valuation of $7,000 per vehicle.  Even if Elon Musk were the second coming of Steve Jobs, which he is not, there is no way such a valuation makes any sense on this or any other planet in this or any other universe.  I can’t wait for Tesla stock to crash and wipe the smug look off the faces of all the cult members (which includes the idiot analysts on Wall Street and their bosses who recklessly allow them to publish this pablum they call research). I remain short and would add to my position with both calls and puts that are long-dated and out of the money.  This company is a house of cards and Elon Musk gives PT Barnum a bad name.

Sincerely,

Michael

19 Responses to “Here’s What I’ve Learned from Making These Bad Calls”

  1. All I have to say is that the Market has been stupid for the last several weeks with different market people making up lain brain excuses as reason the market is doing nothing, and there is not good reason for it. Like all institutions and traders are mainly afraid that something crazy is about to happen when everything is mainly normal, other than the norm which is something always going on about ISIS around the world, Syria, Russia, etc, etc. At home, all is quite well

  2. What most analysts miss is that tesla is not just a car company.

    It is an energy company that sells cars.

    To value the company on just the car is ludicrous.

    Yes of course it is overvalued , and it will drop at some point in time when it is convenient for for itself not us the investors.

    However this is what you are missing in all your recommendations and analysis.
    If you were to use technical analysis in all your trades and ema crossovers like the 20 day and 50 day you would have about 80 to 100 percent of your trades being successful….if you look back at charts from your recommendations you would see this.

  3. Micheal Kravitz

    I figured it out awhile back and will only do the ones that are 6 months to a year out. I have lost money on all but one since I joined. Won’t be able to justify renewal unless I see improvement. I think that you are right but the crazies are killing us.

  4. Kathleen johnson

    Thanks for the update. For sure, the news on tesla is always great. I was beginning to think things had changed from listening to them. I knew better and am relieved to hear you haven’t changed your stance.

  5. I kept passing on your suggestions for options on Tesla but I agree with you
    that your research is accurate. And you have a lot of company when it comes
    to options recommendations that have not panned out, in fact I have only
    had maybe 3 winners (no doubles or triples) from putting money into option
    recommendations from you and several others. So they make their money on
    the subscriptions while we take the beating on our end. Who do you trust?
    Having said that, I like your subscription the best. Thanks Michael.

  6. I did not put money into your recommendations on Tesla, something
    told me that that would cost me. But on the other ones like Sears, and VRX I jumped in. Oh well. But Michael, you are not the only one passing out a long list of losing positions. However, I still like your subscription the best. The subscription fees of the ones I signed with are way over priced for the results I have gotten.

  7. For once, I actually did what you just recommended. After I could see the handwriting on the wall in December, I resigned from Zenith Trading Circle in time to get a full refund.
    In retrospect, I avoided more losses, and I’m glad I got out when I did. I signed up for the service in the first place because I trust you, Michael. I know you make fantastic calls most of the time, and will admit when you’re wrong. That puts you ahead of most newsletter writers, who try to put a positive spin on every loss they incur.

  8. You are not the only one passing out losing positions and no one is holding a gun to our head to put our money on the table. But with the cost of some of the subscriptions I have paid lately, they are not worth it. Yours is my favorite, so I will run into the sunset with your subscription in tact. Something has to give.

  9. Like some of the other folks who have commented I agree you are one of the few (only?) newsletters that face up to the a losing recommendation, which is a very honorable trait. When I hear someone crowing about all their wins I run, not walk, in the other direction. Your ideas are logical and well presented and an entertaining read. I am sticking with moving forward and have some optimism the longer term puts do pan out. thanks for your honesty.

  10. LOST ON DEUTSCHBANK NOT FAR ENOUGH OUT AND THE GERMAN GOVERNMENT WILL KEEP THEM ON LIFE SUPPORT ANY WAY BUT I AM WINNING ON JC PENNEY ONLY NOT A LOT AT THE PRESENT TIME SO TIME WILL TELL JUST KNOW THAT I AM IN THIS ALONE NO ONE HAS MY BACK AND I WILL RISE OR FALL ON MY OWN MERITS IT IS NICE , HOWEVER TO HAVE SOMEONE KNOWLEDGEABLE IN MY CORNER

  11. Up to this point I’m losing my *ss on SHLD long-dated put options. I did not buy these options solely on the recommendation of Michael lewitt. I purchased them because when I go to the mall down the street from my house the Sear’s store looks like a morgue even though they have been running a 60%-70% off sale since before Christmas. The only section of the parking lot that has any empty spaces in is the section in front of the Sear’s store.

    When I look at their balance sheet all I see is red ink. When I listen to the stoires about all of the real estate they own and how the company isn’t as bad off as everything thinks because they own all this wonderful real estate all I see are old, worn-out big box footprints that have little in the way of residual value. After all if Sear’s, Penney’s Kohl’s, Macy’s, Dick’s and all of the other big box retailers can’t make money occupying one those 150,000 square foot buildings who can?

    Point is, I shorted Sear’s because the company is obviously part of a dying breed in a dying sector. The disruptive nature of the Amazon business model has sealed the fate of the brick and mortar retail industry. It’s only a matter of when, not if they all go under. The problem with using options to short these stocks is that you are faced with time decay and inefficient pricing. In particular when a stock like SHLD is as heavily shorted as it is. Whatever Eddie Lampert is up to is anyone’s guess but he will not and cannot succeed at putting Humpty-Dumpty back together.

  12. While I agree with most of your analysis, your timing is so way off that there is very little difference between you and the talking heads on TV. If you could adjust for that factor(irrational markets vs solvency) you’d be great but I think that is almost impossible. I do appreciate your insight though

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