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.