Saturday, January 14, 2023

Anatomy of a Bubble

The classic bubble shape!

A reader was asking me whether Elon Musk shorted Tesla and then intentionally caused the share price to crash.  I doubt this, as it would be highly illegal to do so - and you'd face civil liability as well.  In fact, Tesla and Musk are on trial in California for his manipulation of share prices when he made his famous "420" buyout Tweet (because, as we know, CEOs of major corporations always make marijuana puns, right?).  Some people thought he was serious and bid up the price of the stock, which was a good payday for Musk and other shareholders.  Not so much for the small investor.

But then again, anything is possible - but I think it would be ridiculously easy to get caught doing such a thing.

It made me wonder about the free-fall in Tesla shares and I looked up the share price (chart above) and lo and behold, we have a classic example of a bubble!  Note how the share price languishes for years before a sudden and unjustified price climb.  The share price at the peak made no sense (nor did P/E ratios close to 1000) and the bubble "burst" just as quickly as it inflated.  The share price today is about the same as it was two years ago.  The bubble barely lasted 24 months.  That's not a lot of time in the greater scheme of things, unless you are a day trader.

Will Tesla go back up in value?  Yes, probably, over time.  That is a common misconception about bubbles - that the commodity or stock in question will go down to nothing in value.  That simply is not true, at least most of the time.  The famous "Tulip Bubble" in Holland eventually collapsed when people realized that while tulips were a thing, they were not that much of a thing.  Values returned to Earth and were pretty much what they were, pre-bubble.  People still grew and sold tulips and in fact, still do today, in Holland.  They are pretty famous for it.

Similarly, when the railroad bubble burst, it didn't mean that all the railroads went bankrupt and everyone went back to horses and wagons.  Rather, a lot of speculative and weakly financed lines went bust and were bought out by larger concerns.  Railroads continued to operate - although over the years, there were more bankruptcies and consolidations.  It never ends.

With commodities, each bubble gets bigger than the last.

Gold?  Same deal - it peaked in the early 70's and again in the early 80's and in both cases, if you had bought at the peak of those bubbles, you'd have to wait a decade or more to earn your money back not even factoring in inflation.  The same is true today - gold is not worthless, just worth less than what some folks thought a few months ago.  And with inflation, over time, any commodity will go up in price, but timing the market is tricky and nearly impossible to do.  Buy at the peak in 1981 you'd have to wait two decades to just break even.  Commodities, like derivatives, are tricky investments and not for amateurs.  And you can really screw yourself badly with derivatives!

Provided that Tesla continues to make a product that is in demand and makes a profit, it should continue as a concern, and the share price will stabilize over time.  If the price goes low enough, a "legacy" manufacturer might even attempt a buyout.  But frankly, I think the best bet for Tesla is if Musk walks away from any position with the company, as his "dirty halo" will turn away left-leaning EV buyers.

Of course, the question is, how much lower will Tesla stock go before (and if) it rebounds?  Again, time machine investments are a shitty idea.  If you need a working time machine in order to make money from an investment, it is probably a bad investment and in fact, is just gambling.  I have gotten "lucky" with some of these kind of things - buying Avis for 74 cents a share or Winn-Dixie a couple of weeks before a buyout was announced - but like any gambler, I remember the "wins" and try to forget my losses.  Did I mention the $5000 I "invested" in GM stock before it went bankrupt?  Gone - all gone.   Trying to time the market is for chumps!

Take it from a First Class, Grade-A chump, too!

My point here isn't to bash Tesla or Musk (again) or figure out whether Tesla is a good "buy" or not - merely to point out that, in retrospect, this clearly was a bubble - the shape of the curve fits the pattern, as does the idiotic bidding up of the share price to the stratosphere to the point where the company had a higher "market cap" that several major automakers combined.   And as in any good bubble, most of us saw this going down and tried to talk some sense about it.  And like in any good bubble, the voices of reason were shouted down with the mantra, "this time, it's different!"

But again, time machines.  With the perspective of time, we can see clearly this was a bubble - with people bidding up the prices to the point where they made no sense, just as happened with tulip bulbs.

There are, of course, those who claim the Tulip Bubble never happened, or that there are "logical explanations" for it - and the South Seas bubble as well.  Some are so bold as to claim bubbles simply don't exist and they are mere "market valuations."  And usually, these "experts" who are no doubt paid by the people hyping the stock du jour (act shocked!) are trotted out whenever a bubble is in the process of forming and the voices of reason cry out warning.

Yes, markets are blatantly manipulated.  Despite our watered-down regulations, it is perfectly legal to hype your stock, provided you don't blatantly lie.  So you want to do an "IPO" and become a Billionaire, you do a "road show" first and go around the country talking up your company and its plans.  Your actual prospectus could say, in 50-point type, that you have no plans other than to spend company money on hookers and blow - that's legal, as you disclosed your actual plans. Of course, nobody reads the prospectus.  Get some famous "financial gurus" or even online bloggers to hype the stock.  Plant some shills on social media sites. Give interviews to the financial press - they will oblige you with a cover story about "The Hot New IPO!"

And yea, it is all pretty much legal.  And by the way, ditto for "crypto" which is why celebrities are being sued for endorsing those cons as well.

And yea, it is all unfair and crooked and should be (and used to be!) illegal.  The only solution is to not get sucked into these things.   Stop being a chump.  Stop trying to "beat the system" (the system will beat the crap out of you, if you try).  Don't listen to headlines and talking heads for "stock tips!"   If it is even mentioned in the financial press, odds are it is too late to get in, and likely you will lose your shirt.

So this is why I really don't care much about the price of Tesla shares, other than as an academic exercise.  I am content to sit on the sidelines with my popcorn and watch the drama. I don't feel the need to "get in on the next big thing!" as I know from experience that I would likely get creamed if I did.