Sunday, January 8, 2023

Stop Trying To Time the Market!

Trying to time the market, without a time machine, will end in tears.

A reader writes asking me if I think whether Tesla would be a "buy" if the P/E ratio went down to 10, which is a more common level among "normal" automakers.   The short answer is, NO. Not just because of that.

It is a question I see being asked online on sites like the aptly named Wallstreetbets - where people gamble away their life's savings and then commiserate with each other.  They cling to slogans which have been proven wrong time and time again. "Buy on the dip!" the ringleaders say - and these ringleaders go out and place an option, betting the price will go up, which it will, because they hyped the stock to their followers.

Don't be a follower.

But why would Tesla be a bad buy at a P/E ratio of 10?  Well, it might not be. It might be.  There is no way of telling based on the reading of this one flight instrument, which itself may be faulty.  If you are going to fly a plane in IFR and look only at one instrument, you will crash.  Sure, airspeed might be useful to prevent you from stalling. But if you ignore altitude, you'll fly into the side of a mountain.  And say, that artificial horizon sure comes in handy as well!

Not only that, but such readings are historical in nature.  We had a few boats and they had depth finders as well as GPS navigation systems.  The depth finder sensor is mounted on the back of the boat and is really handy (as I discovered the hard way) of telling you how deep the water is where you just were.  It doesn't tell you how deep the water is ahead of you, which the GPS can do, provided the maps are accurate and up-to-date.  At 30 MPH, you need to know this in a real hurry, lest you run aground.   Granted, you can sort of project what is happening by monitoring how quickly the depth is decreasing - if so, you may be headed for shallow water.  What does this say about a rapidly decreasing P/E ratio?

Similarly, P/E ratios can't predict the future.  They tell us what the ratio is between stock price and earnings yesterday but not tomorrow.  And a falling P/E ratio may mean the stock is undervalued or that the company is headed for more trouble down the road.  Without a working time machine it is hard to tell the difference.

For example, I recently noted that Ford's P/E ratio was at a very low 9.  I thought, "Maybe I should buy Ford stock!"  Well, since then, the P/E ratio has dropped to about 6 (today 4.5 or so!) which is scary.  What is going on?  Well, I looked this up and a lot of stock analysts think we are headed for a huge recession in 2023 and the "car shortage" that allowed car companies to charge premium prices for vehicles, will evaporate very quickly, as people run out of money to spend on $80,000 pickup trucks.  That, and the cyclical nature of the car business (it seems every 3-5 years, people go nuts buying new cars, and then are satiated for a few years - sales go up and down in a cycle).  That and higher interest rates and inflation are taking their toll on everything from housing to groceries.  Eventually, people will stop spending - but not quite yet!  There are still idiots ordering $12 McDonald's food and paying $18 in delivery fees.  There are still idiots renting AirBnB's and paying $300 cleaning fees.  People are just racking up credit card debt and hoping it all works out somehow.

It takes a long time for behaviors to change - but 2023 may be the year we change our behaviors, at least for a while.

With regard to Tesla, you have to look at the overall picture, not just the P/E ratio. A P/E ratio in the hundreds (or close to 1000 at one point) tells us the stock was overvalued - but doesn't tell us if and when it will go down in value.   Similarly, a ratio below 10 tells us Ford may be undervalued, but doesn't tell us whether it will go up anytime soon or whether something bad is about to happen (like a massive earnings drop next year).

Tesla, in particular, has a number of systemic issues:

1.  Politics:  I have developed the habit of giving the Nazi salute to every Tesla car I see and shouting, "Hey, nice car there, Hitler!" Just kidding, but there is a real blow-back between Musk's politics and sales of Tesla - prices of used Teslas are in free-fall, falling four times faster than any other brand.  I noted before, I saw a man at a Gay campground with a new Ford Mustang Mach-E electric vehicle.  He also put an order in for a Tesla Model Y and a Nissan Leaf, but Ford delivered first (and at $20,000 less than Tesla!).  But the main thing, he said, was he felt he "dodged a bullet" as he felt as a Gay man he would feel awkward driving a Musk-mobile, given how unhinged and far-right Musk has gone.   Given the politics of most EV owners (and how the far-right hates EVs!) how is this going to play out?

There are other reasons the price of used Teslas is dropping, however.  One is flippers - there was a "shortage" and backlog of new cars from Tesla, so many people were getting on the waiting list, buying the cars and then selling them at a profit to people who "had to have one right now."  The same was true with a lot of products that were in short supply during the pandemic.  Graphics cards for computers were in short supply because crypto miners were using them in bulk.  Today, they are a drug on the market,as the cost of mining many cryptos is less than their market value - driving many "miners" out of business.

So it is hard to tell if the used car price drop is due to liberals dumping their Teslas or a sign of success for Tesla as their production reaches an all-time high (still a negligible amount compared to Toyota or GM) and thus reduces the used-car shortage, thus depressing used-car prices.  The same could be said to be true for other used cars, which are falling in value - just not as fast as Tesla!

2. Service Woes: I saw - oddly enough at another Gay campground - some fellows with a very early Model-S (this was a couple of years ago, before Musk went insane) and they said it was holding up well.  I have heard noises that getting parts and service for older Teslas can be tough.  Then again, BMW and Mercedes play this same game - making servicing the cars so expensive that the cost of repair exceeds market value fairly quickly.  You can repair an old Camry because aftermarket parts are dirt-cheap from China - who is willing to tool up to make parts for a car that sells in the millions every year.  But boutique brands?  Often the dealer is the only place to get parts.  So an older 7-series BMW with all its gadgets and toys, goes to the junkyard when it needs a valve job or a transmission repair - and resale value plummets rather quickly.   I think BMW and Mercedes prefer this, as they don't want older ratted-out examples of their cars on the road - it detracts from the cachet of the brand.

So maybe Tesla is going down this same road, if you'll pardon the pun.  I suspect most will be junked by the 15-year mark, particularly if they need a new battery pack. That's about the design life of most cars, anyway.  But if Teslas acquire a reputation as being hard to repair out of warranty, that could also spike resale value.

3. China:  Like GM, Tesla makes the bulk of its money in China, and sales there have gone down to the point where they are slowing down production.  Why sales are slowing is a good question, but I suspect it is because there are other options for Chinese buyers as China has produced a number of EVs at far lower prices than Tesla. Patriotism and Nationalism are taking hold there as well, which I think spells trouble for all "foreign" brands (Ford is probably happy their efforts there never paid off!).  So sales will probably continue to stagnate.  This spells big trouble for Tesla's profit picture.

4. Competition:  For the most part, Tesla had the entire market to itself for a decade (The Model-S was introduced in 2012).  And at first, they were high-end "luxury" cars sold to the rich at high prices.  I noted before we were in Winter Park, Florida many years ago, and out front of a tony restaurant was parked - behind the velvet ropes - a Bugatti, a Bentley, and a Tesla.  Teslas were considered a "high end" luxury car at one time!  But for the EV to succeed, it has to move down-market and other manufacturers are coming out with competitive vehicles at lower prices.  I noted before my friend bought a Mach-E for $40,000 versus $60,000 for a Model-Y.  That's a 50% price difference.

Ford also has a dealership in nearly every town in America - not that they are of much use most of the time, but that beats a network of none.

Worldwide, it seems everyone is jumping on the EV bandwagon - except Toyota, which has not only held back from EVs (and instead sticking with hybrids) but is also the largest lobbying group in Washington against global warming initiatives. I think this will hurt Toyota more than Musk's switch to far-right politics.  But every other automaker has some sort of EV in production or will introduce one in 2023.  It might be enough to dampen enthusiasm for Tesla products.  You had to have a high threshold of pain to own a Tesla - the mass-market doesn't tolerate that.

Not only that, but both Ford and Chevy have introduced EV pickup trucks.  Meanwhile, Tesla's embarrassing "Cybertruck" (who names these things?  A third-grader?  Oh, wait...) is promised next year after next year after next year.  The rest of the product line is aging horribly - and needs a refresh.  Most cars are redesigned every 3-5 years.  Tesla has done a model "refresh" on the S and X models, but usually that sort of thing is done between model overhauls, every 2-3 years.  Tesla's designs are old, and a new bumper strip isn't going to change that.  It screams "we're short of cash" to me.

5. Recession: 2023 is poised to be a recessionary year.  1/3 of the world is already in recession as food prices soar in many countries and most of Europe shivers in the cold due to the energy crises created as a result of Russia's war.  So who's buying expensive EVs during a recession when even regular vehicle sales are slacking off?

6. Musk Stock Sales:  Elon Musk has sold a lot of stock in Tesla to shore up his ill-fated Twitter adventure.  It appears he will have to sell more to keep Twitter afloat as he isn't paying rent on any Twitter facilities, paying severance pay for employees, or even buying toilet paper for the bathrooms.  He is basically saying "fuck you" to every supplier.  He needs $3B a year to keep Twitter afloat.  It was losing $1B a year before he bought it, and in one month he tripled those annual losses.

It also appears that Musk pledged nearly half of his Tesla stock in a loan agreement he used to avoid paying income taxes.  A keen move, if your stock keeps going up in value.  A shitty move if your stock is over-valued.  If the share price falls to a certain level, the banks will call the note and demand sale of the shares to pay back the loan.  This, in turn, could lead to a further drop in share price.

Once again, we witness that share price is based on perception, but also supply and demand.  If you dump a million shares on the market, there may not be enough buyers to buy them.  And it doesn't require a big delta between buyers and sellers.  Even a one percent lack of buyers means share prices would drop ten percent as otherwise those shares would remain unsold.  This is why, if you want to "cash out" of a company, you have to sell in dribs and drabs over time, not in big chunks, all at once, which banks may force Musk to do.

Even then, it always concerns investors when the "founder" (and we use that term loosely!) sells his shares.  What does he know about the future of the company that we don't?

Then toss in a recession - who's buying stocks when they can't feed their family?  A lot of the retail "stonk" investors who were propping up the share price are starting to realize they have been snookered.  Fear not, in a few years a new generation of idiots will decide they can "beat the market" and the whole thing will start over again.

7. EV Saturation:  There is a distinct possibility that while EVs may be a "thing" they are not everything.  It could be that once everyone who wants one has one, demand will drop off dramatically.  And even if sales remain steady, it is possible they may remain a minority of vehicles sales.

In the 1950's each carmaker sold basically one car.  If you wanted a Chevy, you bought the Chevrolet car.  They came in one size and the only difference was body style and trim.  By the mid-1960's, carmakers had at least three sizes of cars to offer - the traditional "full sized car" and the compact and "intermediate" (which was a stretched compact).  So you could buy a Bel Air (full sized) or a Chevy II (compact) or a Chevelle (Intermediate).  The vast majority of sales were still for full-sized cars.

So it is entirely possible that the whole EV thing may be overblown, and while they will still be a "thing" they won't replace IC engine cars at all, and in fact may represent a fraction of the market going forward.  This may be particularly true due to the costs involved.  You can still buy a functional IC car for under $20,000 new (some as low as $15,000) but the cheapest functional EVs start at $30K (although a Chevy Bolt can be had at $25K, if you can find one stripped).

Maybe that explains why Ford's P/E ratio is so low - analysts are skeptical that the ten billion dollar investment in Kentucky EV plants will pay off.  Again, we need a time machine to be sure - and time machine investments are a bad idea all around.

So what does this all mean?  Well, only that there are so many variables surrounding any stock that looking at pricing trends, price, or just P/E ratio (or EPS) isn't enough to divine whether an investment is good, or it is "time" to buy.

Timing investments is impossible to do, as there are people much smarter than you or I who have much more information at their disposal, who will outwit us at every turn.  I am sure there is at least one person at nearly every investment house whose only job is to analyze stocks in the EV market, or indeed, just Tesla.  He isn't the guy you see on television - that's just a guy trying to manipulate share prices.  And right there is why we can 't win at this game.

Buying some dumb boring mutual fund or EFT and just holding onto it might seem like a stupid choice, but when you are investing for the future, you can't afford to be gambling.  And trying to time the market is just gambling.

As I learned the hard way, over the years....