## Tuesday, May 21, 2019

### How Tesla fanboys' comments look with some hindsight

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Most defenders of Tesla (or long investors in Tesla) on the Internet may be classified as textbook examples of dumb and obnoxious trolls. They never have bring any ideas, any numbers, anything rational to the discussions at all. They just insult everyone who dares to have a brain – an organ capable of figuring out that the Tesla stock is overvalued at least by one order of magnitude.

To shield my Twitter search pages from this junk, I have blocked roughly one hundred Musk fanboys but new ones keep on emerging. Sometimes, you may find a Tesla fan who behaves as if he were capable of writing full sentences superficially resembling the human thought and I will pick one example here.

On Tuesday, August 7th, 2018, Elon Musk notoriously tweeted that he had "funding secured" to take Tesla private for $420 (a marijuana number) per stock. The stock price which was about$340 before the tweet jumped to 1/2 of the interval between the previous price and the promised $420, i.e. to about$380, on the following day.

On the following Friday, August 17th, I posted a text celebrating the laziness which talked about the nonsensical character of the "funding secured" claim, about the overvalued Tesla stock, and the wrong attitude of the CEO that makes it clear that he really doesn't have anything that could be a foundation for a promising car company.

Great. So within a week, this was the time when the Tesla stock reached those $380 or so. The 52-week high is$387.46. The market has regained some common sense. Yesterday, near the beginning of the trading session, Tesla reached a new 2-year low at $192.25 although it finally closed at$205.36 – reducing the daily drop to a modest 2.69%.

Nevertheless, $205.36 is just 53% of the 52-week high,$387.46. Those $195.25 is just 50.4% of the 52-week high. And$205.36 is below 1/2 of the promised price $420. It is approximately fair to say that the Tesla stock has dropped to 1/2 of the all time high. It is still an insanely overvalued stock. But in the comment section about the "laziness", you could see a user named Mike Sandifer. 8 out of 11 Disqus comments in his life were posted in the discussion about "laziness". Quite a percentage! OK, his main point was that I was incompetent – a heretic – because I dared to say that the stock was hugely overvalued. Note that even 10 days after the ludicrous "funding secured" claim, he had actually still believed that the funding was secured! Let me repost his August 17th comments: Mike Sandifer wrote: Your comments about Tesla are silly. If you know the value of Tesla better than the deepest equity markets, you should be short the stock. I see no mention that you are. Your opinion is worth about as much as your short position. Musk certainly deserves criticism for his tweeting and for trying to reinvent the wheel when first trying to manufacture the Model 3. But, to claim his business model is flawed and is only kept afloat by cultists is a bit self-contradictory. With enough cultish customers, he certainly can do things the way he's doing them. He will eventually sell his cars at above-average margins, just as Apple does with its phones. You just don't get it. Your hatred for liberals blinds you to obvious truth, and puts you in opposition to the EMH. You praise free markets over capitalism, but apparently believe markets are extremely inefficient, at least in the absolute sense. Your link to that article about SpaceX in your above reply is evidence for this. How silly to simply post a baseless opinion by a SpaceX competitor. [...] Your posts on high energy physics are perhaps the best I've seen, apart from the needless ad hominem directed at people you correctly point out as having crackpot ideas. Also, you've done posts on monetary policy, for example, well-above a layman's level, though ultimately reaching the wrong conclusion about QE, for example. So, your comments about Tesla certainly don't stem from a lack of raw intelligence or basic ignorance, but rather a failure of metacognition. Have you had opportunity to discover Sandy Munroe's analysis of the Model 3? His company tore it down for analysts to cost out the construction and determined the gross margin on the model is around 36%. Also, while commenting that the fit and finish was crude, the design of the electronics is next generation in terms of econone, sophistication, and connectedness. Tesla leads the industry in this respect. That's a far cry from your claims about potential margins and lack of important innovation. The Wall Street consensus is obviously that Tesla will achieve volume sufficient to overcome their fixed costs and become profitable. I see no reason to doubt that consensus, though there's obviously risk. Tesla should go private, just because Musk is too much of a loose cannon to run a public company. [...] Okay. That's still considerably different than the assumptions in this blog post. Tesla may not make it, particularly given Musk's recent public behavior, but I don't defend Tesla. I only defend the EMH. [...] I was merely pointing to reasons why Tesla's prospects are better than you claimed. I assume market rationality, but know markets aren't always correct. If they were always correct, there'd be no sudden price changes. To be clear about how I see EMH, the claim for strong EMH is that individual investors cannot out-perform the broader market above the rate of chance on a sustained basis. I subscribe to a somewhat weaker version, recognizing that there must be limits on efficiency to provide arbitrage opportunities sufficient to maintain incentives to guarantee some minimum relative efficiency. [...] I think you should re-read the second half of my second paragraph about the EMH. Also, anecdotes are meaningless as, statistically, some relative small number of individuals will beat the market consistently by chance. A particular problem with the Buffett example is that he's long had considerable influence over many of the companies in which Berkshire invests. Berkshire owns companies like Geico, Dairy Queen, See's Candies, etc., outright. [...] You are one of just a relative tiny handful of people with a solid understanding of what is known about string theory, so your IQ is likely off-the-charts. However, a lot of your information here is out-of-date, except for cases in which it was never correct in the first place. For example, the price of the Tesla stock is the best indication of market forecasts. Who cares what a single short-seller says? But, if you want the consensus of professional analysts, start with these net hold recommendations: https://www.nasdaq.com/symb... https://quotes.wsj.com/TSLA... Even the lowest price targets have Tesla highly profitable one day. Second, you likely understate current Model 3 output: https://www.bloomberg.com/g... Third, listen to the Sandy Munroe describe how he determined the Model 3 his company tore down will have a gross profit margin of over 30%: [video] You can get a prospectus on his report here: https://m.youtube.com/watch... And finally, you claim Consumer Reports did not recommend the Model 3, bit that was before an over-the-air software update fixed a breaking problem. Consumer Reports now recommends the car: [video] https://www.consumerreports... More fundamentally, in past posts you've demonstrated a solid understanding of EMH and argued in favor of it. Hence, your problem is not one of failing to understand how markets work, but instead, one of bias. [...] I'm not bragging about anything. I'm not even long Tesla, though perhaps I should be. I'm more apt to recommend a straddle in the short-run, as I have for the S&P 500 ETFs since February, which have been extremely profitable. The point is, I'm defending the EMH, so I approach stocks with high valuations, but low or negative earnings with humility. I do disagree with the market here or there, but then my rate of return is higher than that of the broad market, though Fama would say I'm lucky and/or am just taking proportionally more risk. Unfortunately for your anti-Tesla position, the EMH simply does not allow a cult to irrationally prop up an obviously unworthy stock for years. And you know better. Obviously every investment by a fool creates more incentive for a counter-investment from competent investors. The American equity markets are complete for all intents and purposes. Yes, Tesla has the largest short-side of any American equity, but it also has a valuation higher than Ford or GM, each of which obviously produces millions of vehicles each year. What does this mean? I'm sure you could explicitly analyze the risk better than I can, with the advanced math you can bring to bear. That's why I know you know that the interpretation is that the market is extremely optimistic about future Tesla sales and profits, but also recognizes much higher than average risk. Hence, the large short positions and volatility. It's unfortunate to see someone who understands markets well let bias get the best of him. Comparing Tesla to a communist cult is just wrong in almost every respect, even if Tesla ultimately fails. And the market indicates there's a higher than average likelihood that will occur. [...] To be clear, am I wrong about EMH, or is EMH wrong, or both? LM back: You see that this guy wanted to preserve an image of a financially literate person. He even wanted to paint himself as a successful investor. But his long tirades didn't include anything that made any sense or anything that could pass the test of time. Basically every single statement he made was wrong. First, you see the usual trolls' bullying. I was not allowed to write about Tesla – no Tesla critic is allowed to write about Tesla according these fanboys – and I should stick to high-energy physics or monetary politics where my texts were more valuable. (This screaming meant to suppress the discussion is forbidden in the TRF comment sections, just to remind you.) This is what tons of such people who have no meaningful arguments do. They just want to intimidate, harass, and silence the people who actually know something and who have tangible arguments. The only problem with Mike's harassment is that it is pretty clear by now that I was right about Tesla just like I was right about the other things he mentioned, and more. In particular, lots of the bulls from August 2018 – including Ross Gerber, a nearly comical Tesla bull whose hyping of the company has made him analogous to Saddam's minister of propaganda – have already closed their whole long Tesla positions with a huge loss which really means that they have admitted to have been wrong according to their own definition of wrongness. Gerber's funds have some policies to protect the funds against arbitrarily high losses so he had to sell. This particular Mike has just collected some random and incoherent positive articles or videos as "evidence" that Tesla would become profitable or great. None of this has materialized and most people already agree that none of this will ever materialize. The stock has dropped 40% since the moment when he wrote the texts. The already tiny chances that Tesla will ever be profitable or growing are decreasing every day. He had a particular idiosyncrasy – the EMH. Which stands for the "efficient-market hypothesis". You know, I do assume this hypothesis in any "generic" thinking about the markets – meaning the whole markets or markets as a general activity of the mankind. Markets are rather efficient because the people are struggling to be better off although they're never "perfectly efficient" and "perfect efficiency" can't even occur in a well-defined way because the non-uniform opinins about securities are necessary for most of the trading activity. But this assumption is analogous to the assumption that e.g. believers in a religion will have a problem with a certain Western habit or with a scientific finding. The efficient-market hypothesis is just an approximate "stereotype", a broadly reasonably expectation about something (markets in this case) that is useful if you don't have any more detailed information about the issue. However, if we look at a very particular thing – like the Tesla stock price – we shouldn't be satisfied with general principles or "stereotypes" such as the efficient-market hypothesis. We see what's actually happening and it is demonstrable that this market is insanely inefficient or irrational. (Similarly, we may see that e.g. Abdus Salam wasn't like other Muslims. He was not only able to accept the Standard Model – he had actually co-discovered it.) The book value of Tesla – which is a reasonable estimate of the stock price for other carmakers – is some$25 per stock. And the market value assuming P/E=6 – which is also pretty good for carmakers – would end up being negative for Tesla. And there is no good reason to think that Tesla will be profitable in 2019 or any year in the foreseeable future.

So how could a sane person apply "the efficient-market hypothesis" to Tesla? That market obviously isn't efficient at all. It's self-evidently dominated by irrational sheep – especially the 153,000 individual investors who are long Tesla through the Robin Hood accounts in the U.S. Almost all of them have been brainwashed by some highly superficial and uncritical hype and most of them are probably ideologically motivated and willing to lose the money, too. So the assumptions of "theorems" that imply that "the markets are efficient" are almost maximally violated.

People like these 153,000 clueless, small, and mostly green long Tesla investors were necessary to inflate the bubble and create the potential for a substantial shortsellers' profit. On the other hand, the shortsellers – who have borrowed almost 30% of the Tesla stocks as of this moment (they have already made some $3.5 billion this year and their future total profit will be around$10 billion if Tesla drops towards zero and they keep the position) – are actually responsible for most of the trades that actually react to the events now. Most of the trades are actually between two shortsellers now – who are short TSLA in average but some of them are more short or long short at different moments. So the shortsellers are actually the dominant "discoverers of the price" in the case of Tesla now! Should the Tesla stock drop right before a risky weekend etc.? Shortsellers are the key who determine the answers now. That may happen for a heavily shorted stock – and Tesla is the world's most shorted stock.

Mike Sandifer is an example of the people – in the present, it's almost always the leftists – who completely deny the reality and who think that their membership in a mindless herd is a good enough argument for denying the reality. When he talks about "the efficient-market hypothesis", he actually means that he has a scientific proof that a rational person should be a mindless sheep in a herd. He was not saying anything else whatsoever.

He even claimed, using the pompous and totally inadequate terminology, that being a member of a herd – and not thinking about the value of the stock independently at all – is a recipe for good returns. He couldn't have possibly made a systematic, reliable profit in this way. This herd instinct is, on the contrary, the best recipe to guarantee that the markets will be very inefficient and the prices will be completely wrong. Can't he understand this simple point?

It's nothing else than Feynman's story about the length of the emperor's nose. If you ask lots of people who have never seen the nose, averaging of their opinions won't bring you closer to the truth. Of course it's better to ask one witness who has actually made a sensible analysis of some tangible data – a single shortseller, if you wish – exactly what Mike says that you shouldn't do. It's just amazing he really can't understand the simple "Feynman's" point that the average of lots of clueless people's opinions is still detached from reality. (In Feynman's case, it was about the sloppy reviewers of science textbooks for kids. They didn't really look at the books, either not carefully or they haven't looked at all, and they tended to copy the ratings from neighbors. Of course the total ratings you get in this way are pretty much worthless.)

When people buy something – tulips, Tesla stock, Bitcoin, anything – for a price that they don't try to determine by themselves (instead, they just copy the price from neighbors in the herd) – it is very obvious that the price will have nothing to do with any fundamentals or reality and there will be no reason whatever to think that the price should be sustainable. For a while, such a price disconnected from any reality or objective analyses may go up if a bubble is in the growing stage (and tulips, Tesla stocks, and Bitcoin have gone through that stage) but the bubble ultimately runs out of buyers, the greater fools, and the collapse of the price may go arbitrarily low because there hadn't ever existed a rational, herd-instinct-independent reason why the price should be comparably high.

There has never been a glimpse of a rational reason why the Tesla stock should cost above $50. The Tesla stock is vaguely going in that direction. Minutes ago, Morgan Stanley reduced the TSLA target price from$97 to $10, the first really sensible target price from a big bank's analyst (maybe they already sold the leveraged Musk margin calls stocks LOL which is why they're more than free to be skeptical). After Tesla got a recent funding,$2.5 billion, Tesla has delayed the bankruptcy that would have already taken place without the raise. Elon Musk likes to promote the idea that the cash burn rate is just $200 million per month, close to the average in Q1 of 2019 ($230 million per month). But it's totally obvious that the cash burn rate is much higher now, probably above $500 million now, because the demand cliff is insane (see e.g. the drop in Norway after March 2019) and Tesla either grows huge inventories (which reduce the cash massively) or needs to keep on lowering the price (which drives the profit margins to more negative values). So those$2.5 billion are enough for at most half a year of extra life. Tesla won't survive 2019 without an extra raise and an extra raise may turn out to be impossible.

If you bought the new Tesla stock in the recent raise for $242, you already lost 20% of that investment. It's pretty clear that another raise would already be far more problematic and maybe impossible. The only big question is whether the Tesla stock price will first reach reasonable values such as$30; or Tesla will go bankrupt first.

Mike also had silly comments about the "need to go short" for my opinion to be right or worth listening to. Unfortunately, I just hadn't have the paperwork to have access to shorting and the U.S. markets so I didn't have the short position. But this unfortunate practical glitch is clearly unrelated to the question whether my arguments and my conclusions are right, isn't it? The accuracy and truth value of propositions isn't measured in dollars. People with a significant exposure (in dollars) may be more motivated to find the good analyses or the truth – but the high exposure clearly doesn't guarantee that they actually pick the right answers. Completely impartial, non-profit observers may obviously analyze the situation more accurately than others. There is no law that would make this outcome impossible.

He also wrote some nonsensical statements such as "I believe free markets over capitalism". Capitalism is about the free markets, they're basically the same thing. And he protested that owners such as Buffett influence the companies. And many other crazy things. Almost everything he wrote was insane.

Needless to say, some collapsing wannabe car company isn't the greatest thing I care about in the big picture. It's just a proxy to something more important. What I am primarily worried about is the growing influence of the movements that basically tell everyone that the world will be a great, happy, prosperous place if everyone turns into an obedient sheep without an individually operational brain. Sorry, one can't build progress on these herd foundations. If this approach became widespread, the society couldn't even sustain the current level of prosperity. People who actually individually look at the data are absolutely necessary for capitalism – and science and the human society in general – to work. People who rely on herds (even if they call the herds pompously, "efficient market hypothesis"), are just parasites who add noise. And fortunately, they can't make a systematic profit (or beat the market), either. To beat the market, one must clearly be ahead of the herd. Does Mike really misunderstand these statements?

The Tesla stock price above \$200 was/is clearly insanely overvalued. Whoever can't figure this simple fact out – after 1 hour of searching for the basic data – is financially illiterate. There exists no valid principle that could reverse this conclusion. In particular, the "efficient-market hypothesis" cannot mean that "sheep should trust the market to the extent that they copy opinions and numbers from each other" because such a herd model of the market players is a textbook example of a dysfunctional market – and a dysfunctional society.

And that's the memo.