Elon Musk, Tesla. Why the Difficulties?

Dear Reader,

The mainstream financial news media in the last two weeks was filled with news about Tesla and its founder Elon Musk. The news were predominantly negative - from Elon Musk supposedly misleading investors by tweeting he is going to take Tesla private. From him smoking pot on air and lately the SEC charges and the subsequent  settlement of Tesla and SEC whereby Elon Musk has to give up his post as Tesla Chairman and remain only CEO.

But these news are wayward of an important caveat. Why actually is Tesla facing so many difficulties in quickly producing a high enough number(>5000 units) of Model 3?

In short, I think Elon Musk underestimated how difficult it is to manufacture cars at scale? Hey, if it was so easy to produce automobiles at scale anybody could start up and become the next Volkswagen or Toyota! Developing the know-how to produce cars is not accomplished by simply reading some books on the matter.

Tesla is simply too young a company. Ford has produced cars for more than a century. Volkswagen and Toyota have produced cars for many decades. Tesla simply does not have the know-how yet to manufacture automobiles at scale. Tesla hired some of the best and most experienced in the car production business to work for it, but still it seems it is not so easy to produce cars at scale. Throwing money at the matter, much of it through government subsidies, simply will not work.

Will Tesla survive? Hardly. Producing electric cars is simply too expensive. One of the reasons is they contain a lot of ferrous metals. The German automakers were basically coerced by Angela Merkel's government to ramp up production of electric cars. And sill the electric car adoption in Germany is very low. Angela Merkel's governments have tried to persuade VW, BMW and Daimler  in the virtues of electric cars many times. But the production of electric cars is simply not profitable, even with subsidies. Tesla is the poster child of the elctric car industry. If Tesla fails, this would deal a heavy blow to the whole electric car industry and could even stop it in its tracks. To make electric car production profitable what is needed is a technological breakthrough which would make the manufacturing of electric cars viable.

Will Tesla succeed in disrupting the combustion engine car industry? Without a technological breakthorugh which would make electric car manufacturing profitable, Tesla would fail when governments stop keeping Tesla afloat with subsidies.

Disclaimer: The blogposts and comments on this blog and posts on social networks(Twitter, LinkedIn etc.) are not investment recommendation, are provided solely for informational purposes, and do not constitute an offer or solicitation to buy or sell any securities. The opinions expressed in the blogpost and posts on social networks(Twitter, LinkedIn etc.) are the author's and they in no way express the opinion or official position of the company where I am working currently!

Conflicts of interest: I may possess some of the securities,currencies or their derivatives mentioned in the blogpost and posts on social networks(Twitter, LinkedIn etc.)!


Kind regards,
Petar Posledovich

Value Investing, Warren Buffett, Benjamin Graham and so on!

Dear Reader,


Warren Buffett has been famous for beating the stock market indices year in, year out.

Other followers of value investing strategy like Benjamin Graham, Seth Klarman, Joel Greenblatt have been able to beat US stock market indices by stock picking as well.

What is value investing actually? It is a strategy of investing in mature, profit making, dividend distributing companies in mature businesses that have low Price to Book and Price to Earnings ratios.
In the book 'The Intelligent Investor'  it is quoted that Price to Earnings ratios above 40 would make Benjamin Graham cringe. Benjamin Graham, after all, is the 'father' of value investing.

Why does value investing generally beat the market over long periods of time. As far as I am concerned, the answer is as follows. The mature, large, lowly valued, dividend distributing companies value investing favors, actually tend to fall less in bear markets or financial crises or they have the proverbial 'margin of safety' popularized by Benjamin Graham in his book the 'The Intelligent Investor'. Why does this happen? Basically, it seems that valuation in some peculiar way seems to matter. Investors seem to think high flying technology and growth stocks that rise exponentially during stock market boom periods are more likely to fail and their stock prices fall more in bear markets than the stock prices of established companies from established industries.

Why then doesn't everybody follow the value investing strategy and become exponentially rich.
Well there are two problems with value investing. First, the out performance of value investing with regards to the main stock market indices is minor - usually 2-3 percent a year so high fee structures like the typical hedge fund fees of 2% of assets and 20% of profits are not feasible. Why do large established companies' stocks not move more? Size effect. They are too large and if they continue growing very fast they will subsume the global economy in their respective industry. One way to circumvent this is to break into other industries. Many research analysts seem to push this explanation for Amazon's crazy high valuation.

Another problem with value investing is that the value companies seem to change. Once they are growth companies like banks before the Great Recession in 2008 and now banks are value stocks. Energy companies were growth stocks when before the Great Recession oil was trading at 140 USD. Now energy companies are value stocks. A typical example is when Warren Buffett said he would not touch airline stocks and recently he bought quite large quantities of them. Growth stocks also have spanned different industries during the years.

Now growth stocks are the global IT leaders like Apple, Amazon, Microsoft, Google and Facebook.
Facebook is down 25% from its recent peak. Basically, Facebook's growth stopped and Facebook's stock exhibited the large fall typical for growth stocks.

Warren Buffett's Berkshire Hathaway invested circa 23% of its stock portfolio value in Apple's stock. I read some explanations that Apple is now an industrial company and it should not fall hard as a technology stock. I do not think this is true. When Apple's current 13% revenue growth falls t let's say 1-2%, Apple's stock will fall hard, similar to Facebook and if Berkshire Hathaway's is still heavily invested Warren Buffett will lose a huge sum of money.

Disclaimer: The blogposts and comments on this blog and posts on social networks(Twitter, LinkedIn etc.) are not investment recommendation, are provided solely for informational purposes, and do not constitute an offer or solicitation to buy or sell any securities. The opinions expressed in the blogpost and posts on social networks(Twitter, LinkedIn etc.) are the author's and they in no way express the opinion or official position of the company where I am working currently!

Conflicts of interest: I may possess some of the securities,currencies or their derivatives mentioned in the blogpost and posts on social networks(Twitter, LinkedIn etc.)!


Kind regards,
Petar Posledovich

George Soros, Reflexivity Theory and the Efficient-market Hypothesis!

Dear Reader,

I recently read the following book by George Soros:

The Crash of 2008 and What it Means: The New Paradigm for Financial Markets

Mar 31, 2009

In it the famous investor George Soros proposes his view of how financial markets work by putting forward the Theory of Reflexivity. Basically, he says financial market participants are not casual observers of the situation in markets. They are able to influence the present and future developments. This he calls the manipulative function. This is  supposed to dismantle the Efficient-Market Hypothesis which says that market participants take the events as exogenous. Supply and Demand in economic models are exogenous. Soros shows that Supply tends to influence demand and vice versa, so they are endogenous.

Yes, Donald Trump, Federal Reserve Chairmen Ben Bernanke, Janet Yellen and Jerome Powell have the power to influence markets, so Soros is right that to a certain extent there is a manipulative function of market participants. But the problem is, with open market economies, freely flowing capital and markets in existence you never quite know what the effect of a certain policy will be. During Chairman Greenspan's tenure the Federal Reserve raised rates only to see the yield on ten year treasuries actually fall- which is known as the "Greenspan's Conundrum"- this happened in 2004-2006 period. Classical economics, on the other hand, is preoccupied with the fact that market participants only observe and analyze events - or what Soros calls the cognitive function. Classical economics seems to assume that no market participant is large enough to influence supply and demand - supply and demand are exogenous. That obviously is a long stretch, because the economy of the USA makes up about 20% of world's GDP and is obviously large enough to change reality or the world. The same is true for the actions of the Federal Reserve and the President of the USA.

George Soros wonders why his theory of reflexivity has not gained enough traction in both academic and practitioner circles. One explanation is that the theory is difficult to model, according to Soros. That, actually, is not true. Refelxivity theory could quite easily be modelled. You just assume that Trump's or market participants' actions are a shock  which influences prices. This shock changes the price in one moment, than the price itself exudes a shock on market participants or Federal Reserve Chairman's beliefs, they adapt, change their beliefs and again exude a shock on the market. The markets are in constant flux or change. George Soros never mentions Bayesian statistics, so I am not sure whether he is familiar with these methods. Bayesian statistics models the current state of events as the prior, which the new information changes, so the prior changes and the posterior results change. Then the prior changes again and so on... The problem with all this is that with democracies and free markets you never quite know what effect Trump or Jay Powell's actions will have on the market. You do not know the shock outcome. But yes, reflexivity theory is not very difficult to put into models.

The Efficient-market hypothesis. Ah, that great academic construct. To put it straight, there are at least 30-40 portfolio managers whose track record in managing investments disprove the Efficient-market hypothesis. As far as I am concerned,  a portfolio manager needs to beat the market in at least 5 from 10 years to make the Efficient-market hypothesis invalid. There have been MANY occasions on which portfolio managers have disproved Efficient-market hypothesis. Warren Buffet, George Soros, Bill Miller, Benjamin Graham, Seth Klarman, Joel Greenblatt, Philip Fisher are just some of the most famous examples. Let's take a deep dive. Why is the Efficient-market hypothesis not true. First, it is very difficult to test the truthfulness of the Efficient-market hypothesis. Second, the Efficient-market hypothesis assumes that the aggregate market participants' views are always correct and there is no way to extract 'abnormal' profits. Basically, the Efficient-market hypothesis assumes there is GOD who knows all- God is the aggregate market participants' views, which are ALWAYS right. Why is this NOT true? Anyone who has invested in the markets knows why. There are simply too many frictions. Market participants DO NOT have the same information. What is more, in the Efficient-market hypothesis there are the implicit classical assumptions of classical economics that people are always rational and Supply and Demand are given or exogenous. Basically, that is NOT true. The iPhone supply created its OWN demand. Supply constantly influences Demand and Demand constantly influences  Supply. Kahneman and Tversky, Arielly and Richard Thaler have pretty clearly documented that human beings are not always rational, especially in the short term.

To put it in a one single sentence:

YES. IT IS POSSIBLE TO EXTRACT ABNORMAL PROFITS FROM FINANCIAL MARKETS. CONSISTENTLY. PERIOD(.)

Where does that leave classical economics? I am a classical economist in the sense that markets always know better than a single person or dictator. I am a free marketeer. I believe there should be minimal government intervention. I believe there should be both state and private hospitals and universities, where people could choose according to the financial means they have. However, I am Keynesian in the sense the regulators should get involved from time to time to correct the markets' excesses. Why? Because unbridled greed could cause severe damages to the capitalist system in the short run. Yes, as George Soros says, hunans are always fallible, their knowledge is imperfect, but society is after all a human construct. 

P.S. Hats off and deep bow to the Chicago School of Economcs and Eugene Fama who developed the
Efficient-market hypothesis and the Columbia Business School which since Benjamin Graham has contended that markets can be predicted and abnormal profits can be extracted from financial markets. I have always dreamt of studying in such universities!

Disclaimer: The blogposts and comments on this blog and posts on social networks(Twitter, LinkedIn etc.) are not investment recommendation, are provided solely for informational purposes, and do not constitute an offer or solicitation to buy or sell any securities. The opinions expressed in the blogpost and posts on social networks(Twitter, LinkedIn etc.) are the author's and they in no way express the opinion or official position of the company where I am working currently!

Conflicts of interest: I may possess some of the securities,currencies or their derivatives mentioned in the blogpost and posts on social networks(Twitter, LinkedIn etc.)!


Kind regards,
Petar Posledovich