How a portfolio manager might like GE but not Tesla

We just published another Tesla post a week ago, and while this title is so hot we could do one every week and still have a lot to say, there is a lot more to discuss. in our kingdom and that we normally want. spread these things a lot more for the sake of variety if nothing else.

In just the week since the last article, Tesla is up another 24%, a figure that portfolio managers have been pulling for over a year, a good full year. If I gave them the chance to take 24% on January 1 of any year, or risk having the skills to beat that number, it would be very doubtful that any of them would reject it.

This is by no means a bad patch in a single week for a portfolio of stocks that portfolio managers typically fear on their way to the top with the Tesla Balloon. We have mentioned how many people in the investment industry are so afraid when a stock’s P / E ratio goes above 30, but no one has told Tesla investors they need to be afraid of it, or what ‘such a thing matters, and it really doesn’t matter.

If we don’t understand this, we will be making the same mistakes Hightower Portfolio Manager Stephanie Link makes over and over again. Link is a regular at CNBC and so we see how her fears of strong stocks show up 5 days a week, where very often she tells us how scared she is of “overestimation”, and Tesla is the devil himself. when it comes to that, scary like nothing else.

Tesla’s P / E was already at 800:

1 a week ago when we last wrote about it, and since then both have crossed the $ 2,000 mark and the P / E ratio of 1000: 1 The analysts then halted their valuation, which inspired this last article, and we told you that this was not just a take or a buy, but a buy of the strongest type we’ve ever had. seen.

You don’t get much more out of a stronger buy than gaining 25% in just one week, so it stayed true to form, but every time it goes up people like Link get more. in addition afraid. This is a model that we definitely need to discuss, as it is common to both many investors and even traders, who may even be so afraid of jumping on a rising stock that even the finger on the sell button is all over the place. time with a stop loss. tight to start may not be enough to make them feel comfortable enough.

However, traders who suffer from this problem fail in school because it leads to poor grades overall, and you don’t stay in business school for long getting F like this. This robs them of most of the good opportunities, as most of the money in trading is made by pursuing moves, not waiting for reversals, and you will end up being broke quickly if you are afraid of making money and to move away from trades that cover your losses and provide. the most that traders are looking for.
Being scared to death by a stock like Tesla is hardly remarkable on its own, and we wouldn’t want to choose Link just for that, and the list of other famous stock advisers who made this mistake would indeed be very long. Link proudly proclaims that he “owns” Apple, which many people won’t even touch, but Apple’s $ 35 price-to-earnings ratio isn’t that far out of his comfort zone, and Tesla is over. 30 times higher than that. terrifies.

In the same sentence though, Link told us about how she had been at GE for a long time and still loved him.

It reminds us of how some questions are asked about IQ tests, where a person likes something but not something else, where Stephanie likes GE but not Tesla for example, and we should see what we can deduce from what she likes. and I do not like. It’s more telling than anything you’ll ever see in an IQ test.

We’ll leave the characterization of GE to Link’s CNBC colleague Kevin O’Leary, who summed it up perfectly when he noticed that GE is where the money is going to die. This is how you describe a stock that went from $ 31 in December 2016, and has since been sucked slowly and steadily, to the $ 6 it’s worth now.

We don’t need to get more into GE than to say that O’Leary’s lineage is dead.

GE is stuck in the intensive care unit on a ventilator and all she can do these days is twitch a bit in bed, with her family including Link standing around the bed and hoping for some every once in a while, but every time he tries to regain consciousness he eventually passes out again and his situation gets even worse.

Very enthusiastic traders can also find long games with action like this, when it starts to twitch involuntarily and the moment its head hits the pillow again and its tongue sticks out of its mouth, but it requires a huge amount of effort. amount of skill, enough that we don’t even recommend them to traders in general, and especially investors who aren’t even interested in exiting a trade when needed, let alone when it is time to leave.

This animal bites pretty hard, and it’s a strain that tried to get out of bed twice from the bottom that the market did in March, where you need to see enough movement to confirm it might wake up, and the twice it collapsed. Don’t get stung by these trades because its upward movements have come to such a brutal and violent end, going up for two or three days and then going back to bed two or three days later is as difficult as a trade.

We’ve seen bearish reversals in Bitcoin’s size without fundamentally going up, trades that require monitoring so close you have to be at its bedside full-time, and not even something you could check on a daily basis without too much risk. a bad surprise. His two mini-crashes after the big one were over 30%, to get a taste of how this old stump has gone wild now that he’s in a nursing home where money and people are going to die.

Conversely, Tesla has now broken the 1000% return from where it started in June 2019 at.

This is more than what the average investor gets in their entire life. One would have to go back until GE first entered the market in 1962 to come close to this type of nominal return. The S&P 500 has done better, especially over the past few decades, but that kind of comeback has still taken over 30 years to achieve.  1928: Amelia Earhart with the airplane

It’s even worse than that, because of the effects of inflation.

If you put $ 1000 in the S&P 500 in 1989 and still hold it, you will get a nominal return of 1000%, but $ 1000 bought a lot more in 1989 than it does today. Tesla’s little extra return of over 1000% covers the low inflation for the year and the past 2 months, but you have to go back to 1954 with the S&P 500 to get an inflation-adjusted return of 1000%.

Assessment is a mental disorder that remains at a pandemic level

Stephanie loves GE but not Tesla is amazing, and GE’s massacre doesn’t scare her, but Tesla scares her a lot, which she readily admits. There seems to be a side of her that is ready for such a thing, but she cannot do it because she admits that she is suffering from the disease of the evaluation.

Although you don’t see much talk about this disease elsewhere, like you have it, you don’t know you have it, your condition seems quite normal to you, we are released from it and therefore able to report it when we see symptoms. They are very easy to notice and every time you see someone referring to earnings as driving stock prices they are just telling you that they are sick.

It’s not even about people who think fundamental analysts may pay too much attention to short-term gains, which is certainly true, and instead think long-term gains are what people look for when they are. ‘they are rolling. Tesla as he accelerates down the main road. The idea that profits determine the stock price is at the heart of this disease, where we have to get rid of this idea completely if we want our minds and approach to be healthy.

Someone who didn’t know any of these things might be wondering why profits matter at all to stock prices, and we would like someone to raise their hand and ask that question of one of these people, and we don’t. can’t even think how they would respond to that other one who just be amazed.

Perhaps their answer would be similar to what we found when we researched Bing .

why earnings are considered important to stock prices.” Search engines offer answers to these things at the top of the charts and Bing told us that “the price of a stock reflects the market’s assessment of a company’s value. A company’s value is a value. measure that depends on its income. So as the income increases, the value of that business increases. ”

If this statement makes sense to you, you suffer from evaluation because it describes the disease so deeply.

It goes without saying that many investors suffer from this disease and the resulting distortion of reality might even manifest itself in the liking of GE but not Tesla, for failing this IQ test so miserably.

Where this explanation completely leaves its mark is the part where we are told that “the price of a stock represents the market’s assessment of the value of a company.” This statement is patently false, based solely on delusion, and we only need this statement to diagnose the evaluation.

This disease is so widespread that we are sure we are not alone in considering it a boon, but we have yet to see it properly explained elsewhere. We find this amazing because we think it should be so obvious or obvious enough that others will recognize this big mistake as well.

The heart of this disease can be summed up quite simply.

People buy shares in a company and may think they are speculating on the company. What they actually do, whether they realize it or not, is speculate on the stock. They are far from the same.

Those who study stocks on their own do not suffer from this disease, because they limit themselves to the stock, and not everything that happens with the company itself is correctly considered to be relevant.

We call these people technical analysts, as opposed to people who suffer from valuation, fundamental analysts.

They have been fighting since the dawn of technical analysis, since the days of Charles Dow, the father of the Dow Jones indices, although technical analysis originated several hundred years earlier in the Japanese rice markets, where the Japanese are the candlesticks who are the most. widely used today come from.

Assessment is a very difficult disease to treat

Fundamental analysis has survived and thrived all this time, and the main reason is that neither party fully understands that profit has absolutely nothing with the price of a stock, now, later or. never. If you don’t hit them at the source of their misunderstanding, you won’t reveal it enough.
The price of a stock and the valuation of a company may be related, but the price of a stock is not at all dependent on earnings or any fundamental criteria, and all we need to do is ask the fundamental analysts explain why they think any of the basic criteria used is predictive and the most you might hear is gossip, simply repeating their beliefs and insisting that they are right without even the possibility of justification.

It’s the demand for stocks itself that drives stock prices up, and that’s what technical analysts limit themselves to completely and fundamental analysts completely ignore. Valuationitis sees people negotiating the business, where the value of the business becomes central, and they are also left without explanation as real life deviates from their perspective.

Nothing sums up this error as eloquently as Bing’s explanation, where the price of a stock reflects the market’s assessment of a company’s value. This assumes that all market players will fundamentally value a stock and, if that were true, their point of view would be correct, but it also allows us to look at disease at the cellular level.

What they are doing is assuming that the stock market values ​​stocks the same way they do, and here we have hit the hammer when it comes to finding the root cause of this disease. This is exactly what they do, where the price of a stock has to go according to their formulas, but when the market starts to speculate, speculation is not built into their model, as insane as it may sound when we consider that this is why. people buy stocks in the first place.
We can think of it as a measure of the temperature of a stock, where the hotter the better, and that temperature determines the mood of stocks and the mood determines their prices.