Anatomy of a Bubble - Tesla and Bitcoin

Here we go again

First, a quick summary for lazy people

The pandemic has caused a massive, ongoing shock to the world. One knock-on effect is that technology companies have risen in value. Tesla, however, has risen so violently that, despite its intrinsic value, its market value is in bubble territory. Based on my experience trading the Bitcoin bubble, I offer some suggestions for anyone currently investing in Tesla to navigate this opportunity and avoid getting popped.


Let me fill you in

If you just left your underground bunker for the first time since mid-March, the situation is probably even worse than imagined. Here’s a quick rundown since you cut yourself off from society:

  1. Almost a million people dead from coronavirus worldwide, with almost two-hundred thousand dead in the U.S. alone

  2. Real U.S. Gross Domestic Product down -5.0% in 2020Q1 and down an unprecedented -31.7% in 2020Q2 on an annualized basis

  3. Unemployment higher than at any point since the Great Depression

And the stock market? Oh boy…you might want to sit down. Were you planning to retire on your 401(k) nest egg? Your plans will have to change; you may need to adjust your planned retirement age because the market is at…fresh all-time highs.

Wait, all-time highs?

Yeah! Despite everything that has happened, the overall stock market has totally recovered. It’s not only trading higher than in latter 2019, when the coronavirus was just a random person coughing for the first time, it’s trading higher than the pre-crash peak in February 2020.

No. I’m not kidding.

See, one of the big drivers has been tech companies, which have benefitted from the “work-from-home” and “remote” trend that’s occurred since everyone decided they didn’t want to die leaving their home. Check out the tech-filled Nasdaq:

A disturbance in the force

Just think about it, a world-changing global pandemic has taken place, facilitating a massive shift in how people live their lives in the short-term. Some of these behavioral changes are likely to persist in the long-term. The main theme of these changes is rooted in technology.

People are using Microsoft and Apple products to do their jobs, buying their goods from Amazon, connecting with family and friends through Facebook, searching for answers to their existential life questions through Google, and trying to ignore that existential dread by watching Netflix.

People did this before the pandemic too. But, now they are doing more of it. And, even if the virus disappears like a miracle, it seems unlikely that people are going to react by getting rid of their cell phones and going back to work using typewriter instead of a computer.

A rising tide lifts all boats

The story doesn’t end with the success of the big tech companies. “Smaller” tech companies have seen huge gains as well. Shopify, Zoom, Fastly, Twilio, DocuSign, Square. The list goes on.

In fact, some of these companies have risen so much that they are trading at market values on par with long-time heavy hitters from the traditional blue-chip world. This change has occurred in a matter of months. Not years.

Chaos is a ladder

Amidst the change, one tech stock reigns supreme. In a sea of winners, there is but one king. Elon Musk.

See the source image

Okay, so yes, this dude has several companies but I’m talking about Tesla. To get a sense of just how well that stock has done lately, let’s look at its price since IPO:

For $7,625 invested at the opening offer price, you’d have a million dollars today.

The story matters

Stocks can become inflated through mania-fueled narratives - not fundamentals. For amateur investors out there who have read a few books and done a DCF model crying, “buh buh buh the fundamentals *sniff* the price-to-earnings ratios *sniff* the estimate of intrinsic value!” there are plenty of people saying, “hurr hurr stock goes up I buy.”

Who is “right” here? Is it the people who calculate a few ratios and lose sleep over money not made or the people recklessly investing and making monster gains? Does it make “sense” that there can be such a bad public health crisis that obliterates the economy while stocks do well? This is an ongoing debate.

I think it misses the point.

You don’t need fundamentals in every situation. Sometimes, a story takes on a life of its own. Sometimes, performance becomes completely untethered to any analyzable fundamentals. It’s human psychology. It’s mania of the masses. It’s a bubble.

Ignore the haters

Once you call something a bubble, all sorts of emotions come out. Jimmies get rustled. People get opinionated. It becomes really difficult to make objective decisions.

That’s okay. Subjective decisions can still make a lot of money. They can also lose a lot of money.

The important factor to keep in mind, if you are invested in Tesla or even thinking about investing in Tesla, is to avoid the noise and focus on extracting maximum value.

Riding a bubble is dangerous. It can also be lucrative.

So, what should you do?

I should probably have this entire article covered in caution tape with disclaimers like “past performance is not indicative of future returns” and all that other mind-numbing boiler plate language that people use to sidestep responsibility.

Where is Tesla going? Probably up, down, or sideways. That’s not what matters.

Anatomy of a bubble

I think Tesla is a bubble. It’s not about whether it’s a “tech” stock. It’s not about how well tech should or shouldn’t be doing since the coronavirus crisis began. Those are stories that help fuel the narrative.

I think it’s a bubble not because it has no intrinsic value but because it’s market value has far exceeded that intrinsic value. I believe it’s trading outside the realm of any rational fundamentals and, instead, on vast speculation.

That’s just noise though - it’s an opinion. The most interesting thing about bubbles is that, because they trade on speculation, they basically defy whatever any rationale commentators, like myself, want to apply, especially in the short term.

But, again, I think all this talk misses the real point. Let’s not worry about whether it’s 100% a bubble or 100% not a bubble.

A bubble doesn’t have to be a binary thing. It can be a spectrum. Not everyone may agree that Tesla is a bubble but I think more people would be willing to concede that it is certainly bubbly. And, if something is acting bubbly, we can leverage past experience with bubbly things and maybe gain some insight.

I’d like to offer up my experience with Bitcoin, which, to this day, some people will still claim is (or was) “not a bubble.” (Maybe down the road when everyone is driving Teslas that they bought with Bitcoin, they will laugh at me and say they were right. I stick by my opinion that Bitcoin, at least for a time, sure acted bubbly.)

The year was 2017…

My first “what is going on” moment with crypto hit me in early March. I was debating whether or not to spend a few hundred bucks on a ticket for a music festival. I checked over some accounts to see if I could afford it. I remember thinking, “Wait…why is my crypto account up triple from when I last checked? Cool! That easily covers my ticket.”

Over the next few months, prices continued to rise and I did more investing. I was scared though. I really thought I was going to be investing at the very peak and end up losing money. Because of that fear, I couldn’t justify suggesting it as an investment to others and was nervous to even mention it to people in conversation.

I was getting beaten over the head with crazy gains and I didn’t really understand what was happening. No one was really talking about it either. That changed quickly:

Trump!

Every article these days has to mention Trump so the algorithms will boost it for clicks. It does play a part in this story though.

Back before the 2016 election, I was trying to assess the implications of Trump winning the presidency. I was following the predictions at FiveThirtyEight and other sites and, based on my risk background, knew that the odds of victory were well within a range worth considering as a possibility.

This isn’t a politics thing really. It’s just a matter of uncertainty. I think a lot of people would agree that, prior to Trump’s election, the prospect of a Trump presidency would be different than the status quo.

In the case he did win, I didn’t know what the impact might be. However, I did think about diversification as a hedge. So, I thought it might be useful to diversify into Bitcoin, which I had followed closely for many years.

I didn’t invest in Bitcoin to make money. I thought it would go up and down a bit, sure. But, the goal wasn’t to hit some exponential lottery. That’s a key point I think Tesla investors would echo prior to things getting bubbly. “Hey, this is a good company and I like the product - seems like a fine investment to hold.” To me, Bitcoin was the same way. Just another investment…

Who are the real winners in a bubble?

I didn’t buy Bitcoin thinking it would turn from $600 into almost $20,000. I just happened to get lucky and buy in before the hype.

The hype was people buying Bitcoin precisely because they thought it would turn from $600 into $20,000…or $200,000…or $2,000,000. The problem is, the majority of people who thought this weren’t buying bitcoin at $600. They were buying it all the way up the parabolic curve and even, in the most damaging way, after the peak, once it had crashed and looked to be “on sale.” Buying the dip burned people.

I’m not saying that people who bought at $5,000 or $10,000 or $15,000 were dumb. Some of them made money and exited for a gain. But, the closer they bought to peak prices, the smaller the gains and the bigger the potential for losses.

A bubble is like a black hole

Everyone gets sucked in.

The challenge of a bubble is that the fear of missing out rises alongside the price. Everyone thinks, “oh man, if only I bought back when. I thought about it too! I really did! I’d be rich…maybe I can still get rich.” That narrative spins out of control because the people who buy late have to pitch increasingly outlandish scenarios to justify buying so high by claiming it will go even higher.

I’ve heard some of these stories with Tesla. “Of course it should be worth more than the entire auto industry because people will eventually all drive Teslas! Oh, and Elon will own the power grid. And something about a star link…that’s related too isn’t it? I don’t know bro but it’s going to print. Elon is a genius.“

When bitcoin rocketed toward $10,000, I thought, “enough is enough” and cashed out completely on the train to see my family for Thanksgiving. Do you know how painful it was watching the price double over the next few weeks? The same world-changing narratives that are playing out with Tesla were playing out with Bitcoin.

I didn’t lose sleep because I had money riding on the bubble. I lost sleep because I didn’t have money riding on the bubble.

Most shockingly, the bubble continued way longer than I ever expected. In hindsight, why wouldn’t it? I had been making huge gains for over a year.

The pull was too strong. I had to jump back in. It wasn’t nearly the original amount but, after a few days, I traded with some “play” money and the gains were so easy. I remember getting a burger with a buddy who also traded and we made hundreds of dollars just being idiots while watching a football game. We left a good tip. We didn’t even trade well. With the market relentlessly rising, it was like you couldn’t lose.

I remember walking to work one day that December. It was packed on Park Avenue and I glanced at the phones of people walking by who looked sucked into their screens. Within a few blocks, I saw three different people actively watching live crypto charts on trading platforms. It felt like that old saying about the 1929 bubble that it was all over when the shoe shine boy was giving stock advice. These finance bros watching their phones on their way to work were the crypto horsemen of the apocalypse.

Boom goes the dynamite

Bitcoin peaked. I remember watching the final rally. It exploded upwards by thousands of dollars in what felt like the blink of an eye.

Then, there was a pullback. It didn’t seem like the end. Bitcoin had dipped plenty of times. No one knew it was the end. The peak was over and every single dollar invested anywhere near that peak still sits at a loss years later.

Other cryptocurrencies kept flying. However, those eventually peaked too. In fact, they peaked on the day my burger-buddy texted me to say he made $4,000 dollars in the time he went to go use the bathroom (and we’re talking number one here not number two). That’s how fast it everything exploded when the bubble was at its end. It was insane.

I was mostly out by then. I was so jealous.

The aftermath

While prices went down, there was still absurd volatility. Money could be made. The issue was, it was so much harder than when there was volatility on an uptrend. The mistakes made while eating burgers that got quickly covered by a rising tide turned into huge chunky losses on the other side of bubble mountain.

I did even more trading on the downtrend and did well for a while. My buddy got out for good. It seemed like everyone else did too. I felt really alone in my trading because suddenly people went from saying “wow you invest in that?” all starry eyed to “wow you invest in that?” while texting me help hotline numbers.

It took a very long time to justify my trading. For a long time, I was below my peak profits. It only got worse the more trading I did. And, just like the 1929 bubble, the pain didn’t end with the initial crash. In fact, the pain got worse much later. Bitcoin, after a period of stabilization, crashed another 50% in the fall of 2018.

Suddenly, I was very far away from my peak and all the mitigation and hard work I did was worse than if I had just done nothing at all. If I had cashed out on the train that Thanksgiving of 2017 and just done nothing, I would’ve been further ahead.

You can’t escape the black hole

I learned so much from the experience. Eventually, I ended up at a new all-time high in profit despite Bitcoin and other cryptocurrencies never again touching their peak. That’s not bragging though because I 100% do not ever recommend doing what I did. Ever.

It was a massive waste of time and effort.

I made money but at what cost?

The amount of time I could’ve spent learning a new skill, or investing in my professional life, or just enjoying myself would’ve been worth so much more than grinding back to a peak profit I had reached years earlier.

And, I am one of the lucky ones! I got in early. I mostly got out before the real pain. I made some good trades and got back lost ground. A lot of people not in my position that kept playing the game got absolutely screwed.

I do not recommend anyone ever invest the amount of time and the amount of stress I put into trading like that. It’s just not worth it - just say no.

I still trade crypto to this day.

Wait, I thought this was about Tesla?

Now that I’m done with my crypto-induced PTSD flashback, I want to relate this to Tesla. Let’s say you invested in both Bitcoin and Tesla back in May of 2017:

You can see the exact point in the middle there where Bitcoin hit its bottom and all the forums put up suicide help notices. No joke. This stuff is serious. A bubble is a serious psychological phenomenon and can lead to people making horrible decisions. There is a reason people still tell stories of people jumping out their windows during the 1929 stock market crash.

The most dangerous aspect to bubbles is that they become about more than just money. They can become life and death. When I talk about the hard work and stress I put in and don’t recommend it to anyone, I’m talking from experience. And I made a huge profit.

Think about that. I made a huge profit and I’m saying to stay away from the black hole. If it looks bubbly, you could get popped.

Now, look at Tesla on the right of that chart. Does it look familiar to what you see on the left? B u b b l y.

Here’s what I would do

If you are currently invested in Tesla, think about me on the train as I closed out my positions. I was mad for a long time, especially as the bubble continued to inflate. Eventually, I wish I had just walked away for good.

If you are thinking about investing in Tesla. Dude. That ship has sailed. I’m not saying it won’t go higher but the risk/return profile right now is so not in your favor. This is gambling. There are no fundamentals, just like Bitcoin had/has no fundamentals. Go to a casino if you need to be reckless. At least there you have some fundamentals.

If you have lost some money on Tesla already. Congratulations. That’s actually hard to do right now. It will become much easier to lose more after the peak. There will be many more like you in time. Just walk away and accept your losses and move on.

If you are thinking of investing on the next dip. Be warned, ye who dare - the next dip may never end. *spooky hand waving*

If you are thinking of investing or trading after the peak. Just say no. The thing about bubbles is that they continue to be incredibly dangerous well past the peak. 10% off seems like a steal…until it becomes 20% off…then 50% off. Then you are just like…wait where did all my money go? Investing in crypto on the post-peak downtrend felt like shoveling money into a furnace.

Find value elsewhere

I’m not invested in Tesla. I never have been. Do I wish I had been? Yeah. I think back to my three favorite stock picks in 2011 (Lululemon, Tesla, and Whole Foods). Why the heck didn’t I invest in them? I wanted to save my cash for travel. Guess what? I don’t regret it at all. I made memories that will last a lifetime. (That being said I maybe wish I took a less expensive trip and put some money into those stocks.)

Forget stupid disclaimers. Don’t invest in Tesla. Not right now.

I stand by that the same way I stood by that recommendation on the upswing of the crypto bubble. People came to me because they knew I invested in crypto. They said, “what should I do?” I said, “nothing.” They got mad. I was okay with that because I felt a responsibility to give the most prudent investment advice even if it meant ridicule.

Sometimes it’s okay to leave money on the table. If you try to grab every last dollar, you might get burned. Greed isn’t always good.

There is so much value to be found out there that doesn’t require you to dance on the event horizon of a black hole that could suck you in forever. Sometimes the real value is avoiding the massive party where everyone dances until the music stops.

It will stop. Some people already left and are very wealthy. Elon will keep his crown. This isn’t a debate about intrinsic value. It’s a debate about what to do to avoid being caught in a logjam while escaping a burning building. If you’re on the outside, don’t go in, as enticing as the pyrotechnics may be. There are plenty of green shoots to nurture far away from the coming conflagration.

You can join me and the other non-Tesla holding peasants out in the fields.


Who dares warn the masses?

I started this newsletter as part of a new year’s resolution to write and publish every single day. The streak is still intact!

For everyone who has been reading and made this year so rewarding, I hope this fun one-off super post was an enjoyable thank you for the support thus far. I think it’s good to mix it up a little bit and write off the cuff. After reading a lot of my dry boring stuff, you deserve it.

If you’ve read this far, it probably means you enjoyed the content. Perhaps you know someone else who might enjoy this content and want to share? I have two easy buttons below to do so. This writing stuff is kind of like the PBS plugs, it’s made possible by viewers like you! So, all the support is greatly appreciated. And, I save these links for the end because I want the people who actually read stuff and think critically to be the one’s supporting - there is more to all this than blind popularity.

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With the shameless plugs out of the way, I wanted to leave one last point.

The best part about writing has been hearing everyone else’s thoughts on the topics I cover. I don’t have a crystal ball. I’m wrong a lot (something something about the Michael Jordan quote about missing shots to make myself feel better).

I learn a lot talking with others. So, drop me a note if you agree, disagree, or think I’m an idiot. It’s all good.

Until then, I wish you all the best out there. Don’t get popped!