Annual Report and Shareholder Letter
January 2, 2020
Simulation Trading Disclaimer
This is an annual report for my simulated stock portfolio for the calendar year 2019. I am a student at Miami University in Ohio. The management of the portfolio is an independent project that is not part of my course work at Miami, and is not in any way associated with or endorsed by the university.
Hypothetical or simulated performance results have certain limitations. Unlike an actual performance record, simulated results do not represent actual trading. Also, since the trades have not been executed, the results may have under-or-over compensated for the impact, if any, of certain market factors, such as lack of liquidity. Simulated trading programs in general allow for the benefit of hindsight; no representation is being made that any account will or is likely to achieve profit or losses similar to those shown herein.
Closure of the Full Year Stock Hold Fund and Launch of Crossroad Capital
For the previous 2018 calendar year, I operated a year-long long/short equity strategy with the title of Full Year Stock Hold Fund under the domain of my personal website wstreetbeat.com. For the 2019 calendar year, I’ve decided not to renew the title Full Year Stock Hold Fund and to launch instead a new simulation of an active global long/short equity strategy under the name Crossroads Capital, which is still associated with my website wstreetbeat.com. The new name offers more of a personal reflection of my typical investment approach. In essence, “crossroads” are the intersection of two or more paths. Hence, the name Crossroads Capital in this context suggests the intersection of micro and macro analysis, accounting, fraud investigation, value searching and judgement of the rise and fall of what economist Robert Shiller refers to as “Animal Spirits” – all coming together to direct an individual investment decision.
In my 2018 Annual Report for “The Full Year Stock Hold Fund”, I detailed my prior strategy of focusing 100% of the investments in stocks listed on the NYSE and allowing only the purchase or shorting of a stock on it’s beginning date and sell or cover on it’s ending date. This previous strategy was rather limiting. For 2019, I adopted an active global long/short equity strategy that seeks to take a long position in underpriced stocks while selling short overpriced shares. This augments traditional long-only investing by also taking advantage of profit opportunities from securities identified as both undervalued and overvalued.
The objective of the active global long/short equity strategy is to exceed the gains realized by the S&P 500 Index benchmark over a 10-year period.
An important aspect of a businessman is establishing one’s image and personality or what I like to refer to as one’s “auteur aspect.” We often give Warren Buffet his credit due when it comes to commonsensical value investing or are intrigued by Richard Branson’s eccentric ways. Therefore, I believe it to be important that I seek to establish my identity, image and personality to you, the reader, while humbly keeping in mind that by doing so won’t yet put me among the incredibly successful likes of Buffet, Branson and many more. But, there is no better time to attempt to do so than in the present. Therefore, I’ll introduce myself by initially stating that I’m a current Economics undergrad student at Miami University in Oxford, Ohio and I got my start or initial experience investing on the heels of the financial crisis of 2008, after my parents gave me free reign over a miniscule Etrade brokerage account. As luck would have it, I essentially wandered into the stock market for the first time ever during arguably what could be the greatest buying opportunity of my lifetime. While being around 10 years old at the time and having very little clue as to what I was doing, I did recognize one thing: that well established American businesses were trading at prices well below what they once had before the crisis. A more simple explanation would state that back then I had deemed these companies to be “undervalued.” In early 2009, I made my first purchase of Ford Motor Company and General Electric, two American businesses that both were founded pre-1905. Later in the year I purchased Citigroup and around 2011, probably inspired by my account’s growth and no notion of the perils of “easy money”, I purchased NUXFF which I honestly have little explanation for, many years later, as to what I bought or why, but NUXFF was the beginning of some more common money mistakes I had to learn through experiencing the hard way.
By 2013, I had sold my Ford Motor, General Electric and Citigroup for a pretty hefty profit. Ford I made 962.30% and with General Electric 243.36%. This was certainly due to luck, but I did start realize and witness the incredible rewards associated with finding undervalued companies trading below their typical prices during periods of financial difficulty. From there I sort of abandoned my previous value search attempt and moved into some of the growth stocks such as Tesla and Amazon and moseyed around with futile strategies such as buying and selling within the week and other high-cost and low patience approaches. By the time of the later stages of High School came around, I decided it best to move out my funds and place it into a college savings account rather than take the risk that my youthful inexperience could lose all that I had in the markets.
Rather than bring my investing experience to a complete close, I began using Marketwatch’s Virtual Stock Exchange program while drawing influence from a section of Sir James Goldsmith’s book The Trap in which he states:
“Those who practise a discipline, rather than merely teaching it, are constantly testing their ideas in the real world and, very quickly, if the ideas seem to be failing, changing them until a successful system is found. A theoretician can continue to believe in and teach the same theories without ever discovering whether they are effective. This is like the legendary character, Virtuoso, who considers himself an expert on all things that move and believes that he is the world’s greatest swimmer. He demonstrates the strokes while lying on a table but never swims in the water.
Most western societies are constantly losing knowledge and valuable skills. Instead of an apprentice learning reality from a master, we have students learning theory from a theoretician. Germany has gained a great advantage over its European competitors by maintaining its respect for apprenticeship.” (pg 98)
While I should note all trades were made on a simulator and it was my only option, but this form of continued practice soon led to a significant investment approach overhaul. As Charlie Munger, vice chairman of Berkshire Hathaway, famously stated “like a bunch of cod fisherman after all the cod’s been overfished. They don’t catch a lot of cod, but they keep on fishing in the same waters” I began to move away from my previous small circle of competence and began realizing companies could actually be overvalued in a stark contrast to the initial experiences of Ford and GE trading well-below their worth at the time of 2009. Hence, I started practicing short-selling which led to me searching for both under and overvalued businesses within my simulated long and short equity fund. This led to future successful short positions such as Riot Blockchain, Blue Apron, Tilray and Jumia Technologies and while also experiencing the losing side of short-selling with regards to Snapchat.
The discovery of overvalue in markets certainly was transformative. It was the research into Riot Blockchain, Bitcoin, Tilray, Theranos, Jumia, WeWork and others that moved my previous permabull investment theory to more of a mix typically seen in a long/short equity approach.
This discovery of overvalue coincided with the fact that one thing I’ve never understood is the romance with brevity. We as a country, for example give significant praise to music’s “27-Club” made up of the likes of Jimi Hendrix, Janis Joplin, Jim Morrison, Kurt Cobain and others. Now I recognize their feats, they operated in a completely different industry and made some incredible music! But with regards to business and investing, one thing to always keep in mind is capital preservation and longevity, recall Buffett’s most important rule is “to never lose money.” Hence, brief acts of business brilliance and innovation such as Studebaker or the more recent AOL, could similarly be called the stock market’s “27-Club” made up of innovative companies gone to soon. Therefore, when taking a long position, I often look at stocks using my personal idea of the “77-Club” made up of companies that I hope will achieve longer lasting profitable success, well beyond the shorter lifespans of the given prior examples of Studebaker and AOL. With that being said, I’ve always had that underlying term “77-Club” in the back of my mind, but the exact term was inspired by a quote from Bill Gross. Gross, co-founder of PIMCO, in an interview with Bill Griffeth, financial journalist for CNBC, states on page 100 in Griffeth’s book The Mutual Fund Masters:
“I viewed Wall Street as very short term oriented, looking at two to three months’ numbers, you know, fixating on one day’s industrial production number or a housing starts number and those types of things. I thought that that was too short term rented, because it tended to promote a herd type of mentality. It tended to allow for psychological whipsaws as some of the numbers came in good and then the next day came in bad.”
It was at this very moment, inspired by Gross, when I began to start looking at companies and stocks under a wider scope or span. Along with this drastic change in scope, experienced in 2017 I opened up my personal website wstreetbeat.com in which I started to write down my theories, beliefs and trade descriptions that coincided with my activity on the stock market simulators. In 2018, with the help of friends and family editing and critiquing my report I finally published my first mock yearly portfolio report titled Full Year Stock Hold Fund, in which a pretty self explanatory manner I purchased and shorted an array of companies, held them for a full year and then subsequently compared the performance to that of the S&P 500. Then this year, I reopened my simulated fund for 2019 under the title Crossroads Capital. I already went into briefly why the reason for the name change, but note investing is a mix of many different forms of analysis and as Bill Berger of the Berger funds states:
“All of us who manage money are reading the same music, it’s just that some of us conduct the orchestra differently. There is a very fine line that separates the good conductor from all the directors of high school bands across the country who are just waving a baton.”
Hence, the goal for Crossroads Capital and this year’s annual report is to exemplify to you, how I “conduct the orchestra differently” and to begin, what I hope to be an eventual foray into the career path of becoming a portfolio manager. Lastly, I’ll note I fully understand that there are significant differences in the behavior of real money versus portfolio management via simulator, but it is my only current opportunity to practice investing. I hope you enjoy reading, agreeing or critiquing what I have to say in this year’s portfolio report.
Total Return Index Comparison for a Hypothetical $1,000,000 Investment
For the chart below both the Crossroad Capital Fund and the S&P 500 are set to a hypothetical $1,000,000 investment on a start date of January 2, 2019 and an end date of January 2, 2020. A $1,000,000 investment into the Crossroad Capital Fund on Jan 2, 2019 would give you a pre-tax return of $2,144,734.27 on Jan 2, 2020 or a gain of 114.47%. A hypothetical $1,000,000 investment into the S&P 500 Price Index on Jan 2, 2019 would give you a return of $1,304,300 on Jan 2, 2020 or a gain of 30.43%. A hypothetical $1,000,000 investment into the S&P Price Index (including dividend reinvestment) on Jan 2, 2019 would give you a return of $1,330,700 on Jan 2, 2020 or a gain of 33.07%. Lastly, please note I am not listing pre-tax returns in efforts to increase the hypothetical returns, but rather as an admission that I don’t know the tax code well and the exact capital gains tax to apply, therefore I will abstain in effort to prevent listing a miscalculation.
Performance data represents past performance, which does not guarantee future results. Investment return and principal value will fluctuate, and you may have a gain or loss when you sell your shares. Current performance may differ from figures shown.
In addition to providing this year’s returns information from the Crossroad Capital Fund, it is incredibly important that I provide the maximum amount of information in order to verify my claims. Therefore below I’m providing multiple screenshots with the name of the fund played within Marketwatch’s Virtual Stock Exchange. Along with screenshots in order to verify the exact 42 stock market transactions that have taken place within the time period of January 3, 2019 to January 3, 2020.
Voids and Corporate Misconduct
After the review of Crossroads Capital’s performance over the past twelve months and the different companies stock I purchased or shorted, I want to focus on a specific overarching themes that commanded significant attention throughout 2019: voids and corporate misconduct. To begin this section, let it be noted among all of the past year’s financial mischief, four companies seemingly stood tall above the rest: Theranos, Jumia Technologies, Tilray and Beyond Meat. Hence, these four companies shall be investigated in the subsequent paragraphs, which is intended to reveal that each company shares two common traits of voids or scarcity and corporate misconduct.
The first common shared characteristic is voids and how it relates to the rise of Theranos, Jumia Technologies, Tilray and Beyond Meat. Theranos, is the possible product of desire for a woman CEO to emerge from the boys club that is Silicon Valley. If we think of the more recent examples of exemplary success and start-up culture, minds wander immediately to names like Zuckerberg, Musk, etc. A list of CEOs based in and around Silicon Valley looks something like this:
- Facebook: Mark Zuckerberg
- Twitter: Jack Dorsey
- Uber: Dara Khosrowshahi
- Lyft: Logan Green
- Snapchat: Evan Spiegel
- Apple: Tim Cook
- Tesla: Elon Musk
- Google: Sundar Pichai
- Airbnb: Brian Chesky
- Slack Technologies: Stewart Butterfield
Notice not much of a female presence. After more searching, I was able to find that Susan Wojcicki was the CEO of Youtube and Meg Whitman of Hewlett Packard. Now, I do want to note my intention here isn’t anything political, but my investigation does show a significant or disproportionate amount of Silicon Valley male CEOs versus female CEOs. As to why that is isn’t the point, rather there certainly existed a void for a strong female start-up founder to create a revolutionary business and succeed amongst the boys club. With this void or scarcity growing larger in proportion over the past couple of years as male-led companies continuously filed initial public offerings and garnered significant public attention, along came Elizabeth Holmes.
Holmes was initially was a storyline perfect fit: former Stanford student with the passion to develop a product that would revolutionize blood testing. She founded Theranos, after dropping out of Stanford in April of 2004 and was able to quickly develop relationships and important connections across the venture capital sphere. By 2014, her company was valued at $9 billion with more than $400 million in venture capital and she was titled “The world’s youngest self-made billionaire” while being ranked #110 on the Forbes 400 that year. In addition, Holmes started to garner immense publicity while being featured on the cover of Fortune, Forbes and The New York Times Style Magazine and formed “the most illustrious board in U.S. corporate history” which included names such as George Shultz, James Mattis and Henry Kissinger. During this period she also gave a widely publicized TEDMED talk in which she “elegantly delivered” a speech covering topics such as transformative technology, data and harnessing the power of the individual.
Regardless of her bizarre behavior and eventual fall, which I’ll get to in a bit, I’m certain that her initial ability to attract investors had to do with the desire for a strong female start-up founder to create a revolutionary business and succeed among the all boys club of Silicon Valley. She was able to gather tens and even hundreds of millions from the famous names of Tim Draper, Betsy DeVos, The Walton Family, The Cox Family, Rupert Murdoch and Carlos Slim. All seemingly invested into the company without asking, does her blood-testing method even work? Why were millions just thrown her way if Elizabeth Holmes couldn’t even go as far to describe and show that her product actually worked? Why was healthy skepticism and rigorous testing, two important stages for any start-up, so easily forgotten with regards to Theranos? Was her symbolic status of new-era female entrepreneurship enough to warrant the bypass of basic investment principles?
The second exploitation of scarcity comes from Jumia Technologies, an ecommerce platform doing business primarily in Nigeria, but interestingly enough headquartered in Berlin. Jumia is another company that seemingly has risen through a void by becoming the first African tech startup to list on the New York Stock Exchange. While not in similar fields of business, Jumia did share the bypass of initial skepticism similar to Theranos. Pegged as the “Amazon of Africa” Jumia Technologies went from very recent prior financial dire straits, with only one year of cash on hand, to holding an IPO on the NYSE and watching it’s shares jump from $14.50 to $49.77. Again the exploitation of void or scarcity seemingly allowed for the “Amazon of Africa” to peg itself as transformative technology and attract investors without having to answer the questions of why Amazon itself hasn’t moved into similar areas of Africa, the stability of the region in which Jumia operates or as to why the company saw a considerable decline in growth last year?
In our third example, Tilray happens to be another instance of the exploitation of void and scarcity. Before 2018 they’re certainly existed a lack of publicly traded cannabis companies accessible for mainstream US investors. Que in Tilray, by becoming the first pure-play cannabis company to list on the NASDAQ, it’s shares were able to capture investors wild enthusiasm for the cannabis industry prices went soaring from an IPO of $17 to $300 within only a few months. Again healthy skepticism seemingly bypassed. Questions such as is Tilray a long-term profitable company? Will they give a second or third listing further diluting existing shareholder value? Why are insiders dumping significant blocks of shares with virtually no insider buying? All these went went unanswered in the beginning and if one did press for answers the only thing given were vague statements such as “the cannabis industry is the future” and “pot equals profits.”
The final example, Beyond Meat, certainly gives the other three companies a run for their money in terms of mispricing and investor insanity. Beyond Meat is a Los Angeles based produced of plant-based meat substitutes that went public in May of 2019 at $25 a share. Within two months Beyond Meat traded at a high of $239.71 or up 958%. The company captured enthusiasm by becoming one of the largest and certainly the most publicized vegan company to go public. But yet again, investors and in this case a multitude of sustainability funds threw heaps of money Beyond Meat’s way without asking does the company have sound and capable leadership? Will Beyond Meat offer a second listing further diluting existing shareholder value? How can it justify such a high market cap with relatively weak fundamentals? Will Beyond Meat be able to compete with upcoming new competition in the meat substitute market? In similar fashion to Tilray, my hard pressing for answers left me more baffled than before. Seemingly the only story on the internet the first few weeks was the transformative Beyond Burger and how they hope to directly compete with what they refer to as the unscrupulous meat industry, all the while adhering to the companies personal sustainable principles.
The second characteristic shared among that of Theranos, Jumia Technologies, Tilray and Beyond Meat is corporate misconduct and how it manifested itself in sometimes shockingly extreme fashion. The point of this investigation and it’s second part is to analyze leadership behavior and how it can tip off investors that the company could either be wildly overvalued or in a more serious matter: a complete fraud.
The first and arguably most extreme example of corporate misconduct comes from CEO Elizabeth Holmes and Theranos. Hence, rather than bore readers with a long winding paragraphs, detailing Holmes separate discretions, I’m just going to list individual ones in a more simplistic bulleted format.
- Never turned a profit
- Rented a $1 million dollar a month company headquarters and spent $100,000 on a single conference table.
- Kept a personal publicist on retainer for $25,000 a month
- Had two personal drivers and two personal security guards and rented a mega-mansion all by herself six miles away from company headquarters in the ultra-expensive Los Altos neighborhood. Also insisted on only flying via private jet.
- Kept nine different law firms on retainer and paid the legal fees of her 54 year old ex-boyfriend Sunny which according to multiple executives cost the company millions of dollars per month
- Fired board members who personally questioned her about the developmental process of her product and her shady financial reporting
- The Theranos core product, The Edison, was a small consumer blood testing device that reportedly used a small drop of blood to perform hundreds of medical tests. This was revealed in itself to be a fraud, as investigations show that the company didn’t do it’s own testing and rather relied on third party devices to administer its tests. In addition, Elizabeth Holmes withheld information regarding the test results of her own products.
- Her plan to rescue the failing company included adopting a nine week old Siberian husky and subsequently naming it Balto, after the famous sled-dog who, in 1925, helped a team of huskies bring a dire needed antitoxin 600 miles from Nenana, Alaska to Nome, Alaska. In addition to his adoption, Holmes brough Balto with her everywhere ignoring scientists protest that the dog could contaminate samples when she would let bring it into testing labs. In an even stranger fashion, if the previous wasn’t enough, Holmes refused to address her dog as a dog and would actually bluntly rebut any reference to it’s dog-like appearance and refer to it only as a wolf.
- The day the company was finally locked out of its last remaining Newark, California office, Holmes was spotted off partying at the upscale music festival Burning Man in Nevada.
- Upon the filing of criminal charges, Holmes was financially cut-off from the company and according to remaining executives and management, she threw a multiple hour long hysterical fit.
Elizabeth’s adamant focus on appearance and image, rather than viability and profit, bore significant resemblance to the former directors and executives of arguably the most famous bubble of all known as the South Sea Bubble, which occurred in Great Britain from its founding in 1711 to subsequent collapse in 1720. In a passage from page 40 of Random Walk on Wall Street, author Burton G. Malkiel notes, with regards to the South Sea Bubble that:
“The directors were however, wise in the art of public appearance. An impressive house in London was rented, and the boardroom was furnished with thirty black Spanish upholstered chairs whose beechwood frames and gilt nails made them handsome to look at but uncomfortable to sit in. In the meantime, a ship load of company wool that was desperately needed in Vera Cruz was sent instead to Cortagena, where it rotted on the wharf from lack of buyers.”
As one can see by comparing one to the other, notice the similarities. The impressive house in London, the $1 million a month headquarters in Silicon Valley, the thirty handsome upholstered chairs and the $100,000 conference table. Regardless in the end, fortunes dispersed and Theranos went from a former $9 billion valuation to zero. Investors lost hundreds of millions, board members felt disgraced and former employees can no longer find work due to the stain on their career. All of this was made possible by the bypassing of what should be the first step of investing: healthy skepticism. While the void for female entrepreneurship remains among the predominantly male Silicon Valley, it is certain that eventually a female led company, start-up or CEO will come along with a brilliant business plan and execute on it. But, as an investor never let your guard down, regardless of the company if you value preserving your capital. Let Elizabeth Holmes and Theranos be a lesson for the perils that come along with bypassing behavioral and financial skepticism, investigation and review.
Jumia is another example of corporate misconduct manifesting itself when the watchful eye of an investor is blinded by the face of void and scarcity. As the first “African” company to go public on the New York Stock Exchange, Jumia Technologies was exploiting the lack of previous companies operating within the region. The first issue in relation to corporate misconduct and Jumia, is that it simply isn’t an African company, which is highly unfortunate due to the incredible emerging growth opportunities that exist throughout the continent. A quick look into the companies pre-IPO investors and shareholders reveals this list belowCorrect me if I’m wrong, but my geography tells me that Germany, Belgium and Luxembourg are located in Europe. Granted, Mobile Telephone Networks Holdings is the largest shareholder and located in faraway South Africa, but the company has already issued press releases about the plan to sell a majority of its existing stake in Jumia as soon as the IPO lockup period expires. In addition, Jumia leases three office spaces in Berlin, Dubai and Porto, Portugal. Their location in Porto serves as the companies technology center and when former French CEO Sacha Poignonnec was asked in an interview as to why Portugal, he responded “In reality, in Africa, there is not enough development and developers.” Unfortunately, the company seems less focused on developing the regional ecosystem and rather has used the African potential growth story merely as positive pre-IPO public relations.
Our third example of corporate misconduct comes from Tilray, a cannabis company based outside of Vancouver. While in comparison to Theranos, Tilray can seem benign, but don’t let the Tilray to Theranos comparison fool you, Tilray has a corporate misconduct rap sheet that should make any investor weary. Again, I think rather than going to long run-on paragraphs it’s just best to list a simple bulleted form detailing the companies various discretions.
- Never turned a profit
- In 2018 Tilray had $41.13 million in total revenue and $57.65 million in operating losses while Brendan Kennedy was the second highest paid CEO that year bringing in a cool $253 million
- The company isn’t even in the top ten for largest cannabis production capacity
- In 2019 Q1 and Q2 there was $28 million in insider selling and $0 in insider buying
- Issued an additional $400 million in senior convertible notes that mature in 2023
- Significantly overpaid for a series of head scratching acquisitions
- https://www.cnbc.com/video/2019/03/18/watch-cnbcs-full-interview-with-tilray-ceo-brendan-kennedy.html (Please watch body language does not lie, point of concern begins at 5:40 mark)
- Company puts emphasis on retail CBD, meanwhile the FDA is in the process of regulating the currently unregulated CBD market
Combine these discretions with their overvalued stock back in early January, I found Tilray to be one of the primest examples of voids gone wild. The mere lack of previous listings gave the company a wave of initial optimism so strong that it briefly hit a $20 billion market cap. Just like previous Jumia Technologies and Theranos, investors seemingly lost sight of basic rules and levels of skepticism. No sane investor could justify a $20 billion market cap with a company that has a very small production capacity, widening losses and a heavy debt load. Hence, I’ll say again my previous statement. As an investor never let your guard down, regardless of the company if you value preserving your capital. Let Brendan Kennedy and Tilray be a lesson for the perils that come along with bypassing behavioral and financial skepticism, investigation and review.
The final example of corporate misconduct, Beyond Meat, rests between leadership greed and just taking advantage of mispricing. It certainly is the most legitimate company of the four comparisons but yet is still another instance of valuable investor warning signs. The biggest moment or action of corporate greed with regards to Beyond Meat is their recent IPO lock-up period waiver. Conventionally, companies sign a pre-IPO agreement which requires insiders to wait for a specific time-period before they can sell shares, but not Beyond Meat. Instead of adhering to the previous agreement, which entitled insiders to have to wait till October 28 to offload shares, the company decided to complete a secondary offering of 250,000 shares and allowing insiders to the ability to sell their 3 million shares at a much sooner date. Essentially actions like waiving a lock-up agreement are a complete slap in the face to shareholders. An even more pessimistic view on the whole fiasco would certainly raise suspicion that insiders and management don’t have faith in the long-term prospects of the company or value their own wealth and that of their pre-IPO investors over the majority of new investors. Maybe the CEO wanted to free up some cash so he could take his family out to celebrate at a steakhouse, but who really knows. Rather, my interpretation was that Beyond Meat is less evil than the previous examples and more reminiscent of Pete’s Brewing Company stock from the mid-nineties and management knows this.
For a little history lesson, Pete’s Brewing Company, based out of California, was one of the first craft beer companies to IPO in November of 1995 and saw shares go up more than 40% on it’s first day of trading. Prior robust growth and newly raised cash led to plans for a new production complex to be built in Napa Valley but soon the craft beer market, which Pete’s was a pioneer in, became overcrowded and too competitive. By 1998, contract brewing agreements with Stroh’s and Matt Brewing Company that carried penalittes if minimum orders weren’t met along with an explosion in new competition pretty much sank the once hot stock. Eventually, it was purchased by The Gambrinus Company and by 2011 had discounted the production of their signature wicked ale citing significant declining sales.
The rise of Pete’s and Beyond Meat certainly share characteristics, both being California companies pioneering in a new market and witnessing rapid initial revenue growth. But as history has told times before and the examples given above, the “next big thing” doesn’t always bode well for the shareholders. Hence, in Beyond Meat’s case I still label their actions as corporate misconduct but it also poses a personal question of can you blame them for waiving the lock-up agreement? If you knew new vegan competition from the likes of Tyson Foods and others was only months away, as CEO wouldn’t you take every chance to get the maximum value out of your share of the company? Nonetheless, Beyond Meat remains another instance of corporate behavior and the need to investigate and evaluate as a potential investor.
To wrap up the overarching theme of 2019, besides voids and corporate misconduct, I find that Theranos, Jumia Technologies, Tilray and Beyond Meat all also share a commonality in that professed title of the next big thing. While it’s easy to cast stones at the hoodwinks and fools, the real root of the next big thing is derived from the Castle in the Air theory and basic crowd psychology. The Castles in the Air theory, coined by the famous British economist John Maynard Keynes, essentially serves an opposite to the Intrinsic Value theory first put forward by Yale Professor Irving Fisher, in which investors dedicate their efforts to thinking about what is the most probable to rise in price rather than waste time attempting to estimate intrinsic value. In a more simple manner, the ideas of John Maynard Keynes suggest that a buyer anticipates the future buyers will assign a higher value.
The study of this buyer anticipation, which sometimes can be synonymous with the term greed, leads one further into the field of crowd psychology. These basic principles of investing and it’s relationship with crowds is eloquently stated within the works of french psychologist Gustave Le Bon, who authored in 1895 The Crowd: The Study of the Popular Mind. In this fantastic work, Le Bon states “In crowds it is stupidity and not mother wit that is accumulated.” Now I wouldn’t go so far as saying those caught up within a crowd of financial bubbles are stupid, I would rather argue more for using the term carelessness, but pulling from relatively recent personal experiences I’ve seen how crowd pyschology can drive investors to do some pretty crazy things.
In light of crowd psychology and the spread of financial madness, I want to present to you an example of what I call the Neighborhood Bitcoin Craze, which has to do with the recent bitcoin faze that took millennials by storm. Just to lay out an initial framework, our lead character for this example will be named John and John is just out of college working his first full-time job. Also previous to this day-long example, John is relatively isolated from bitcoin, he doesn’t really know anyone who has bought it and has ignored any arguments about it, which are key elements to why John begins the day initially thinking bitcoin’s recent meteoric rise to a valuation of $20,000 is a bit absurd. But as we will see bad investments can easily turn into greedy thoughts, John wakes up on a Saturday and goes outside to get the morning paper. While outside his neighbor Rick stops by on his morning jog, the two catch up and Rick tells John about how he recently just purchased some bitcoin and thinks it’s a great investment. John listens but is hesitant. Lastly, Rick says the greatest thing about bitcoin is that is anonymous and way easier to use to purchase things online, even though Rick doesn’t use it for the purpose. John shrugs most of the morning conversation off and decides he needs to go to the store to get eggs and milk. While driving to the local store, his favorite radio talk show is playing and the topic of bitcoin comes up. One host says how he recently bought some to hold in hopes of using the profit to pay off a little more of his mortgage and that he hopes to sell once bitcoin rises over $30,000. This comment catches John’s ear. While in the store, John gets what he needs and proceeds to wait in line. The person in front of him is also buying basic weekly necessities but also a new newsstand magazine all about cryptocurrency. This magazine catches the eye of the cashier and he says to guy in line “that looks interesting” in which as a response the guy ahead of John proudly states that just bought bitcoin in his son’s college fund and once bitcoin hits above $40,000 he won;t even have to save any more for his kids college. John too checks out and eyes the bitcoin magazine. When he gets home he finally breaks out the morning paper in which the title states: bitcoin hits $20,000 how much higher will it go? To John, bitcoin is seemingly everywhere and he too begins to think about buying in. He thinks to himself “I mean if my neighbor bought some just yesterday, the radio host from my favorite talk show bought some to help out his mortgage and the guy in front of me bought it using funds from his son’s college fund then it must mean this bitcoin is a good idea and a good investment.” Sure enough, John buys in and just like the rest, within six months the price drops by more than 50%. Gone is neighbor Rick’s enthusiasm, the radio host is now burdened with less funds for his mortgage and the guy in the store has decimated his child’s education fund. The dangers of “going with the crowd” are very real and as I sat and wrote this introductory part of my letter, my example actually became reality. I happened to be sitting at a small little library in Kill Devil Hills, North Carolina when an older man brought in a collection of old physical stock certificates in hopes of getting help to figure out if they still happened to be worth anything. While I initially ignored the overheard bits of the developing conversation, I started listening a little more and more of what he was saying for it was a very small little library far away from the bustling financial streets of New York, but what the man said next struck me as an important lesson that extends beyond Wall Street into every ecoleon of family personal finance in this country. He started to describe the company that he had invested in and proceeded to exclaim to the librarian that had come to his aide “Everyone in the family wanted to get in on the bandwagon, and I think the bandwagon’s four wheels fell off. It was supposed to be the next big thing, but that’s life.” I found this to be an incredibly powerful phrase “but that’s life.” Getting duped or losing all one’s money, I don’t think that has to just be the way life goes, I wondered but didn’t ask how much was lost. Was it enough to cause family friction? Could have one of their children not being able to choose a school of liking due to the prior money mismanagement?
You see the implications of getting duped into investing into the next big thing are much greater than just a loss in one’s investment. Relationships can be strained and opportunities can get squandered, consequences from these decisions are very real. I guess the best way to put all of this that the need for female startups, African e-commerce, cannabis companies and vegan burgers aren’t inherently bad or wrong, entrepreneurship and innovation are embedded in the fabric of this great country, but one does need to ask and answer a series of basic questions before investing. Otherwise the failure to do so may leave you like the old man in the library exclaiming “it was supposed to be the next big thing, but that’s life.”
Hence, to combat the potential financial consequences noted in the previous parts of this introductory section, I’ve decided to create what I refer to as Crossroads four basic investing principles. It’s not a foolproof approach, no investing guideline will ever be, but it’s an effort to layout a basic and understandable guideline, so that you may hope to preserve and grow your investment.
- The first principle to adhere to is an estimate of value. Value is often defined alongside the use of the term worth and is an estimate of a company with regards to price. To utilize the principle of value, two recent examples come to mind. Apple, an established American company with billions in annual profits, traded at $230 on October 18, 2018 and at $142 on January 3, 2019. With such a drastic price shift, one first has to ask did something go incredibly wrong? Was there a scandal of significance? In Apple’s case there was neither, hence one might come to the conclusion that such a rapid price decline left Apple shares in early January “undervalued.” The opposite of Apple is our next example: Tilray. Trading at near $300 in September of 2018, Tilray, a company with negative cash flow, was valued briefly higher than Macy’s, a nearly 100-year old global department store brand with roughly $1 billion in annual profits. Hence, a fundamentally base estimate of Tilray, in September of 2018, would most likely render the stock to be considered “overvalued.”
- The second thing to look for is sustainable long-term earnings growth. If a company is at first a pioneer in a new market, ie Tilray or Beyond Meat, one must first analyze does this innovative company has a moat around their innovation. Using the example of Tilray and Beyond Meat again, a quick analysis would argue that they have no barriers to competition and this is proving true as new competition continually moves into the market and dwindles Tilray and Beyond Meat’s market share more and more. Also ask oneself what are the regulatory risks involved with operating in this new market or field of business? What is this company’s potential liabilities?
- The third principle I tend to look at is through the lense of potential investor. Questions to ask and inquire about are: what are the chances the company is going to file an additional offering further diluting my potential stake? Does management exhibit concerning behavior or the contrary does management value their shareholders? Examples of Beyond Meat, Apple and respective management paint two very different pictures. Beyond Meat, after their IPO quickly filed for a secondary offering and waived their lock-up agreement allowing insiders to quickly dump shares. Meanwhile, Apple led by CEO Tim Cook, continues their share buyback program and increasing the company’s dividend, actions which serve in the shareholders interest.
- The fourth and final evaluation is an investigation into a company’s financial strength. Questions to consider asking are: does the company you potentially want to invest in have a mounting debt load? Is there a concern hidden deep within their balance sheet? Does the company generate considerable free cash flow to fund growth opportunities from within or will it need to seek outside financing?
Lastly, as an end to the section of voids and corporate misconduct, I want to end with example supplied from outside my own words to hammer home the dangers of emotional investing and being swept up into the greedy madness of crowds. Hence, I searched throughout my yearly readings and found myself returning to Burton G. Malkiel’s A Random Walk Down Wall Street for the most fitting example I found. On page 53 and 54 of his excellent book, Malkiel writes:
“I have a good friend who once built a modest stake into a small fortune. Then along came a stock called Alphanumeric. In addition to offering an exciting name, it also promised to revolutionize the method of feeding data into computers. My friend was hooked.
I begged him to investigate first whether the huge future earnings that were already reflected in the price could possibly be achieved given the likely size of the market. (Of course, the company had no current earnings.) He thanked me for my advice but dismissed it by saying that stock prices weren’t based on “fundamentals” like earnings and dividends. “They are based on hopes and dreams,” he said. “The history of stock valuation bears me out. This Alphanumeric story will have all the tape watchers drooling with excitement and conjuring up visions of castles in the air. Any delay in buying would be self defeating.” And so my friend had to rush in before greater fools could tread.
And rush in he did, buying at $80, which was close to the peak of a craze in that particular stock. The stock plunged to $2, and with it my friends fortune which became much more modest than what he originally started out with. The ability to avoid such horrendous mistakes is probably the most important factor in preserving one’s capital and allowing it to grow. The lesson is so obvious and yet so easy to ignore.”
This year, speculators finally witnessed a wide scale tumble within the world of the recent Canadian “Green Rush” and as famed Chicago journalist, Sydney J. Harris once said; “History repeats itself, but in such cunning disguise that we never detect the resemblance until the damage is done.” Since January, the former speculative boom has since partially shed it’s all smiles disguise and has investors now thinking less boom and more bust. Rather, the Canadian “Green Rush” or the “Dot-Bong Bubble”, through its former peak and developing trough, gave speculators an old-school lesson similar to it’s old school west coast breathean: the 1848-1858 California Gold Rush.
As new land and unlimited prospects gave way to excessive optimism, the California Gold Rush started with the discovery of the precious metals by James Wilson Marshall, alongside the American River near Coloma, California. While at first, Wilson tried to keep his luck and potential fortune secret, rumours of wealth and instant fortune soon spread across the globe. By 1849, thousands of restless young men had “borrowed money, mortgaged their property or spent their life savings to make the arduous journey to California. In pursuit of the kind of wealth they had never dreamed of” all in an effort to hear themselves mutter their very own Eureka!
As the boom continued, by 1850, some estimated 100,000 men had come to California in hopes of riches. But as optimism soon waned and the cycle moved from boom to bust, investors, speculators and boys just trying to strike it rich now faced a humbling reality. That reality played out by giving vast wealth to only the fortunate few. Large scale mining operations, supported by previously established businessmen, were the ones in the end who took most of the profit with an estimated $81 million pulled out of the ground in 1852, while declining to an estimated $45 million by 1857. But as with most boom and bust cycles, new supporting operations, innovations and business sprouted up around the Gold Rush.
Rather than going for the gold, others got quite rich by “mining the miners.” John M. Studebaker sold wagons and wheelbarrows to miners in their trek to strike it rich, Levi Strauss sold much needed clothing to the miners, Henry Wells and William Fargo established Wells Fargo bank to provide shipping and banking services to miners and businesses out of San Francisco, Wells Fargo and John Butterfield founded American Express to rapidly deliver goods and money across the United States and arguably the richest of them all initially, Samuel Brannan, made a rapid fortune by operating “the only mining goods store between San Francisco and the gold fields.” Brannan bought all the equipment he possibly could and then proceeded to run up and down the streets of San Francisco shouting “Gold! Gold on the American River!” Not only was it a brilliant marketing ploy, but the ensuing stampede made Brannan the Gold Rush’s first millionaire. Yet for the majority, that reality played out to be quite bleak. Upon arrival in California, miners had to stenously labor through thick dirt and freezing streams while suffering from sickness and malnutrition. While in the end most miners ended up working for larger operations that had purchased advanced equipment to reach the gold reserves below the surface.
Hence previous bubbles and rush’s such as the early 2000s dot-com bubble, last year’s Bitcoin Bubble and this year’s Canadian “Green Rush” serve as recent and past lectures, yet the lesson is older than the Gold Rush itself; that bubbles and euphoria come and go in different disguises, but when the mask is peeled away, the face is almost always the same.
Therefore by ignoring the new disguises noted by Sydney J. Harris, I hoped this year to brush up on economic history, peel back the masks and find one with the greediest face of them all. This year that happened to Tilray, described as a global leader in cannabis research, cultivation, processing and distribution. To harken back to disguises and the annual spirit of Halloween, Tilray’s financials were downright spooky. Increasing total revenue with widening losses since 2016, along with incomptent and unscrupulous management turned the once pricey red-hot pot stock quickly into a freezing San Francisco stream. At the start of the fiscal year, I was able to acquire 6,047 Tilray shorts at $81.51 on 1/9/19 and on 6/20/19 I felt Tilray was only worsening and hence, acquired 4,171 more shorts at $47.00. Then the financial situation continued to decline and I decided to short an additional 20,206 shares on 9/12/2019 at a price of $30.55 and an additional 30,720 shares at price of $24.02 on 10/24/19.
Arguably the biggest reason behind my “convincing lack of faith” in Tilray is the way it approaches, what I describe as the simple principle of business. This individual principle is to create a product, which lets say costs $1 to do so, and then sell it for a higher price, for example $2. I do feel the need to state here that yes, in certain situations it is strategic for a business or entity to operate at a loss for some period of time, whether it be in the beginning stages of growth or trying to price out competition, but this is not one of those situations. Nonetheless, the inability of management to wrap their head around this simple principle of business is really just hard to understand. Hypothetically think here for a minute: if a single gram of their medical marijuana costs, let’s say $10 to produce (think growing facilities, licensing, labor costs, executive salaries, shipping, etc) then by selling each gram for $7 is a pretty darn good way to ensure a steady trip on the unprofitable route. I guess my lack of empathy or understanding of this business approach comes from harkening back to my middle school days, in which I fondly remember walking to the CVS near my house and purchasing bags of candy for $1. I would then get driven to school and sell roughly 10 bags of candy a day for $2 each. This netted me a total profit of $10 for the day and if we really want to get analytical here, the school was about 20 miles from my house. So my transportation aka shipping costs would be around 1.5 gallons of gas (dropoff + afternoon pickup so 40 miles). Using an average $3 per gallon price (for as long as I can remember the price has hovered somewhat above and below this for my area) would give me a daily transportation cost of $4.50. Hence, for the day my total revenue was $20, my total profit was $10 and my real profit was ($10-$4.50)=$5.50. Now my mobile little sweets shop was hardly a remarkable feat or a gargantuan undertaking, but all I did was adhere to the simple principle of business and come home with more money than I started the day with, something Tilray fails to do.
Now how does this argument move from just a general distrust and dislike to an all out short position? Well back when I was a small-time liquorice salesman and making my small daily profit, I was ages 10 to 13. The CEO of Tilray, Brendan Kennedy, whose behavior reminds me a bit of Cortes Randell of the old National Student Marketing Corporation, is 47 and holds an MBA from Yale. Also, Kennedy is operating in the now legal Canadian cannabis industry. Now to go back in history and use a bit of a more extreme point, plenty of people and organizations, over the past couple decades, have even been able to make a pretty penny operating within the cannabis black market. For example, a 1984 DEA raid on the Guadalajara Cartel pot field in the northern state of Chihuahua netted an estimated seizure of 2,500 to 6,000 tons of marijuana. This, according to the Wall Street Journal’s investigation, would be worth an estimated $3.2 to $8 billion in today’s prices. Now the illegal cannabis trade was a much more unscrupulous endeavor, but the point here is it makes me wonder if some people could develop such a large-scale profitable operation, while evading fellow crooks and law enforcement and Tilray can’t break even legally selling cannabis across Canada, then how misguided by executives are they?
Another issue with both Tilray and the industry as a whole, is the thought that initial success can actually be detrimental. Hence, how I came about to shorting Tilray was more a top-down approach rather than a bottom-up. I started noticing a trend that was leading toward a potential marijuana oversupply starting around the middle of 2018. Due to the early success witnessed by first-movers and companies that were early to come to market, ie the stories about retailers making upwards and in some cases even more than $100,000 a month in Colorado when the recreational market first opened up and the incredible price growth witnessed by initial cannabis company IPOs, large amounts of investment and interest started to flow toward the funding of new ventures. I figured this would eventually lead to a situation of oversupply. The issues with this are relatively simple to understand in terms of pricing.
Using the basic supply and demand curve provided above, note a few things things before I discuss further: (S1 is our initial supply with P1 being our initial price and Q1 our initial quantity produced) and (S2 is our increased supply with P1 being our new price and Q1 our new quantity produced). Note in the shift from S1 to S2, that Q1 increases to point Q2 and hence P1 decreases to P2. It is here in the visible price decrease that I understood could spell trouble for not just Tilray individually but the industry as a whole. Using data from Growersnetwork, which tracks the total current and future production square footage capacity, you can see the incredible leap in capacity from 2017 to 2018 (note 2019 data hasn’t been released yet but the trend more than continues).
The total current production capacity square footage in 2017 is 3,332,804.
The total current production capacity square footage in 2018 is 6,737,571.
Upon review of total current square footage production capacity 2017 vs. 2018 for the industry there is over a 100% increase, which then leads to the situation explained above in the supply and demand graph and sure enough the general market theory proved correct. For 2019 in Tilray’s quarter two report the company noted that it’s price per gram decreased from $6.38 (year prior) to $4.61 and in quarter three the company reported prices dropped from $6.21 per gram (year prior) to $3.25. In essence, using the principles of basic supply and demand, I figured that this impending price decrease would eventually decrease margins and prevent profitability. Hence, the top down approach rather than bottom up.
In addition to what I referred early as what appears to be Tilray’s internal desire to lose money and industry wide price decreases, Tilray’s stock price tested the upper limits of optimism and once traded at almost $300. This gave the company, that loses lots of money every year, a market cap of almost $20 billion and by early January 2019, the stock had descended from loony investor mars to the slightly less loony moon, by trading at a market cap of $7.5 billion. In order to perceive Tilray’s early January situation better, I think it’s best to include a passage from Benjamin Graham’s The Intelligent Investor, that can be found on page 189:
“Since common stocks, even of investment grade, are subject to recurrent and wide fluctuations in their prices, the intelligent investor should be interested in the possibilities of profiting from these pendulum swings. There are two possible ways by which he may try to do this: the way of timing and the way of pricing. By timing we mean the endeavor to anticipate the action of the stock market-to buy or hold when the future course is deemed to be upward, to sell or refrain from buying when the course is downward. By pricing we mean the endeavor to buy stocks when they are quoted below their fair value and to sell them when they rise above such value. A less ambitious form of pricing is the simple effort to make sure that when you buy you do not pay too much for your stocks.” (Graham 189)
Now shorting newly listed cannabis companies would do violence to the typical principles and passages preached within The Intelligent Investor, but this snippet relates to Tilray perfectly. In the underlined section, with regards to pricing it states: “By pricing we mean the endeavor to buy stocks when they are quoted below their fair value and to sell them when they rise above such value.” In early January 2019, while Tilray quoted a $81.51 price and a market cap of around $7.5 billion, one could rewrite the passage, to relate to the current situation, by saying I was engaging “in the endeavor to short stocks when they are quoted significantly above their fair value and to cover shares when they approach such value.” Again I feel the need to state that shorting Canadian cannabis stocks has little relation to the conservative principles preached by Benjamin Graham, but when viewing Tilray’s pricing under a lense of “fair value” I derived that a price of $300 and a market cap of more than $20 billion was aggressively outrageous and a price of $81.51 and a market cap of $7.5 billion was only simply insane.
Before moving back to the initial topic of the Green Rush and the California Gold Rush, I want to continue the wandering by lending an ear to another “rush” of old. One of the best recent examples of mispricing occurred within the fanatic “Internet Boom” of the late 1990’s and very early 2000’s. It was here that a hot technology sector grew so fast and big that it took a significant chunk of the market with it in it’s wild upward rise and subsequent fall. Hence, these past waves of optimism and some of the egregious follies along the way have given us the great gift of what not to do and specifically of what to avoid. No better examples, I could find, than those given by the famed Yale University behavioral economist Robert J. Schiller in his wonderful book: Irrational Exuberance. Below, you will find the excellent example derving from a former internet boom company called eToys.com. Note that eToys isn’t a 1 to 1 example with Tilray, for Tilray is a completely different company in a completely different field, but as stated earlier “that bubbles and euphoria come and go in different disguises, but when the mask is peeled away, the face is almost always the same.”
Examples of “Obvious” Mispricing (Pg 199-200) Robert Shiller Irrational Exuberance
“Despite the general authority of the efficient markets theory in popular thinking, one often hears examples that seem to offer flagrant evidence against it. There are in fact many examples of financial prices that, it seems, cannot possibly be right. They are regularly reported in the media. In the 1990s stock market boom, many of these examples were Internet Stocks; judging from their prices, the public appears to have held an exaggerated view of then potential.
For example, consider eToys, a firm established in 1997, to sell toys over the Internet. Shortly after its initial public offering in 1999, eToys’ stock value was $8 billion, exceeding the $6 billion value of the long established “brick and mortar” retailer Toys “R” Us. And yet, in fiscal 1998, eToys’s sales were $30 million, while the sales of Toys “R” Us were $1.2 billion, almost 400 times larger. And eToys’ profits were a negative $28.6 million, while the profits of Toys “R” Us were a positive $376 million. In fact, Toys “R” Us, like other established toy retailers. Had already created its own website. Despite some initial difficulties getting its site launched, Toys “R” Us was seen by many as having a longer-run advantage over eToys in that dissatisfied purchases of toys on the internet could go to its numerous retail outlets for returns or advice. In addition, customers who were already shopping at one of those outlets would naturally gravitate to the toys “R” Us website when making online purchases.
Despite these publicly aired doubts, investors loved eToys. But it didn’t take long for the doubters to be proven right eToys.com filed for bankruptcy and was delisted from NASDAQ, in march 2001. The final step was the May 2001 sale of the eToys.com web address to KB Toys, which in turn filed for bankruptcy in January 2004.
The valuation the market placed on stocks such as eToys at the peak of the market in 1999 and 2000 appears absurd to many observers, and yet the influence of these observers om ,market prices does not seem to correct the mispricing. What could they do that would have the effect of correcting it? Those who doubt the value of these stocks could try to sell them short, and some do, but their willingness to do so is limited, partly since there is a possibility that the stock will be bid up further by enthusiastic investors. We will see other reasons later. Absurd prices sometimes last a long time.”
The last three sentences in particular, hit home a bit: “Those who doubt the value of these stocks could try to sell them short, and some do, but their willingness to do so is limited, partly since there is a possibility that the stock will be bid up further by enthusiastic investors. We will see other reasons later. Absurd prices sometimes last a long time.” The reason was that I was shorting a cannabis company within a time frame where it certainly appears full federal legalization could potentially become a real thing. Undoubtedly, a present complete legalization by the United States would send investors into a frenzy. Personally, I think it will take considerable time as in years and a couple presidential terms but I vote as an individual, not as a large block. Therefore, I would be foolish to underestimate this potential and the risks associated with holding any short positions within the industry.
As with the comparison of eToys.com and Tilray, there are differences, but like eToys.com they share together a disdain for what we described before as the simple principle of business, which is to simply make an annual profit. As quoted in the passage above from Shiller: “in fiscal 1998, eToys’s sales were $30 million…..And eToys’ profits were a negative $28.6 million.” One quick look at Tilray’s 2018 statement would reveal a total revenue of $43.13 million and net income of negative $67.723 million. One could argue 20 years since eToys, not much has changed in terms of mispricings and an unsound approach to doing business. Its best to put these criss crossing comparisons in a more simple table format, note companies on the left side (eToys.com and Tilray) represent absurdity at its worst and companies on the right side represent a more typical market average and at least involve some form of sane price discovery in their stock. Also since Tilray is a retailer, I’ve decided to pick its comparison stock in local retailer Kroger (ticker symbol: KR) since I’m right here in Ohio next to the companies local Cincinnati founding.
eToys.com (1998) Toys R Us (1998)
Market Cap of $8 Billion Market Cap of $6 Billion
Sales $30 Million Sales $1.2 Billion
Profit: -$28.6 Million Profit: +$376 Million
Tilray (2018) Kroger (2019)
Market Cap of $26 Billion Market Cap of $20.244 Billion
Revenue $43.13 Million Revenue $121.162 Billion
Net Income: -$67.723 Million Net Income: +$3.11 Billion
Next, I’ll drop the topic of Tilray, the company for a bit, and focus solely on its management team, specifically chief executive officer, Brendann Kennedy and his relation to me doubling down on my bearish opinion. Over the course of the year, I started reading a little more into essentially what could be referred to as “the king or queen running the kingdom.” Note that the CEO serves as a companies most critical figure. American history is filled with centuries old examples of incredible entrepreneurs like Henry Ford, John D. Rockerfeller, Walt Disney, Andrew Carnegie, Charles M. Schwab, Milton Hershey, J.P. Morgan, Cornelius Vanderbilt, Alfred V, du Pont and John Harvey Kellog. More modern and current examples would be led by the likes of Steve Jobs, Warren Buffet, Bill Gates, Larry Page, Mark Zuckerberg, Elon Musk, Tim Cook, Jeff Bezos and Jamie Dimon. Incredible efforts and innovation, from my understanding typically comes with great rewards, that is how a capitalist system should work. This can be summed up by the famous biblical proverb states: “for whatever a man sows, this he will also reap.” This all leads into the belief that CEO’s should get compensated for their work and risks and hence, can get large pay packages. As for the fiscal year of 2018, I’d first like to list the top five most paid CEOs before saying anything else:
- Elon Musk $513 million
- Brendan Kennedy $256 million
- Bob Iger $146.6 million
- Tim Cook $141.6 million
- Nikesh Arora $130.7 million
Sure enough, Kennedy has been able to secure himself a spot among the company of the founder and CEO of Tesla, the CEO of Disney, the CEO of Apple and the CEO of Palo Alto Networks, a cybersecurity firm, when it comes to who’s the most compensated. What does this mean for Tilray? Well their CEO, whose reign has seen his companies stock drop from $300 to below $20, all the while being one of the highest paid businessmen in North America and don’t take this as an agenda or slight against millionaires, I would argue I pretty much align with Andrew Carnegie’s written statement saying that “It will be a great mistake for the community to shoot the millionaires, for they are the bees that make the most honey, and contribute most to the hive even after they have gorged themselves full” but in this situation, it certainly seems as if Kennedy was able to “reap without having to sow.” Further investigation delivers results that make this statement even more true. Tilray doesn’t even crack the world’s top 10 when it comes to cannabis production capacity. Not being a member of the top 10 in production capacity also leaves very little room for Tilray to strike anymore deals with large tobacco and brewing companies. Hence, a total overview of tilray would render a picture of company operating a very small production capacity, running at a -$67 million net income loss for 2018, thinning margins, rapidly increasing global competition, the 2nd highest paid CEO and most importantly; an overvalued stock.
In addition, a section from one of my previous articles titled Guidelines When Evaluating Management, would lend Kennedy and fellow management even less kind words. To put Tilray and their transgressions into proper perspective, I’ve included the whole passage for present and future reference:
Guidelines When Evaluating Management
A company’s top executives and upper level of management first and foremost should tell the public what they intend to do and do what they intend to do. In order to confirm this, I recommend reading past annual reports and look at the forecasts made by executives and gauge whether these forecasts were fulfilled or not. Also another aspect of quality management, is managers who willingly admit to mistakes and beware of those who seek to deflect blame by turning to common scapegoats such as “the economy” or “lack of demand.” Additionally, check in the annual reports and letters for tone. Ask yourself, does a managers tone change drastically, does the change in tone reflect the newest Wall Street trends and jargon or does it consistently stay sincere? Lastly, beware of drastic change in business declarations and missions, for example in 2017 did executives of a cigarette or furniture company declare suddenly that they were “on the cutting edge of crypto technology”?
In addition, I want to further develop a basic series of 4 questions that help answer: are they (executives) caring for the shareholders or themselves?
- My biggest concern typically comes from a company that reprices its stock options for its insiders. This is often done under what is commonly called an “options exchange program.” Essentially, a company will cancel current stock options for their employees (typically due to the options being worthless or after drastically falling in price) and replaces the options with new ones at better prices. While companies often argue this is a necessary action to retain executives, it creates a dilemma between the shareholders and the insiders. If their option values are never allowed to go to zero, and their potential profit upside is unlimited, how does this encourage and incentivize executives to properly care for a company and its assets. Also, the process of doing so, is seemingly fundamentally unfair. Modifying these options allow for employees to financially gain in a bear market, while common shareholders bear the brunt of stock price declines. If looking for past examples of this, note the practice became popular right after the tech bubble burst in 2000 and the financial crisis in 2008.
- A second issue derives from employee compensation. A CEO that gets $50 million in a year better have an incredible reason (some do deserve it but you can count the amount of those “some” on your fingers). Unfortunately, often with such an obscene payday, when given no qualified reason suggests that the company as Benjamin Graham says “is run by the managers, for the managers.” If looking for past examples of this, look no further than Brendan Kennedy of Tilray, who saw a nifty $256 million pay package while the share price utterly plummeted. Do note though, for the likes of a Tim Cook, Mark Zuckerberg, Bob Iger and a few excellent others I will say they certainly earn their high pay.
- A third objective, when evaluating a company is to search for what’s called an “option overhang.” This is found in an annual report typically within the footnotes. To create an example, let’s say company A has issued 5 billion shares of common stock outstanding, but within the footnotes of company A’s annual report, it is stated that company A has issued options on an additional 500 million more shares. Therefore, taking the perspective of a shareholder, this means company A’s future profits will have have to share among an additional 10% more shares.
- The last of the basic 4 questions, is arguably the simplest to evaluate. Is there significant insider selling? Now there can be important reasons to sell, people will always need money, but I’m talking about significant and consistent offloading of shares by insiders. To find this information look on https://www.insidertracking.com/ or “Form 4,” which is available in the EDGAR database at www.sec.gov. Want an example of insiders repeatedly offloading their shares, look no further than today’s Tilray, which has seen insiders offload millions of shares in recent months.
A short review of this passage and it’s comparison to Tilray reveals a cumbersome number of transgressions by management. The first aspect being CEO compensation and secondly, not only does Tilray’s prospectus declare it’s intentions to issue additional stock, which further dilutes an investor’s ability to reap potential profits, they also implement to practice of stock option’s repricing and the 2019 Q1 and Q2 filings reveal $17 million and $11 million of insiders selling with $0 insider buying. I implore you to view the insider activity screenshot below and look at the 9 consecutive instances of insider selling. Also note, Kennedy offloaded an additional $3 million in stock during the month of July, which has not yet been recorded in this insider log.
While a more recent NASDAQ insider activity update paints an even more stark picture!
Hence, all these combined negative attributes reflect the common oral narrative about the kid and the playground. It’s often said that if a kid, let’s call him Ted, goes to the playground and gets in five different fights, it’s not the five other kid’s faults, rather issues seem to start with Ted himself. The same goes for Tilray. All these negative trends, attributes and performance don’t lend a kind word to the company and it’s management under Brendan Kennedy, which clearly, as Guidelines When Evaluating Management would say, is “caring not for the shareholders, but themselves.”
To tie all this back to the introduction comparison of the Canadian “Green Rush” and the California Gold Rush, one can now start to understand how Tilray and its $300 price mark was likely product of “unlimited prospects that gave way to excess optimism.” While the stock itself might be a future metaphor for hoodwinks and financial market scandals, one can’t be faulted for being swept into the optimism surrounding the marijuanna industry. One look at industries of “vice” reveals a list that includes the large alcoholic beverages, gambling companies and what’s commonly referred to as “big tobacco.” This brings old names such as Philip Morris International, British American Tobacco, MGM Resorts International, Caesars Entertainment, Anheuser-Busch InBev, Heineken Holding and Molson Coors Brewing.
Essentially, it is very easy to see where the new potential lies. A fourth addition to list of “vice” would place the marijuanna industry among companies that rake in tens of billions of dollars every year. With that being said “the rumours of wealth and instant fortune spread across the globe” have attracted a relatively large number of unscrupulous characters to now a quasi-legal industry with a pretty violent black market past. Areas of Colorado, California and British Columbia, once known for their former thriving illicit operations, have now become the forefront adopters of legalization. Therefore, out of the west coast and hence the Gold Rush comparison, quite a number of operations have sprung up trying to strike it rich. And just like the former Gold Rush, few will strike and most will go broke.
The reality that will eventually play out, is that great wealth will fall in the hands of the fortunate few. Unlike the former technology boom, which included companies attempting to build new complex software and electronics, what Tilray is doing contains more similarities to the miners of 1850. It doesn’t take a genius to pan for gold and certainly doesn’t take a genius to grow a common plant. Hence, the successful companies in this new industry are likely going to be the large and well funded operations that profit from flexing their economies of scale. Simply put, a small operation like Tilray has a dark dwindling future and why it was one of my first short selections of 2019.
Lastly, I want readers to understand the dichotomy of Tilray better and how the “No. 1” isn’t the public shareholders but rather the private equity firm named Privateer Holdings. Privateer was founded in Seattle on October 20, 2011 by Michael Blue, Christian Groh and Brendan Kennedy, hmm familiar sounding name? Including Tilray, Privateer Holdings also has in their portfolio Leafly, the world’s largest cannabis information resource and Marley Natural, a cannabis products partnership venture with the Bob Marley estate. Privateer also has considerable financial backing from famed venture capitalist Peter Thiel, who was a significant participant in Tilray’s $75 million Series B funding round. Essentially, Privateer Holdings is Tilray and owns at the beginning of 2019 roughly a 75% stake in the cannabis company.
Since I’ve pretty much covered my thoughts with regards to Tilray in my previous paragraphs, it’s now time to really dig deeper into Privateer and Brendan Kennedy. My first real interest in Kennedy was piqued after his disastrous CNBC interview in which he pretty much lies outright: https://www.cnbc.com/video/2019/03/18/watch-cnbcs-full-interview-with-tilray-ceo-brendan-kennedy.html Feel free to watch the entire clip, but the point of concern begins at the 5:45 mark. This is when the CNBC host asks Brendan Kennedy “I mean your talking about all these bullish, exciting opportunities and scenarios Brendan, and thanks to our reporter Aditi Roy who covers this for pointing this out, why have you been selling so much stock, do you have clarity why you pulled millions out of the stock” The given response was a massive red flag, Brendan Kennedy goes on to give a very bizzare evasive response and has to be asked again by host Wilfred Frost, why he continues to offload shares. This initial introduction, well then led me to question whether he was serving in the interest of himself or someone else. Hence, this thought of someone else or a higher executive led me to discover the relationship that existed with Privateer.
I discovered a pattern of sudden layoffs within both Privateer and Tilray, this didn’t really pop out as a smoking gun because cannabis, especially the cultivation aspect, is a seasonal or scheduled process. Hence, news about big layoffs came across as a bit sensationalized, but I did discover through glassdoor a gloomy workplace picture painted by reviews left on the job review website. Now, I don’t think glassdoor reviews should hold too much weight, but the 1-star reviews certainly compliment the trend of my perceived managerial incompetence. To avoid using potentially fake or faulty reviews I ruled out any posts from after the IPO date of 7/19/2018, but this still left enough evidence to support my case.
Of the four reviews, the second to last one on the list (Dec 1, 2017) really struck me. In the final part, under Advice to Management, the reviewer ends by saying “Being first is only good for so long.” This rang true for Tilray, as stated in my previous section titled Voids and Misconducts, in which I discuss the stocks rise was due to the fact Tilray became the first pure cannabis firm to list on the NASDAQ. As for being “only good for so long” the company, throughout the later half of 2018 and 2019, saw its stock price plummet from a high of $300 to a low of around $16. This rapid decline then leads us to discuss the perils of hype and what I like to refer as rookie stocks, in reference to their new taste and recent IPO.
Taking Tilray, one could argue it shares characteristics with that of a rookie. New name, new style and unique business attributes and talent. It is easy to see why and where interest comes from. With that being said, it’s easy to take in and view the “new stock or the new rook” within a full scope of optimism rather than a scope of pessimism, which then sometimes leads to the mispricings seen in Tilray, Jumia Technologies, VA Linux, eToys.com, Riot Blockchain and others. Hence, I want to stress the perils of investing solely through the scope optimism, rather than a healthy balance between optimism and its opposite pessimism, by introducing the baseball card reference from one of my former articles on the recent wave of money-losing unicorn IPOs.
Rookies and Veterans: The Relationship of IPOs and the Establishment With Regards to Pricing
Another issue I have with IPOs and their appearance in later cycles of a bull market is what I will refer to as the price of a signed baseball card dilema. For example, with regards to the MLB this year two budding fan-favorite stars have emerged and garnered significant publicity. Ronald Acuna Jr, a member of the Atlanta Braves, has become one of baseball’s brightest young stars. A quick search through ebay reveals his signed baseball cards typically sell within a $60 to $300 range, with most prices falling above the $100 range. Another bright rookie star is Vladimir Guerrero Jr, member of the Toronto Blue Jays. His autographed baseball cards sell within the $45 to $225 range, with most prices falling around $90. Now keep in mind one thing; these players are young rookies and second-year players! Not bonafide hall of famers, rather they could be potentially great players in the future.
On the other hand, a quick search of Albert Pujols, an eventual Hall of Fame shoe-in when he becomes eligible for Cooperstown, reveals that his autographed baseball cards sell within the $50 to $300 range. Or roughly the same prices as Acuna Jr. What separates the two? Well, Pujols, as of August 1, 2019, 599 more home runs, 3 more MVP awards, 9 more All-Star appearances and 2 more World Series rings. It certainly seems that potential performance is priced often at the same or above actual long-term performance and success. Hence, why pay the same price for the potential, when statistically speaking, when there is a very high chance Ronald Acuna Jr doesn’t match or exceed the excellence demonstrated by Albert’s career. Finally, this comparison isn’t a knock on Acuna, rather it just shows that the success Albert Pujols has achieved is incredibly rare.
The same can often be said about IPO’s. “Tilray the next MSFT” or “BYND to compete directly with TSN.” Ask yourself how often do companies actually achieve the levels of success witnessed by Microsoft, Google, Apple, etc. Essentially for every Amazon, there typically has to be a couple eToys.com’s. Therefore, a BYND exceeding market cap of Tysons Foods, I would call that a legitimate mispricing or Tilray trading at a $27.6 billion market cap, a bit higher than global department-store retailer Macy’s, which has been in business since 1858. Ask yourself, is potential really worth such a hefty price?
With that being said, I really dislike Tilray’s current prospects and hence why I was short 64,819 shares, but for the cannabis industry overall I also feel pretty uneasy. Several factors will continue to plague the industry in the present; oversupply, gray-area legality, United States banking laws, overestimated demand, lack of federal crop insurance and many others. Hence tying back to the Gold Rush, I would shift focus for now onto those “mining the miners” I truly believe one of the great ancillary positives from this cannabis craze will be the technology developed in need for indoor growing. I think the flood of investment money will lead to significant breakthroughs in systems and machinery and the positives will eventual spill over into and speed the development amongst indoor farming and urban farming. Finally to wrap the Tilray section up, I recommend staying away from most cannabis stocks as of now until there are legitimate strides made in the legality of cannabis and keep your guard up if you do decide too. Always make sure you read a company’s balance sheet, financial statements and do background checks on executive management before investing.
Think for a minute about what typically constitutes unique business success, over the past centuries, it typically has derived from reducing one’s time and increasing one’s comfort or ability to enjoy leisure. For example, take the travel industry, in which advancements have gone from horseback, to railroads, to cars, to arliners and using a present example: the verge of space travel. Now with regards to Facebook, it’s arguably going to be the remaining or final advancement in communication and connectivity for quite some time. Previously if I had a great adventure, family outing or a trip, in order to communicate this enjoyment to my personal network, I must call, text or send a photo individually. Rather, by posting my picture/video with a caption or a body of text, I’m communicating to my entire group about my adventure, outing or trip in a much more efficient manner. For example, rather than calling or texting each person about it. In essence, social media created by Facebook is an incredible innovation in terms of networking, time saving and effective communication.
Furthering my belief in Facebook’s success, the company has just recently added a feature called livestream. This is the fastest possible way to communicate to one’s personal network. I simply can’t communicate to my personal network faster than I can in real time. Where I’m going with this, is that Facebook (using the previous travel reference) isn’t going the way of the horse or the railroad. It appears to be the final and most efficient way to communicate for the foreseeable future. With that being said, in early January, when I was constructing this year’s initial portfolio, Facebook’s stock price traded at $135. Hence, Apple at $153 I thought to be a little more of a safer pick due to Facebook’s higher PE ratio at the time, but I intend on most likely including Facebook in next years portfolio.
Lastly, Facebook continues to show incredible growth. Below highlighted within the provided screenshot of total revenue and gross profit, notice the significant uptrend in gross profit: the profit a company makes after deducting the costs associated with making and selling its products, or the costs associated with providing its services.
Such a continued uptrend is reflective of Facebook and it’s superb executive management led by CEO Mark Zuckerberg. The Facebook team continues to rollout new products and further integrate existing ones. One that particularly struck me as important is Facebook’s recent rollout of Dating Home, their personal dating app. One noticeable issue with current dating apps like Tinder, Bumble and Match is that they are lacking in personality. Note these services are often just a selection of 1-5 photos with a short caption and list of interests. By integrating Dating Home into Facebook and potentially Instagram, the online dating service can offer more scope into one’s personality, thoughts (derived from previous facebook posts) and looks. Familiarity is the key element to online dating, by suggesting matches based off Facebook user’s profile, Dating Home can connect users through more than just looks. User’s can find potential partners through a multitude of additional ways such as shared hobbies, group events, political preferences, humour and habits. Also Dating Home can increase user engagement with Facebook and potentially Instagram, thus increasing time spent on their websites and apps which in turn allows Facebook to charge companies more for advertisement. Therefore growing revenue.
I’m also a fan of their relatively new Facebook Watch TV app which offers access to live news, tv shows and unique user generated content. Lastly, my only suggestion (if Mark Zuckerberg is listening) is I would like to see the content from Facebook Watch and their app livestream capabilities integrated along with Oculus Quest. The combination of live content with virtual reality headsets can truly replicate the experience of actually being there. Hence, providing a unique entertainment experience for each user.
Apple and the Blue Chips
If you’ve reached up to this point in my writings, I’ve either dazzled or bored you with talk of overvaluations and short selling, but now I want to shift away from the IPOs, Tilray, Facebook and begin to talk about the value stock of the year in Apple. Now if I could choose, I’d prefer not to short sell if I thought I could make the same returns by going long, but I take what the market gives me or as some of the previous mutual fund managers like to refer to as “sailing the conditions.” Nevertheless the beginning of 2019 seemingly gave a rare opportunity: a plethora of wildly overvalued recent IPO’s and relatively undervalued blue chips. Now enough has been said in previous sections about overvalued pricing and short selling, but not much has yet been noted about 2019’s value opportunities.
In my initial January approach, I noticed significant overselling in reaction to the Fed rate hike and subsequently, a string of blue chip stocks that had just taken in absolutely beating in Q4 of 2018. For example, below I’ll provide charts that detail 2018 Q4 price declines before laying out my argument as to why I noted Apple, Exxon and Amazon appeared to be undervalued. In addition, I saw a situation developing eerily similar to the “Nifty Fifty” of old. To give a short-summary, the “Nifty Fifty” was a direct result of institutional and individual investors flocking into purported safe and sound principle blue chips during the seventies after the concept stocks rise and hard fall exemplified by old names such as National Student Marketing, Performance Systems (Minnie Pearl’s) and Centers of America, which occurred from the mid sixties to early seventies. Now in relation to the beginning of the “Nifty Fifty” the fall of Tilray and it’s fellow concept stock’s summarized best by this years viral Bloomberg article There’s Unicorn Blood in the Streets had the ability to dial down investors appetite for risk and push large pools of money into big-capitalization blue chips with “sound principles” as they say.
Apple: purchased 1,505 shares at $153.17 on 1/9/19 and 3,001 shares at $152.59 on 1/24/19.
Notice: price decline from early October of $224.29 to a bottom $142.19, a -35.58% drop.
Exxon: purchased 1,503 shares at $75.54 on 1/24/19
Notice: price decline from early October of $86.15 to a bottom $65.51, a -23.95% drop.
Amazon: purchased 150 shares at $1,663.58 on 1/9/19
Notice: price decline from early October of $2,004.36 to a bottom of $1,343.96, a -32.95% drop.
With these graphs above, it’s easy to observe quite drastic downtrends in all three prices. Therefore, I wanted to figure out the burning question every analyst is always trying to answer: is this downtrend continuing or is an uptrend around the corner? With Exxon (XOM) I felt the decline was due more to present global instability and a rise in fear rather than a fundamental decline in business. But for Apple (Appl) and Amazon (AMZN) I noticed a few items that really had me believing both were even more undervalued in early January and a trend reversal was due.
First off, I had to take a look at the economy itself. So I had to answer two basic questions, is inflation noticeably slowing, a common pre-recession warning, and is unemployment rising? Note there are plenty of additional indicators out there, but I like to start with inflation. Notice December 2018’s inflation rate of 1.91% is in decline in comparison to 2018’s monthly peak of 2.95%, but the data wasn’t exactly suggesting anything of significant concern to be occurring.
Then next, I moved onto analyzing the unemployment rate. Rather than look at the monthly numbers, employment is very seasonal sensitive data, I went looking for an uptick in unemployment with data supplied by the Bureau of Labor Statistics.
The data highlighted the continual downtrend in unemployment in the United States since 2009, when it peaked at 9.6% and for 2018 numbers showed a yearly unemployment rate of 3.9%. Hence, I wasn’t sensing much of sudden trend reversal, especially with relatively stable inflation. All of this data lead into making my final judgement: I figured with mild and stable inflation, a downtrending unemployment rate and the addition of increasing US energy production, ie lowering gas prices/transportation costs, utilities, etc that a short-term decline in stock prices could easily be absorbed by the expanding economy. Sure enough the economic situation played out even better than I had originally hoped, with consumer spending continuing to rise throughout the year.
As long as consumer spending continued to rise, like I had hoped, I assumed that this would eventually lift Apple and Amazon out of their respective downtrends and sure enough both stocks saw significant price increases or uptrends from their initial early January lows. From it’s low of $1,343.96 Amazon rose to a yearly high of $2,035.80 while I sold my shares on 4/29/19 at $1,913.53. As for Apple, from it’s low of $142.19 it rose to a yearly high of $281.90 while I sold my shares on 8/29/19 at $208.75. With regards to Apple I wasn’t expecting a near 100% gain in a company that even at its bottom commanded roughly $670 billion in market cap. I guess one could reference the common saying “it’s easier to double a penny than a dollar” but nonetheless, such gains for a company that size are pretty incredible, i.e. rare and such 100% increases are witnessed typically amongst only much smaller growing companies. But such rarities can happen anytime and anywhere, that’s why the stock market can be such a whirlwind of a place, which brings us to the next section of this year’s annual report: Judgement Day!
The goal of this year’s judgement day section is to give a series of predictions (Bearish, Neutral, Bullish) for the upcoming year of 2020 backed with very quick summaries behind each rating intertwined with specific themes to be cognizant of throughout the upcoming year.
Symbol: MJ (ETFMG Alternative Harvest ETF) – Bearish
If you want to short the entire pot industry this is one of the best ways to do it, with that being said I think picking out the worst of the worst in the industry for shorting can give you a bigger bang for buck, but with huge oversupply problems except the entire industry to struggle for most of 2020.
Symbol: TLRY (Tilray) – Bearish
This company has so many issues: impending lawsuits, extreme instances of insider selling, dwindling small amount of cash and significant quarterly losses. Even if the US legal cannabis market completely opened up tomorrow Tilray wouldn’t even have the cash on hand to invest and capture a slice of the market. I truly believe this company is going bankrupt or at the least below $5.
Symbol: LULU (Lululemon Athletica Inc) – Bullish
Incredibly impressed by the recent introduction of their men’s clothing line. I’m a fan, my friends are fans, my neighbors are fans and even my dad thinks the clothes look sharp! This pre-christmas on December 19th I went to their Fairfax, Virginia location and their Tysons, Virginia locations and were completely sold out of multiple items in my size (standard large) and were even sold out online. Note Tysons Mall is one of the largest malls in the country and receives significant foot traffic, especially around the holidays, hence one would assume they have a much larger in-store inventory on hand making an item sell-out there more impressive. Expect a blowout Q4 holiday performance for Lululemon. Lastly, note their womens clothing line has been very popular for almost a decade now.
Symbol: JMIA (Jumia Technologies AG) – Bearish
Just like Tilray everything is wrong with this company. The only catch, something fishy is going on reportedly with Alibaba starting to take interest, that’s enough for me to be weary when short.
Symbol: PTON (Pelton) – Bearish
No I’m not outraged by the recent ad, but I am outraged that someone out there sells stationary bikes for more than $2,000 and can’t make money while commanding a $9 billion market cap. Every hear of Nordic Track? It’s essentially the same product with a more reasonable price tag. Unfortunately, like others Pelton has no moat, but the company will start eating into the lucrative fitness class market by bringing people out the fitness studios and into their homes. For fitness investors, 2020 could be titled SoulCycle vs. Peloton.
Symbol: NFLX (Netflix) – Bullish (on the company itself but stock price is just too high)
I can rag on some West Coast startups all day, but the truth is I use Instagram, occasionally order Ubers and as a college student, haven’t had a cable subscription once. Why is that? Because I torrent sporting streams through reddit and pretty much only watch Netflix. Don’t think their content is up to par, well think again. Netflix commands the nation’s attention with award winning and top TV series like Stranger Things, Narcos, Peaky Blinders, Riverdale, Shameless, and Black Mirror. Also this year’s recent release of The Irishman brings starpower and big screen actors to Netflix originals like never before in the likes of A-list actors such as Robert De Niro, Al Pacino, Joe Pesci and director Martin Scorsese. The only kicker, Netflix’s stock is expensive and competition is rising. I thought the much anticipated rollout of Disney+ was a bit of a dud, but with Netflix’s P/E ratio of 107 I find myself having a hard time jumping in.
Symbol: BYND (Beyond Meat) – Bearish Slightly
This necessarily isn’t me saying BYND will be bankrupt within the year, but I do think they were and still are genuinely overvalued. Don’t expect a complete illustrious flop, rather more of a calm fade away as industry giants move in with similar products overtime. Look up Pete’s Brewing Company stock: https://www.latimes.com/archives/la-xpm-1995-11-08-fi-728-story.html
Name: ESG Funds – Stay Away
ESG Funds stands for Environmental, Social and Governance Funds, which is a nice name for screwing investors over with poor to overtly incomptent management and high fees in the name of global warming or any cause that falls under their umbrella. Remember this, ESG Funds are the stock market’s equivalent to crooked charities.
Symbol: MSFT (Microsoft) – Bullish
Absolutely love what CEO Satya Nadella is doing. Improvements in all sectors of their business both on personal service/product and large institutional service/product levels.
Symbol: TSLA (Tesla) – Up To Elon
I pity any analysts forced to cover this stock. To utter the phrase “all over the place” is an understatement, think it was only two summers ago when a large contingency of people asked for Musk to step down. But one truth still overhangs, American made cars aren’t sexy and have lost their cool appeal (what happened to Detroit muscle?) As of right now, pretty much only Tesla and Musk are putting out American made cars that people want to buy not have to buy.
Symbol: BABA (Alibaba Group Holding Ltd) – Stay Away
Like I said last year, something has always seemed fishy here and you don’t want to be stuck holding it once things start to make sense. With that being said, you just can’t short Alibaba, but something about reading their annual reports always has me feeling like something’s up. I hope to cover this more in-depth in next year’s annual report.
After reviewing all of the simulated investments made throughout 2019, I noticed two particular mistakes that significantly hindered this year’s past performance. The first being a glaring and obvious bad short position against Snapchat that went terribly wrong. With regards to Snapchat, I firmly believed that with it’s dwindling daily active users and it’s youthful engagement, which makes it less lucrative for advertisers because young children don’t typically have disposable income, that the company was a prime short. Yet reality played out in a much more humbling manner: on 1/9/19 I sold short 40,136 shares at a price of $6.25 and on 4/8/19 I covered 40,136 shares at a price of $12.16 for a total loss of -$237,203.76. Note I started with $1,000,000 for 2019, therefore a loss of -$237,203.76 comes to a negative 23.72%. In addition, just to hammer home the gravity of my mistake, just by simply avoiding Snapchat for the year would have potentially saved me from a -23.72% trade and turned this year’s 114.47% gain in a potential 138.19% gain. But hindsight always renders 20/20 vision and with that being said, amongst my past coverage I began to notice a significant indicator and difference between my past successful shorts and unsuccessful shorts.
For past successful shorts I often look to Jumia Technologies, Tilray and Riot Blockchain. All three are true natured concept stocks. Jumia Technologies is based around the African growth story, Tilray came about through the Canadian cannabis boom and Riot Blockchain is a product of the bitcoin craze. There almost lacks a realness about each one. But the opposite is true for Snapchat, which is very real and I even have the app downloaded on my phone. Think of the difference of concept and actual using the metaphor of kinetic energy (Snapchat) and potential energy (Jumia, Tilray, Riot). The very fact that one can download Snapchat, send messages or photos through it and view content makes it that much more real and therefore more susceptible to a turnaround. As for the second part of my mistake regarding Snapchat, was bad timing.
Referencing the chart above, it’s easy to see that around $6.25, such a stock has already seen it’s value significantly decline. Hence, to summarize this more simply, it wasn’t wise for me to short at such price levels for it was reflective of what could go wrong already had already gone wrong. Therefore, as a short seller moving into a stock in this particular situation it leaves me very little additional room for profit. Essentially, the company has to head for bankruptcy (in which I would profit) but such instances are relatively rare or any positive news will send the stock upwards, which is exactly what happened in the case of Snapchat as I had to eventually cover at $12.16 and finished the year above $16.
My second mistake, after reviewing this past year, has to do with the frequency of investments made. In the past year I made a total of 42 trades. When looking back on all of it, only 13 (which are listed below) out the 42 trades turned out to be significantly profitable, that’s only 30.9% or less than one-third. This means in a perfect world it would be wise of me to have just avoided the other 29 trades, which in a real world sense, would have led to significantly higher transaction costs for the year.
Significantly Profitable Investments (2019)
- Short (TLRY) 1/9/19 – 6,047 shares
- Buy (AAPL) 1/9/19 – 1,505 shares
- Buy (AMZN) 1/9/19 – 150 shares
- Buy (AAPL) 1/24/19 – 3,001 shares
- Buy (XOM) 1/24/19 – 1,503 shares
- Sell (AMZN) 4/24/19 – 150 shares
- Sell (XOM) 5/13/19 – 1,503 shares
- Short (TLRY) 5/29/19 – 3,675 shares
- Short (TLRY) 6/20/19 – 4,171 shares
- Sell (AAPL) 8/29/19 – 4,506 shares
- Short (TLRY) 9/12/19 – 20,206 shares
- Short (TLRY) 10/25/19 – 30,702 shares
- Cover (TLRY) 12/26/19 – 64,819 shares
Hence, the avoidance of such unnecessary frequency is certainly a personal goal for 2020 which stems from my recent discovery of Ted Williams and John Underwood’s book The Science of Hitting and its relation to the excellent HBO Documentary “Becoming Warren Buffett.” It is in “Becoming Warren Buffett” were the CEO of Berkshire Hathaway states:
“Ted Williams described in his book The Science of Hitting, that the most important thing for a hitter is to wait for the right pitch. And that’s exactly the philosophy I have about investing is wait for the right pitch, and wait for the right deal. And it will come….it’s the key to investing.”
With regards to the prior 42 investments, an overarching review left me with the feeling that I wasn’t always waiting “for the right pitch” but rather I was sometimes caught swinging outside the zone! A further dive into Ted Williams book renders my self-assessment even more true. In one particular passage, Williams breaks down the strike zone into sections of strengths and weaknesses. He states “first rule of hitting was to get a good ball to hit. I learned down to the percentage points where those good balls were.” In essence, Williams knew his strengths and weaknesses by heart and only chose to play (swing) when it played into his strengths.
Hence, with the continuation of practice, further reading and reflection, it is important that I too start to recognize my personal investment approach and sweet spot or as Warren Buffet says: “The trick in investing is just to sit there and watch pitch after pitch go by and wait for the one right in your sweet spot. And if people are yelling swing you bum, ignore them.”
Elizabeth Holmes (Vanity Fair):
Unicorn Blood in the Streets
Pete’s Brewing Company
Bill Griffeth Mutual Fund Masters
Robert Shiller Irrational Exuberance
Benjamin Graham The Intelligent Investor
Burton Gordon Malkiel Random Walk Down Wall Street
Thomas J. Stanley The Millionaire Next Door
Ric Edelman Truth About Money
James B. Stewart Den of Thieves
Anthony Scaramucci The Little Book of Hedge Funds
Sir James Goldsmith The Trap
Robert G. Hagstrom The Warren Buffett Way
Alyssa Favreau Stuff Every Graduate Should Know
Eric Tyson Investing for Dummies
James Kwak and Simon Johnson 13 Bankers
Ted Williams The Science of Hitting
Ted Williams: The Science of Hitting Explained by Warren Buffet
Mexico Finds Large Marijuana Farm in Baja California
HBO “Becoming Warren Buffett”
List for Future Reading
Let this act as an exhaustive list for future finance reading.
Robert Shiller Irrational Exuberance
Benjamin Graham The Intelligent Investor
Burton Gordon Malkiel Random Walk Down Wall Street
Thomas J. Stanley The Millionaire Next Door
Robert G. Hagstrom The Warren Buffett Way
Michael Shearn The Investment Checklist: The Art of In-Depth Research
Peter D. Kaufman Poor Charlie’s Almanack: The Wit and Wisdom of Charles T. Munger
Jim Healy Mitek: A Global Success Story, 1981-2011
Peter Bevelin A Few Lessons for Investors and Managers From Warren Buffett
William N. Thorndike The Outsiders: Eight Unconventional CEOs and Their Radically Rational Blueprint for Success
John C. Bogle The Clash of the Cultures: Investment vs. Speculation
Max Olson Berkshire Hathaway Letters to Shareholders
L.J. Rittenhouse Investing Between the Lines: How to Make Smarter Decisions by Decoding CEO Communications
John C. Bogle The Little Book of Common Sense Investing: The Only Way to Guarantee Your Fair Share of Stock Market Returns
Fred Schwed Where Are the Customers Yachts?
Phil Beuth and K.C. Schulberg Limping on Water
Phil Knight Shoe Dog
Jeremy C. Miller Warren Buffett’s Ground Rules: Words of Wisdom from the Partnership of the World’s Greatest Investor
John Maynard Keynes The General Theory of Employment, Interest and Money
Oskar Morgenstern Theory of Games and Economic Behavior
Oskar Morgenstern Predictability of Stock Market Prices
Gustave LeBon Crowd Psychology
John Carswell The South Sea Bubble
Harold Bierman Jr The Great Myth of 1929
John Brooks Once in Golconda
Louis Brandeis Other People’s Money
Benjamin Graham Security Analysis
Benjamin Graham The Interpretation of Financial Statements
Benjamin Graham The Memoirs of the Dean of Wall Street
Benjamin Graham World Commodities and World Currency
Scott Smith Find Your Perfect Job: The Inside Guide for Young Professionals
Richard N. Bolles What Color is Your Parachute?
Edwin Lefèvre and Roger Lowenstein Reminiscences of a Stock Operator
Peter Lynch One Up On Wall Street
Michael Lewis Liar’s Poker
Philip A. Fisher Common Stocks And Uncommon Profits
William J. O’Neil How To Make Money In Stocks
Jeremy Siegel Stocks For The Long Run
Jeffery A. Hirsch Stock Trader’s Almanac 2020
Dan Ariely Predictably Irrational: The Hidden Forces That Shape Our Decisions
JL Collins The Simple Path to Wealth
Justin Mamis The Nature of Risk
George Clason The Richest Man in Babylon
John Allen Paulos A Mathematician Plays The Stock Market
Gary Belsky and Thomas Gilovich Why Smart People Make Big Money Mistakes
William J. Bernstein If You Can: How Millennials Can Get Rich Slowly
Steven Drobny The Invisible Hands: Top Hedge Fund Traders on Bubbles, Crashes, and Real Money
Annie Duke Thinking in Bets: Making Smarter Decisions When You Don’t Have All the Facts
Michael Covel The Little Book of Trading: Trend Following Strategy for Big Winnings
Roger Lowenstein When Genius Failed: The Rise and Fall of Long-Term Capital Management
Nassim Nicholas Taleb Fooled by Randomness: The Hidden Role of Chance in Life and in the Markets
Nassim Nicholas Taleb The Black Swan: Second Edition: The Impact of the Highly Improbable: With a new section: “On Robustness and Fragility”
Mark J.P. Anson Handbook of Alternative Assets
Daniel Yergin The Prize: The Epic Quest for Oil, Money & Power
Jack D. Schwager Hedge Fund Market Wizards: How Winning Traders Win
Darrell Huff How To Lie With Statistics
Thomas A. Bass The Predictors: How a Band of Maverick Physicists Used Chaos Theory To Trade Their Way to a Fortune on Wall Street
Gary Belsky Why Smart People Make Big Money Mistakes and How to Correct Them: Lessons from the Life-Changing Science of Behavioral Economics
Meb Faber The Ivy Portfolio: How to Invest Like the Top Endowments and Avoid Bear Markets
Meb Faber Shareholder Yield: A Better Approach to Dividend Investing
Meb Faber Global Value: How to Spot Bubbles, Avoid Market Crashes, and Earn Big Returns In the Stock Market
Mohamed El-Erian When Markets Collide
Chris Russell Trustee Investment Strategy for Endowments and Foundations
David Swensen Unconventional Success
David Swensen Pioneering Portfolio Management
James Montier Seven Sins of Fund Management
Katherine Burton Hedge Hunters
Harry Liem 20/20 Vision
Lois Peltz The New Investment Superstars
Charles Kindleberger Manias, Panics, and Crashes
TJ Stiles The First Tycoon: The Epic Life of Cornelius Vanderbilt
Stephen Drobny Inside the House of Money
Edwin LeFevre Reminiscences of a Stock Operator
Elroy Dimson, Paul Marsh and Mike Staunton Triumph of the Optimists: 101 Years of Global Investment Returns
Elroy Dimson, Paul Marsh, and Mike Staunton 2008 GIRY
Benoit Mandelbrot The Misbehavior of Markets
Michael Mauboussin More Than You Know: Finding Financial Wisdom in Unconventional Places
Justin Fox The Myth of the Rational Market
Didier Sornette Why Stock Markets Crash: Critical Events in Complex Financial Systems
William Poundstone Fortune’s Formula
Peter Bernstein Against the Gods
Robert T. Kiyosaki Rich Dad Poor Dad
Anjan Y. Thakor Becoming a Better Value Creator: How to Improve the Company’s Bottom Line – And Your Own
Keith McCullough Diary of a Hedge Fund Manager: From the Top, to the Bottom, and Back Again
NYT on Seth Klarman Manger Frets Over the Market, but Still Outdoes It
John Griffin How Smart are the Smart Guys? A Unique View from Hedge Fund Stock Holdings
John Carreyrou Bad Blood: Secrets and Lies in a Silicon Valley Startup
Christopher Chabris and Daniel Simons The Invisible Gorilla: And Other Ways Our Intuitions Deceive Us
Roger Lowenstein Buffett: The Making of an American Capitalist
Joshua Brown Backstage Wall Street: An Insider’s Guide to Knowing Who to Trust, Who to Run From, and How to Maximize Your Investments
Jim Collins Good to Great
John Brooks Business Adventures
John Burr Williams The Theory of Investment Value
George Soros The Alchemy of Finance
Andrew Ross Sorkin Too Big to Fail
James Montier The Little Book of Behavioral Investing
Bryan Burrough and John Helyar Barbarians at the Gate
Aswath Damodaran Damodaran on Valuation
Frank J. Fabozzi The Handbook of Fixed Income Securities
Guy Spier The Education of a Value Investor: My Transformative Quest for Wealth, Wisdom, Enlightenment
Nassim Talib Antifragile
James B. Stewart Den of Thieves
Bradley Hope and Tom Wright Billion Dollar Whale: The Man Who Fooled Wall Street, Hollywood, and the World
James Owen Weatherall The Physics of Wall Street: A Brief History of PRedicting the Unpredictable
Peter Lynch and John Rothchild Learn to Earn: A Beginner’s Guide to the Basics of Investing
George Soros Staying Ahead of the Curve
Diana B. Henriques The Wizard of Lies: Bernie Madoff and the Death of Trust
Bryan Taylor Stock Market Scams, Swindles and Successes
Lawrence G. McDonald and Patrick Robinson A Colossal Failure of Common Sense: The Inside Story of the Collapse of Lehman Brothers
John Cassidy Dot.Con: How America Lost Its Mind and Money in the Internet Era
John Kenneth Galbraith The Great Crash of 1929
Michael Lewis Panic: The Story of Modern Financial Insanity
John P. Calverley Bubbles: And How To Survive Them
Richard Dale The First Crash: Lessons from the South Sea Bubble
Edward Chancellor Devil Take the Hindmost: A History of Financial Speculation
Malcolm Balen The King, the Crook, and the Gambler: The True Story of the South Sea Bubble and the Greatest Financial Scandal in History
Stephen A. Schwarzman What It Takes: Lessons in the Pursuit of Excellence
Richard C. Wilson The Hedge Fund Book: A Training Manual for Professionals and Capital-Raising Executives
Ted Seides So You Want to Start a Hedge Fund: Lessons for Managers and Allocators
Ann C. Logue Hedge Funds For Dummies
Jonathan Stanford Yu From Zero to Sixty on Hedge Funds and Private Equity: What They Do, How They Do It, and Why They Do The Mysterious Things They Do
Ron Chernow The House of Morgan: An American Banking Dynasty and the Rise of Modern Finance
William D. Cohan Money and Power: How Goldman Sachs Came to Rule the World
Scott Nations A History of the United States in Five Crashes: Stock Market Meltdowns That Defined a Nation
B. Mark Smith A History of the Global Stock Market: From Ancient Rome to Silicon Valley
Eric Tyson Mutual Funds For Dummies
Dale Carnegie How To Win Friends & Influence People
Kathryn F. Staley The Art of Short Selling
Ted Williams The Science of Hitting
Alice Schroeder The Snowball: Warren Buffet and the Business of Life