Case Study

Investors, stay safe…

….especially contrarian investors out there.

Risk and money management is key when shorting overvalued assets.

Patience is key when long undervalued assets.

Judgement is key when long overvalued assets.

What can go wrong? Setting aside technical execution risks, you run two major investment risks – 1. Your call may be right but the timing may go wrong, this determines the profit or loss. 2. It is risky to ignore mass psychology, whether it reflects irrational exuberance or unwarranted pessimism.

What do these two risks have in common? Information.

What’s one of the biggest modern-day, global, humanitarian crises that we face today? Distortion of information.

As I write this in 2020, social media has been around for ten years – that’s how experienced these companies are with identifying vulnerabilities in the human psyche. The currency of the information age is our attention and that’s not necessarily aligned with delivering facts and the full picture.

I see three major issues here – 1. Increasing clickbait at the cost of value. 2. Active disinformation campaigns now run globally. I read this brilliant line somewhere that “if you torture the data long enough, it will say anything”. Thanks to network effects, misinformation or incomplete information gets amplified. 3. Algorithms are used to manipulate what information we are exposed to.

So how does all this tie-in with investing?

Did you read the headline on Moderna and Pfizer vaccine efficiency?

The headline broadcasted the most: “Moderna reports its COVID-19 vaccine is 94.5% effective”.

Oh great, COVID is over, back to work right? It’s not necessarily that simple, fast and straight forward.

Here’s some additional considerations:

  • The vaccine announcements could have been timed for insider share sales. They may not necessarily be ready for dispatch. Also, the timeline could extend so far as Q4 2021, given that refrigeration and mass-administration worldwide is not a small problem to solve.
  • The vaccine may not be perfect, and it can take time for the immune system to become ready to protect us and translate into herd immunity.1 Social distancing and wearing masks will continue to be of importance.
  • M-RNA vaccines have never been mass-administered to human beings before. If the virus evolves by the time the vaccine becomes available for administration, it may render it ineffective.
  • “COVID-19 outbreaks at US mink farms raise alarm after mutant strain spreads to humans in Denmark”2. Even if this particular mutant strain is not harmful, the possibility of mutation is a real risk.
  • COVID case statistics are worsening, we have crossed 130k+ cases per day in the US, exceeded +9k global deaths per day, last week (all time high on 21st November 2020 of 9798 deaths)3.

Is it possible that things will get worse before they get better and the market has not discounted that? The global stock market size is inching towards 111% of global GDP right now. Is it possible investors are finding any excuse to invest in stock markets because they expect depressed bond yields? Could it be that the level of risk that an average investor is taking on is disconnected from the reality of the path of the vaccine – despite the news being very positive?

Do you see the risk of shorting such a market without a very good analytical basis and accounting for mass psychology? The market is betting aggressively on further stimulus and that the vaccine will solve everything at this point.

And as regards to the timing of trades, it can be years before a company with shady business practices sees its share price crash or an overvaluation gets corrected. And honestly….not everyone is a Bill Ackman who can afford to lose billions shorting Herbalife.

There is behind the scenes politics that plays out in the world of money, which can keep assets afloat even when their future is questionable. It is now that brokerages have started to issue sell calls on DMart, because it turns out that there is a limit to how far you can go, basing the company valuation on optimistic earnings ten years into the future 🙂 Oh, so time to short? Share price still 2300+ Rs, strong support near the 1.9k level. Maybe, maybe not.





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Case Study

A case in Due Diligence – Nikola Corporation

Not every Nikola is a Tesla, pun intended.

The Securities & Exchange Commission (SEC) is investigating Nikola Corporation for fraud following claims from short-seller Hindenberg. The electric vehicle company went public near the start of 2019, is down 72% from its peak share price at 79$ mid-year, trading at 22$ now.

You could have avoided losing money on Nikola shares. No, you don’t have to be an expert in Finance or an experienced short seller like Hindenberg. All it takes is some commonsense questioning a.k.a Due Diligence.

Questions that you could have asked:
1) No sales, no earnings, no production since the company was founded in 2014. Why buy Nikola when other EVs exist that produce something?

2) What is their value proposition? Electric vehicles? – Did you see even one Nikola vehicle on the road? Any road tests by third parties? (None). Hydrogen fuel cell technology? – How many cells produced till now? (Zero).

3) Future plans – how many promises did they deliver on? (None. The list runs too long to mention here). Refer to Sam Alexander’s video on Youtube called “Nikola Motors: False promises (2016 announcement to 2020)”.

4) Management Quality – Did you find Trevor Milton (CEO) credible? (Doesn’t seem to have a good track record). Did he hire the right people? He placed the future of the hydrogen cell technology in the hands of his brother, who is skilled in construction and concrete work. He hired the manager of a golf course as the head of infrastructure development. The work-ex of all these key people is available on Linkedin – just a click away.

5) General Motor’s 11% (2B$) Stake in Nikola – How clear was the benefit that would accrue to Nikola from this partnership? (Not very, it seemed to be a licensing agreement where the only real winner was General Motors).

Looks like the only Trevor you can trust is the one from GTA V.

Disclaimer: We did not and do not hold any position in Nikola shares.