Should You Sell Your TSLA Holdings to Hedge Against A Possible Market Crash?
A Long-Term Investor’s Collection of Arguments From Both Sides of the Debate.
So you own Tesla stock, and you did well in 2020.
Now you’ve got Ray Dalio, Jeremy Granthman and The New York Times talking about stocks being overvalued, and the possibility of another crash like 1999, or even 1929.
So should you sell? Sell now, realize your gains… and if the crash comes, be the guy who can buy more stock at a discount.
Or should you hold? After all, there have been naysayers all the time. Had you listened to them, you wouldn’t be seeing these lovely green numbers in your portfolio right now.
Are we in a speculation bubble? Will 2021 be like 1999? If so, will it affect TSLA? And what can you do to catch as much upward movement as possible, without the risk of looking into your account one day and seeing a big, red “-69 %”?
I don’t have the answers. But I’ve been long TSLA myself since 2015, and I’m asking myself those questions. I wasn’t around in 1929, and I wasn’t around in 1999 (at least financially). So the best I can do is observe, think, and try my best not to fall into wishful thinking or into irrational fear.
Hence, to help me think about the situation, I made this list of arguments for both sides of the story. It’s a work-in-progress, and fellow investors are invited to pitch in.
YES — You Should Sell
Tesla CEO Elon Musk himself said that, in his opinion, the stock price is too high.
- On May 1st 2020, he tweeted “Tesla stock price is too high imo”.
- On December 1st 2020, he said “I said the stock was too high when it was $800 pre-split.”
- Around Deceber 1st 2020, in an internal email to employees, he wrote, “Investors are giving us a lot of credit for future profits, but if, at any point, they conclude that’s not going to happen, our stock will immediately get crushed like a soufflé under a sledgehammer!”
- Musk knows the company. He also knows valuation, since he has built many startups over the years.
Ray Dalio says that we are heading towards a recession (or possibly: another “lost decade”).
- Dalio seems to be a smart guy. He also made this cute video on “How The Economy Works”.
Jeremy Grantham predicts that stock prices will be dropping within months or weeks.
- He says P/E ratios are unusually high, and stock prices rising like they did in 2020 in times of a global pandemic and economic challenges seems out-of-touch with reality.
The IPO market is as hot as in 1999, just before the crash.
- 2020 saw more IPOs and more capital raised through public markets than any of the previous 21 years. The last time the current level was seen was in 1999 — the year when the dotcom bubble burst. (Source: New York Times)
The market has been fueled by an unusually high influx of inexperienced traders who are out for quick gains.
- Rise of trading apps like Robinhood, which allow users to buy and sell stocks “on the go” (or in the bathroom).
- People with a nack for speculation might have been flocking to the stock market since the pandemic closed other avenues, such as sports gambling. (Source: New York Times)
- Due to the pandemic, an unusual number of people are quarantined at home. They are both bored and looking for ways to make money from home.
- There seems to be a surge of YouTube channels about “how to make money” with stocks and options.
Interest rates are at rock bottom. Money is cheap. People will buy stocks for no better reason than not knowing what else to do with their money.
Margin debt is at a peak, according to FINRA data (and it is higher than it was both in 2000 and 2008, even after adjusting for inflation).
- Margin debt measures the amount of debt taken on by investors in order to buy securities. So it measures how much money was borrowed in order to invest in (or speculate with) stocks.
- This is the same measure that peaked right before the stock market crash in 1929 (then called “broker’s loans”):
- Margin debt is currently at an all time high, with the latest data point being $ 722 billion in November 2020.
Everybody believes that, when the bubble comes, they will be smart enough to exit first. But nobody can time the market. Once the market crashes, most people won’t be able to exit before incurring major losses.
- The fact that you suddenly want to sell does not give you any guarantee that anyone will want to buy then. This is precisely what drives markets down in a crash.
- Just as FOMO might have driven stocks like TSLA up in 2020, it will drive them down once investors get scared.
There are dangerous elements present today that were not present in 2000, 2008 or 1928.
- Algorithmic trading and trading bots. They caused the “Flash Crash” on May 6th 2010, where the Dow Jones plunged 9 % within a couple of minutes.
- Some of the practices that lead to the Flash Crash are now banned. Tools to prevent Flash Crashes have been implimented, like the Consolidated Audit Trail and Circuit Breakers.
NO — You Should Hold
A company growing its valuation 1,000 %+ within just a few years is not unprecedented, especially in times of disruption.
- In the 1970/80s, the stock price of UCCEL Corp, a data processing firm, rose from $1.5 to $155 (10,233 %). The company was eventually purchased by CA Technologies.
- Intel’s stock rose around 1,000 % from 1990 to 1996. Those are the gains an investor would have kept even if he had sold at the lowest point after the dotcom bubble, in 2002. (During the bubble, Intel continuted to rise to a high of 5,000 %, but those gains were reversed in the crash — hence I’m not taking them into account here.)
TSLA hadn’t been rising substantially for years in spite of major breakthroughs due to negative pressure on the stock by short sellers.
- Both the act of short selling itself and the activies of short sellers in disseminating “fear, uncertainty and doubt” (FUD) through social media had been holding the stock down.
- Part of the meteoric rise of the stock in 2020 might be explained by a short squeeze.
- Short sellers borrow TSLA stock which they sell. They then hope to be able to fill their debt to the lender by purchasing the stock later at a lower price.
- When the price of a shorted stock rises, the lender calls in the loan. This is the so called “margin call”. The short seller now has to give back the stock. Since he doesn’t own it, he must buy it. He thus is forced to buy it at whatever the current price is on the open market.
- Short sellers “covering” their positions causes the stock price to rise even further. Which triggers even more margin calls. Repeating the cycle.
- Elon Musk had warned of a “short burn of the century” for several times over the last couple of years. Recently, when asked about the short sellers who gave Tesla a bad reputation in the media, he said “It was a seriously twisted affair, but all’s that ends well”. So it seems that he attributes the 2020 rally at least in part to such a short burn. The news media, for what it’s worth, seems to agree.
TSLA has risen close to 1,000 % within a year before, back in 2013/14.
Google Trends “buy stock on margin” is not peaking right now.
- (In contrast, the term “buy bitcoin margin” was, back in November 2017. One month later, bitcoin peaked, and consequently dropped 65 % in value.)
The pandemic may not be a burden. It might be a challenge that pushes the economy forward.
- COVID accelerated the advent of mRNA vaccines.
- A process that otherwise would have taken ten years was now compressed into under one year.
- The infrastructure created for the COVID vaccine most likely will create a whole new field for medicine. Making new vaccines might now be just a matter of writing new code.
- COVID broke the psychological barrier for remote work.
- While remote work, video conferencing and online courses had been technologically available for more than a decade, the majority of people didn’t use them. COVID forced people to break their habits and try new ways of working an communicating.
Elements that were present in bubbles like 2000, 2008 and 1929 are currently not present (yet):
- Companies were built on untested assumptions. Today, fast prototyping, failing fast and “minimum viable products” (MVPs) are standard operating procedure for tech companies.
- Webvan assumed that people would be ready to buy their groceries online. They built their infrastructure… and then were bamboozled to see that people didn’t really use it. (It took the population another 20 years to fully embrace online shopping. Eventually, it took a global pandemic to make people buy their toilet paper online.)
- Many companies were just focussed on ad revenue. The top performing companies today actually provide at least some kind of direct value to the customer.
- Alladvantage paid its users for looking at ads. Users, of course, gamed the system by running the tool all day long, delegating the task of moving the mouse every now and then to software tools designed to make Alladvantage believe that an actual user was there. Alladvantage’s scheme was mere makebelieve for the company and for its advertisers.
- Contrast that with airbnb or even DoorDash. These companies are at least providing a real-world service for their end-users. This is not to say that this service is so valuable that it justifies the stock price of these companies. But it isn’t mere digital vaporware as it was in 1999.
- Banks were treating mortgages as more valuable than they really were. The crash came once this secret escaped and investor confidence was shattered.
- With the current stock market, investors know that many of the “story stock” companies are not making a profit. What their confidence hinges on is simply the expectations that such profits will follow in the future. Here, the risk is in the sphere of the investor. With the banks, in 2008, the risk had been in the sphere of the banks, hidden away by the banks (in part even from themselves). Hence the shock when it came out.
- The 1929 stock market crash had been preceeded by a major real estate bubble. Individuals (not banks) bought up swampland in Florida in the hopes that the state would one day become “the Riviera of America”.
- Land was sold for a 10 % down payment.
- None of the buyers actually expected to ever live on the property. It was bought only for the purpose of selling it at an even higher price to the “greater fool”.
- Developments were sold as being “near” the beach or “near” a flourishing city, even though they were, in fact, 60 miles away.
- One of the many actors here was Charles Ponzi. We know this kind of speculation now as the “Ponzi scheme”. It was new and legal back then. Today, we have safeguards against Ponzi schemes. These are not perfect, for sure. But they exist, and 2020 can therefore not seriously be compared to 1929.
- Pump and dump schemes: It was common that speculators pooled together and agreed that they’d all buy stock at the same time. When outsiders saw the ticker swing upwards, they swarmed in in droves. Then, those who were involved in the scheme dumped their stock on the market at inflated prices.
- We are seeing the same scheme today in the realm of small cryptocurrencies. But major stocks cannot be manipulated like that anymore.
- Information flow for investors was much worse in 1929. The primary medium for stock information was a paper ticker and a physical newspaper. In many cases, you didn’t know what your assets were worth until hours after market close. This situation is not only a breeding ground for uninformed decisions, but also for rumors, uncertainty and psychological manipulation. (In this respect, one could argue that today’s situation isn’t much better: While we do have near instantaneous information about stock prices, we also have algorithmic trading where the computers of big instituations will initiate trades before you and I can even pick up the phone to check our the stocks App.)
- There were no rules concerning the limits of leverage. There were “investment trusts which would sponsor investment trusts, which would, in turn, sponsor investment trusts”. For example, the Central States Electric Corporation, which in 1921 had been worth only some six million dollars, ended up controlling close to one billion dollars by 1929. Another example was the United Founders Corporation. The company had, at its peak, total resources of $686,165,000. The group as a whole had resources with a market value of more than a billion dollars. But the company had started out with nothing more than an original outlay of $500. It was a form of “fiscal incest” that fascinated investors in 1929, because they had not yet realized that the same geometric progression would be at work in reverse, in a falling market.
- (Source for all of the above: “The Great Crash of 1929” by John Kenneth Galbraith)
People have been warning of an imminent stock market crash all the time. Had you listend, you would never have made any gains in the market at all. Selling now just because you can’t possibly time the market is therefore useless advice.
Google Trends “stock market crash” is not at a peak
- Peaked in October 2008, February 2018 and March 2020.
- It is currently 77 % below the last peak.
- This means that warnings of an imminent crash have been even more frequent in the past than they are now.
A bubble does not eradicate all players in a market. Amazon survived the dotcom bubble, and TSLA is very likely to survive the next.
- Had you bought AMZN at the peak of the dotcom bubble, you’d still be seeing 3,100 % of gains. It would have certainly been nicer if you had been able to time the market, sell your shares at the peak, and then buy again at the bottom. But it wouldn’t have been a 1929 situation where your investments would have gone to zero.
- (That is, of course, provided that you had the means to “sit out” the recession. Those who needed the money for their survival or who had bought their stock on margin would not have been able to do that.)
- TSLA has survived the 2008 recession. It did so when the company was in much weaker shape than it is now.
- Tesla has created things that didn’t exist before. They created an entirely new market. In this, they differ from the majority of dotcom companies:
- Model S broke the rating scale for accident safety.
- FSD is the first system to drive door-to-door without human intervention, using only cameras, and without geofencing. (It still requires human supervision.)
- Tesla’s powertrain efficiency is still the best in the industry.
If there is any company that has the grit to survive a recession, it is Tesla.
- Tesla is not just a company based on a nice idea, or a current fad (like SnapChat or Uber). They actually have factories and workers. In fact, they operate some of the largest factories on Earth.
- Tesla is positioned at an intersection of several industries. In that, it is similar to Amazon, which survived the dotcom bubble, while many pure “internet companies” did not.
- Tesla combines manufacturing, artificial intelligence, battery development, construction, energy and software, just to name a few. It’s not a SnapChat that will die if teenagers stop using it.
- Tesla is the largest eletric vehicle maker in the world by market cap. They were also the first major player in this industry. If anyone thinks of electric vehicles, or self-driving, or energy, they will think of Tesla first.
Tesla has some of the smartest people working for them. For many top-graduates and high achievers, Tesla is number one on the list of companyies they’d love to work for.
- Tesla attracts talent not only because they pay well, but because of their mission, and because of the legend status of Elon Musk. I bet there are many smart people out there who’d be willing to work at Tesla for free.
If anybody will be able to raise money in a recession, it will be Elon Musk.
This article is no conclusion. It is a beginning. It is designed to help people make their own decisions in the face of uncertainty.
If you noticed any arguments that are missing, or different perspectives on the same data, then please leave a comment below. I will read all comments and integrate them into the text (with attribution).
Also, if you are a shareholder and you have come to a decision, why not let us know your thought process!