Whitney Tilson’s email to investors discussing stocks extend slide on inflation data; locking in a huge crypto gain; Hertz stock soars; just because you made money doesn’t mean you were smart; Cathie Wood’s ARK wasn’t built for a flood.
Q1 2021 hedge fund letters, conferences and more
Stocks Extend Slide on Inflation Data
1) No sooner did I write in yesterday's e-mail about my concerns regarding inflation than the market puked on exactly that (see this Wall Street Journal article: Stocks Extend Slide on Inflation Data), with the S&P 500 Index falling by 2.1% and the Nasdaq Composite Index dropping by 2.7%.
Here are two more articles about rising inflation that came out too late to include in yesterday's e-mail...
From the New York Times: Jump in Consumer Prices Raises Stakes in Inflation Debate. Excerpt:
Consumer prices jumped at the fastest pace in more than a decade in April, surprising economists and intensifying a debate on Wall Street and in Washington over whether inflation might reach levels that would squeeze households and ultimately undermine the recovery.
Economists and central bank officials said the numbers reflected pandemic-driven trends that would most likely prove temporary. But investors and politicians are worried that prices will keep climbing – potentially pressuring the Federal Reserve to lift interest rates sharply. That could slow economic growth and send stock prices plummeting.
And the WSJ: Employers, Prepare for a Wage Jolt. Excerpt:
Whatever the reason, if the disincentives to work are higher now, then the way to overcome them is by raising the incentives. The biggest one is pay. Doing so might not be the easiest thing for employers to stomach. Companies face investor pressure to maintain profit margins, while many smaller businesses have experienced financial strains as a result of the pandemic that give them less room to maneuver.
Nevertheless, to keep pace with demand in a quickly growing economy, businesses are going to need to add workers. If higher wages are the only way they can do it, wages are going higher.
So, is this the beginning of a big market correction?
I don't know... But if I was forced to guess, I'd say no. As I've said before, I think there's a good chance that the mother of all economic booms combined with unprecedented fiscal and monetary stimulus could lead to a melt-up in the markets.
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Hertz Stock Soars
2) Following up on my April 22 e-mail, where I said, "I might end up being wrong on car-rental giant Hertz (OTCMKTS:HTZGQ)," one of the 25 stocks in my "Short Squeeze Bubble Basket," the stock rose 55% yesterday after the company's announcement that it had reached a deal to emerge from bankruptcy, which would value the stock at roughly $8 per share: Hertz Shares to Recover $8 Each in Knighthead Win; Stock Soars. Excerpt:
In a deal that hands a huge victory to shareholders of bankrupt Hertz, the car renter picked Knighthead Capital Management and Certares Management to buy the company out of Chapter 11, capping a dramatic brawl for control of the company.
The deal, which gives a reorganized Hertz an enterprise value of $7.43 billion, was picked over an offer from a competing group led by Centerbridge Partners, Warburg Pincus and Dundon Capital Partners, according to people with knowledge of the matter, who asked not to be identified because the plan hasn't been made public. The Knighthead-Certares plan would give equity holders a recovery of about $8 a share – a package that's made up of about $240 million in cash and warrants for nearly 20% of the reorganized company, the people said.
Of the 25 stocks I included in my Short Squeeze Bubble Basket on January 27, this is the only one that has risen – and 22 have collapsed by more than 20%. Excluding Hertz, the other 24 are down by an average of 52% (42% including Hertz, which has risen 192%), during a period in which the S&P 500 rose 8%.
I am officially removing Hertz from my basket.
So did I make a mistake including Hertz in it? Given that the stock has nearly tripled, the obvious answer would appear to be yes.
But I'm not so sure...
To be a successful investor, it's of course critically important to learn from both your winners and losers.
But just because you made money doesn't mean you did something smart... And just because you lost money doesn't mean you made a mistake.
To understand why this is the case, here's a simple example: Let's say I give you the opportunity to bet any amount of money, roll a regular six-sided die, and if a 1 comes up, I pay you 100x, but you lose all of your money if a 2, 3, 4, 5, or 6 come up.
Thus, you're going to lose all of your money 83% of the time (5 of 6 rolls), even though the expected value is incredible: $16.67 for every dollar wagered (a 100x payoff one-sixth of the time).
How much would you bet if I let you play the game once? Three times? Ten times? A thousand times?
My answer: The more times I could play, the more I'd bet each time. But even if you only let me play once, I'd still bet a fair amount because I rarely come across 17-to-1 expected value payoffs.
But imagine you were watching me and I played three times, each time wagering $5,000. If I lost all three (a 59.7% likelihood), would you say, "You idiot, Whitney – you just pissed away $15,000!"?
Or would you be wise enough to say, "Those were three great bets, Whitney. You were smart to make them, even though they didn't pay off this time. The next time you see a 17-to-1 expected value opportunity, please let me know!"
Turning back to Hertz... I don't know the exact number, but almost all bankruptcies end in no recovery for shareholders.
I'm also quite certain that the vast majority of investors who had driven the stock from a post-bankruptcy low of $0.40 to $1.92, when I put it in my basket, weren't making a judgement that Hertz was likely to exit bankruptcy with substantial value remaining for the equity.
No, they weren't smart – they just got lucky.
I'm happy for them – and for the company.
But as investing legend Charlie Munger once said:
If you run through a dynamite factory with an open torch and happen to make it to the other side without blowing yourself to kingdom come, that doesn't mean it was a good idea!
Think about that the next time you do something really foolish – but it still turns out well...
Cathie Wood's ARK Stumbles
3) My colleague Berna Barshay, my friend Doug Kass, and I aren't the only ones warning investors about Cathie Wood's ARK Invest funds...
Here's a "Heard on the Street" column in the WSJ: Cathie Wood's ARK Wasn't Built for a Flood. Excerpt:
So many investors piled in relatively recently, though, that her actual wealth-creation record is unimpressive. Analysts at Bespoke Investment Group calculate that the money-weighted annualized return of her funds since inception was 5.24% through Monday. That is far less than a steady investment in a plain vanilla S&P 500 index fund.
And ARK Invest's paper gains have depended on some uncomfortably concentrated positions...
Ms. Wood's "disruptive innovation" jargon may be somewhat novel. What her investors are experiencing isn't. Fund managers like Gerald Tsai in the 1960s who rode Polaroid and Xerox to stardom or various dot-com visionaries in the late 1990s wound up doing poorly for clients who discovered them after they became hotshots. The culprit is unrealistic expectations and reversion to the mean for the bubbly sectors that got them there. Analyst Meb Faber points out that not one of the five Morningstar "fund managers of the decade" through 2010 even managed to beat the market in the next 10 years. The best of the bunch, Bruce Berkowitz's Fairholme Fund, became the worst.
Star managers can be dangerous to your wealth.
And here's a related article in today's WSJ: Cathie Wood's ARK Stumbles as Tech Trade Unwinds. Excerpt:
Cathie Wood's ARK Investment Management is bearing the brunt of the stock market's faltering technology trade, again.
Ms. Wood was crowned a star stock picker last year thanks to her exchange-traded funds' hefty exposure to many of the coronavirus pandemic's work-from-home winners. But her funds have sunk further than the broader market during May's selloff in shares of technology and other fast-growing companies, suggesting their midwinter pullback was no fluke.
Her flagship innovation fund has fallen 15% in the first eight trading sessions of May. That is more than what the ETF shed in February and March when worries about a sharp rise in bond yields began to dent the allure of growth stocks. Shares of the fund are now down more than a third from their mid-February high after more than doubling last year.
Best regards,
Whitney
The post Hertz Stock Soars; ARK Invest Stumbles appeared first on ValueWalk.
