sin investing Archives - Bankers Anonymous

January 27, 2020August 27, 2022

I Hate Tesla

The most important rule for writing a business blog – at least my most inviolate rule – is to never, ever, forecast or make “market calls,” on individual stocks. I have broken this rule only once in my 5.5 years. It’s time to break my rule again. On the same damn stock.

I slather this self-rebellion in thick layers of irony. But irony with a purpose!

Some background. I last tucked my only-ever individual-stock forecast into a post in March 2015.

The point of that 2015 post was to highlight – in my contrarian way – the unpleasant fact that “sin-investing,” especially in a nasty tobacco company like Altria has been extraordinarily profitable over the past 40 years.

But that wasn’t my stock forecast. Instead, I contrasted MO with green-tech market darling Tesla the sexy electric-car company that combines virtue-signalling for reducing your carbon footprint with 0-to-60 acceleration in 1.9 seconds.

I wrote the following about Tesla in March 2015:

“Tesla Motors, to name one public company that I’m reasonably certain will be dead in five years, despite its $25 billion market cap, is an innovative company. But that doesn’t make it a good stock to own.” Then, to further metaphorically point to the bleacher seats while stepping into the batter’s box for my inevitable home run, I wrote “Would a few people mark their calendars for five years on Tesla and let me know how I did with my call? Because I AM SO RIGHT.”

Anyway, time flies. It’s five years later.

I’ll save you the hassle and let you know that Tesla stock is up 182% since then, from $200 per share at the time of my home-run call to $565 per share as I write this. The market cap has expanded from $25 billion to $102 billion. It’s up 35% just this year. Tesla will announce 4th quarter 2109 results on Wednesday January 29th.

Having broken my inviolate rule five years ago of never forecasting a stock in a column, it is only right and just that I have both my hypocrisy and terrible market call publicly mocked.

But that’s not the main lesson you should take away from this shameful episode. The main lesson is that you, too, should never forecast individual stocks. You will be emotionally invested in a way that hurts your chances of building wealth. You will buy, or sell, that stock too frequently. You will let fear and then greed cloud your judgment. You will look up that stock price exactly at the moment when you should be admiring your daughter’s ballet recital. (How many times do I have to tell you to put your phone down?) You will read headlines that confirm your preconceived biases and you will discount headlines that contradict them. You can guess how I know all of these accurate things about you.

Beyond the emotional reasons, you should avoid forecasting because you will also be wrong. You will even be wrong for all the right reasons. Like me.

Like, Tesla, by all rational analysis, has always been a stupid stock. It’s been overvalued forever. But as the Wall Street phrase goes, “the market can remain irrational longer than you can remain solvent.”

I was correct about Tesla then, and I’m still even more correct, damnit! I will now double-down on all of my errors.

Unlike, say, software technology companies that enjoy infinite scalability, building an auto-manufacturer is highly expensive to scale. It takes cash. Tesla has burned billions in cash to build manufacturing plants in Nevada and Shanghai. The competition from other auto companies is intense and global. Regulation is massive. Innovation, for which Tesla is known, is expensive to implement. The company has nearly run out of money more than once in the past five years, even by the admission of their CEO/Evangelist Elon Musk.

Am considering taking Tesla private at $420. Funding secured.
— Elon Musk (@elonmusk) August 7, 2018

One of his dumbest, and the one that got him fined by the SEC.

And then there’s Musk himself. Ugh. As clearly brilliant and visionary as he is, he can’t stop himself from tweeting nonsense, earning rebukes and $40 million fines from the SEC, and lawsuits from fights he picks unnecessarily. He also employs his knack for distracting the media to change the subject, whenever they attempt to ask about Tesla’s lack of profit.

Oh yeah, and about that profit. Tesla has never turned an annual profit in nearly ten years as a public company.

Tesla’s market cap at $102 billion is larger than car companies Ford and General Motors combined. In fact, let’s compare those companies to Tesla. Ford sold 5.9 million vehicles in 2018, for a profit of $3.8 billion. General Motors sold 8.4 million vehicles in 2018, or a profit of $1.9 billion. Tesla, which has never turned an annual profit, sold 367,500 cars in 2019.

Tesla has sold 891 thousand vehicles in its entire history. Total. In other words, Ford and General Motors sell more cars in any given month than Tesla has ever sold. I could go on, but you get the idea. Tesla is a stock that mostly exists in our collective imaginations.

It turns out, Wall Street pros mostly agree with me about Tesla. It is the most “shorted” large stock on the US stock market, meaning sophisticated investors have bet against the share price, finding it as absurd as I do.

Shorting means hedge funds have sold shares at current prices in anticipation of buying back shares when they drop in the future. Shorting Tesla has been, as you can imagine, one of the most spectacularly unprofitable trades of the past few months.

Some people never learn. Like me and like you, the pros also shouldn’t be forecasting individual stocks.

Incidentally, I have no individual positions in any stock so nothing to disclose about conflicts of interest writing about Tesla. Index funds all the way, baby!

A version of this post ran in the San Antonio Express News.

Please see related post:

Sin Investing (and a mention of TSLA)

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March 17, 2015

Sin Investing

A version of this post ran in the San Antonio Express News.

I recently used a reader question about a stock with ticker symbol MO – also known as Altria, and formerly known as cigarette maker Phillip Morris – to talk about investment returns.

I suspect readers of my column on calculating investment returns responded “ok, yes, fine, thanks for the theoretical treatise, but tell me how do I make money?”

Interestingly, MO stock can tell us a thing or two about that question as well. A contrarian like me cannot resist the opportunity to discuss MO in terms of:

Socially responsible investing vs. sin investing, and
Investing in innovative companies, and
A five-year bet, on paper, I’d like to record

On ‘socially responsible’ Investing

I previously wrote about how I do not advocate purchasing ‘socially conscious’ mutual funds.

To summarize those ideas: I don’t like the costs of a typical socially conscious mutual fund; it’s difficult to match up large public companies with one’s specific moral compass; and the returns of such funds may not keep up with the broader market.

In fact, the opposite of ‘socially conscious’ investing – aka ‘sin’ investing – may be a far better idea, at least for making money on your money.

On ‘sin investing’ and efficient markets

When my daughter and I discussed the first stock she should buy with her tooth fairy money, you can be certain that Altria was not on the list of possibilities. (FYI we went with Kellogg, “because Rice Krispies make a lot of noise.”)

While our choice to avoid buying a company like Altria was not market moving,[1] that choice multiplied by many billions of dollars by other similarly-situated investors can leave socially unappealing companies like Altria undervalued. In other words, the fact that cigarette smoking is totally disgusting is the key to Altria’s attractiveness as a stock.

Wall Street Journal columnist Jason Zweig recently highlighted a fund built specifically to take advantage of the aversion many investors feel for stocks in certain industries such as tobacco, alcohol, weapons, and gambling.

The fund – formerly known by the catchy name ‘Vice Fund’ but now going by the more staid ‘USA Mutuals Barrier Fund’ – has had a good record beating a broad market index by nearly 2% per year for the past decade.

I generally do not believe that mutual funds can consistently outperform comparable market benchmarks.

Yet even an ‘efficient markets’ guy like me can imagine that systematic aversion by some investors to some ‘sin industry’ companies creates opportunity for other investors.

By the way, I’m not advocating actually investing in this fund, because the management fees, at 1.46%, run well above what I would consider for my own account or recommend for others. But I think their success may – possibly – highlight an inefficiency in an otherwise extraordinarily efficient market.

Most Successful Company In The World

Finance writer Morgan Housel featured MO stock, Altria, a few weeks ago in a post on the Motley Fool site calling it “the most successful company in the world.”

Before identifying Altria as his featured company, he described the long-run returns of stock ownership:

One dollar invested in this company in 1968 was worth $6,638 yesterday…that’s an annual return of 20.6% per year for nearly half a century…What company is this?

On Innovation and stock investing

And then Housel built the suspense before revealing the company as Altria, tongue firmly in cheek:

…It had to have been revolutionary. It had to have been innovative. It must be in an industry that changed the world – probably the biggest trend of the 20^th Century. It must have done something no other company could do.

And then Housel goes on to reveal – in a way that thrills an incorrigible contrarian like myself – that this world-beating stock is in an unattractive industry, one that suffered massive declines and lawsuits over the past 30 years.

Most interestingly to Housel, and to me for that matter, tobacco as an industry barely innovates at all. And that, Housel goes on to say, is another key to its success.

Innovation is super-expensive. Innovation is risky! Innovative companies frequently die. Innovative companies in rapidly evolving industries get beaten by newer upstarts.

By the way, Tesla Motors, to name one public company that I’m reasonably certain will be dead in 5 years, despite its $25B market cap, is an innovative company.

But that doesn’t make it a good stock to own.

Tobacco delivery is not innovative, but rather something far more valuable for a stock: It’s profitable.

A few final thoughts

I don’t own MO, except probably tucked away as one of a few thousand companies in some broad index fund I own in a retirement account.
I have absolutely zero opinion on whether one should or should not own MO stock for investment purposes.
Would a few people mark their calendars for five years on Tesla and let me know how I did with my call? Because I AM SO RIGHT.

[1] My daughter’s stock picking is NOT YET market moving. But look out, Bill Ackman, she’s gunning for you.

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March 9, 2015

Ask an Ex-Banker About The Big MO: What Are Returns?

A version of this appeared in the San Antonio Express News

Dear Michael,
I own a little of MO, purchased some time back with an average cost of $27.37. As you know it pays $2.08 dividend, and when I tell my friend my return is 8%, he says my return is what the stock presently pays, 3.8% or so.

I figure my return on my cost, not present price. Who is correct?

George, in Boerne, TX

Marlboro_man — The Marlboro Man, before dying a horrible death

Dear George,
Thanks for your question, which hinges on what we mean by ‘returns’ when we talk about an investment. And I can tell you who is right.
I will also use your question to discuss the unending debate between returns on stocks and returns on bonds.

Dividend Yield
Your friend’s definition of return at 3.8% posits a very particular number known as ‘dividend yield.’ We figure dividend yield mathematically by dividing the annual dividend of a stock by the current price of that stock.

Since the stock MO (slightly more commonly known as Altria, more likely known as Phillip Morris, and best known as a massive purveyor of cigarettes such as the iconic Marlboro brand) pays $2.08 per share per year in dividends and currently trades around $55 per share, the dividend yield is roughly 3.8% – which is $2.08 divided by $55.
I know precisely zero people (like your friend) who would call 3.8% the ‘return’ on owning MO stock.
So he’s wrong.

Instead, the return of MO stock ownership is the calm satisfaction you get from funding a delicious and refreshing tobacco-smoking experience for millions of satisfied customers.

Haha just kidding, lolz, smoking is disgusting.

Annual vs. Overall Returns
What I actually mean is the real return of MO stock ownership is calculated, as you already indicated, by figuring out your average purchase price, the current market price, and any dividends you may have received in the interim. Since your MO shares have doubled in price since you bought them, your overall return is something north of 100%, so far.

And so far, so good, for you.

However, we frequently talk about ‘annual return’ on an investment rather than ‘overall return’. If you made this purchase nine or ten years ago, your annual return might be something like the 8% you stated.
But I don’t know. It depends partly on when you bought, and also how you did or did not reinvest dividends.

If you know your way around an Excel spreadsheet, I could use the ‘IRR’ function to input your various annual purchases, plus any interim dividend cashflows, and then the proceeds you would collect when you sell, in order to calculate your annual return.

Then you can tell your friend to put that number in his pipe and smoke it, so to speak.
It’s well above 3.8%.

Knowable vs. Unknowable returns
But since you haven’t sold MO, you don’t actually know yet what your total, or annual, returns will be on the stock. You have to sell the shares to know your return on any stock investment.

And that leads me to a thought on the psychological problem of investing in stocks, especially when compared to bonds.
Since you have to sell to know your return, and since the correct holding period for stocks is roughly ‘forever,’ stock returns are less knowable than bond returns.
Stock returns, unlike the returns on bonds, are unknowable ahead of time. You basically have to leap into the unknown with stocks, which you don’t have to do with bonds.
Unlike stocks, traditional bonds simply ‘mature’ after a set number of years and ‘return’ your money back to you in the fullest sense of the word. Because your money ‘returns’ to you with a bond at a set date, calculating bond returns is knowable.

Donald_rumsfeld — As goofy as he sounded, Rumsfeld was right. About investing, at least

Bond yields are, however, a bit mathematically complicated.
For simplicity’s sake, traditional bonds have a known ‘Coupon Yield’ which tracks the income an investor can reasonably expect just by holding the bond. This would be analogous to your ‘Dividend Yield’ that I described for stocks above.
The Coupon Yield is the ratio of the annual bond payments to the bond price, so a bond issued with a 3% annual coupon starts off with a Coupon Yield of 3%.
Sophisticated bond investors do not consider ‘Coupon Yield’ an accurate enough measure of bond returns, however.

Calculating bond yields
After a bond has been issued, the ‘annual return’ or ‘yield’ you get holding a bond depends on whether you paid more or less than face value for the bond. If you paid less you will make a higher return than the coupon, and if you paid more, you will earn a lower return than the coupon. A precise yield or return calculation would require applying a special ‘discounted cash flow’ math formula to all remaining bond payments.
Confused yet? That’s the way we finance people want to keep it!

Haha just kidding, lolz. Finance is disgusting.

Ok, no, it’s not disgusting, but I’d have to direct you to some math to learn more about calculating bond yields and ‘returns.’ Don’t worry though, because a main point is this: The final ‘returns’ of a traditional bond held to maturity are knowable, making bonds psychologically comfortable for some folks.

Final ‘returns’ on a stock depends on an average purchase price and average sale price. So until you sell the stock, you have unknown returns. This partly explains why stocks are psychologically uncomfortable for some folks.

Stocks v. bonds
So which one should you own in your investment portfolio?
Well, let’s see, that’s a complicated question with many answers.
Let me tap out the tobacco in my pipe, my young friend, clear my throat heartily, and tell you in a deep voice that it depends on your time horizon, your risk appetite, your savings rate, plus a sophisticated calculation regarding the number of years until your retirement.

Haha just kidding, lolz.

You should own stocks.

Please see related posts:

Stocks vs. Bonds

Discounted Cash-Flow formula

Another discounted cash flow example

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