I’ve been following the reports on this virus for the past 3 weeks. Since early February, I felt that this would cause a correction but was surprised that the market was ignoring it.
Then I got busy getting ready for my vacation to Hawaii and flying there when the correction started.
Yesterday, I got some time here in Hawaii to research this more. Today I sold my stocks.
It looks like the WHO (World Health Organization) and several countries have been lying about the severity of this virus. China, Thailand, Vietnam, Iran and the U.S. likely have multiple times more cases than they are reporting.
The U.S. has only reported 50-60 cases, all of which came from travellers from the Diamond Princess cruise ship or China. Yet, California has thousands in quarantine. Today, the first case is reported where the source of the infection is unknown. This implies that it is spreading within the U.S. and many more will be reported in the future.
Iran and Thailand likely have tens of thousands of cases.
This virus is much more infectious, easily spread and deadly than either SARS or the flu. People are succumbing and falling on the ground in some countries. Victims can get sick more than once. Contagious period can be up to 27 days without symptoms. Another difference is the size of the Chinese economy compared to when SARS broke out. This means that the impact to the world economy will be much more significant.
China has been shutting down almost entire cities. This will disrupt supply chains that the world depends on, which in turn will slow the world’s economy.
CDC has said that a pandemic is essentially assured. Germany said that they will have an epidemic. Europe is not doing enough to contain it. The U.S. is not doing enough testing. Italy is using the military to quarantine victims. There are long lineups at the grocery stores in South Korea and the shelves are empty in stores near the cluster in Italy. The number of cases worldwide are doubling every 4-5 days. Vaccine is one to one and a half years away. It looks like it is going to get worse before it gets better.
There is a possibility that this might be the start of the next bear market or recession. Hopefully, I’m wrong.
“In most parts of the world today, solar is the cheapest source of new power generation. So why hasn’t the world switched the plug to solar just yet?”
The only thing holding back the world from going 100% solar is the battery. “MIT researchers estimated battery costs must sink to $20 per megawatt hour if we ever want to switch 100% to solar power.”
Buffett is investing in a solar farm that will store electricity in batteries for $13 per megawatt hour (MWh). That’s $7 less than MIT’s threshold. Combined with generation, the solar farm’s electricity will cost $33 per MWh. That’s $37 less than the $70 for natural gas.
Massive change is coming.
People all over the world are going to switch to solar, not just to make the world greener, but to make their wallets greener.
“The best news for investors, we are still in the early innings of this energy revolution. While the Invesco Solar ETF rallied 51% last year, it’s still down 88% from its highs…In the grand scheme of things, it has barely budged. With so much room for growth, solar stocks could easily double, triple, quadruple, or better in the coming years.”
There are many ways to invest in solar. There are many panel manufacturers, installation companies, financiers of solar installations, solar farm companies such as Warren Buffett’s, etc. But there are mainly just two inverter manufacturers: Enphase (which I own) and SolarEdge. This is similar to smartphones where there are mainly just two smartphone makers, Apple and Samsung. Another way to play solar is with Tesla, which is making batteries for utility companies and solar roofs.
I have made bad, mediocre and good trades. Here are the extraordinarily bad and good trades.
MESA AIR GROUP
I bought this in 2009. This went to ZERO. Bankrupt.
I bought this in 2009. This went to ZERO. Bankrupt.
I bought this in 2011 and was defrauded. NIVS turned out to be one of many fraudulent Chinese reverse-takeovers that listed on the NYSE. This got delisted and went to ZERO.
I bought a few in approximately April 2013 for approximately $40 each. Then it went to $10,000 each in 2017 and crashed in 2018. However, it has recovered some since 2018 and I believe it will fully recover or reach new highs.
I bought this in 2015 for approximately $12 per share. It dropped by approximately 50%, so I put three times more money into the stock (by selling my other stocks) at approximately $6 per share. But it continued to drop until it went down approximately 95% to 72 cents or less in May 2017. Since then, it has shot up to $30 or more.
This has to be the wildest rollercoaster ride that I have ever been on. Who needs to go to Disney World when you can ride Enphase? The next time your kid wants you to take them to Disney World, buy them some Enphase stock.
Enphase is a good example of how the stock is much more extreme than the business metrics. Enphase’s revenue declined in 2016, but the long term future looked okay to good. Prices of solar components continued to decline. If this continues, it will be cheaper than the grid. Nevertheless, shareholders panicked and dumped the stock.
If you cannot handle this kind of volatility, buy ETFs because you will lose money with stocks.
I bought $880 worth for my kid in November 2017 for approximately $27 per share. I watched it climb to $70 per share in 2018. Then it started dropping. When it dropped to $44, I thought it was an opportunity to get in, so I bought some in November 2018. But it kept dropping. I waited and waited until it bottomed, which it did at $27, which was 32% lower than the $44 that I bought it at. After it bounced, I bought approximately three times more for myself for approximately $30 per share in December 2018. Since then, it has rocketed to as high as $160.
Since I bought so close to the bottom in December 2018, I wonder if the SEC is going to be suspicious of insider trading.
I started researching this company in early 2019 and determined that they make the best car in the world, but the world doesn’t know it yet.
However, bad news were coming out. Tesla had missed street expectations for one or two quarters. Sales dropped from 2018. They had to make a secondary offering to raise cash. Short sellers were bashing Tesla incessantly. Bears used the TSLAQ symbol to imply bankruptcy. They mocked Elon Musk’s “Funding secured at $420” tweet. They mocked Elon Musk’s unfilled claims. They posted news about Tesla cars on fire and Auto-pilot killing its driver. The stock kept declining. I waited and waited and waited until it would bottom. It bottomed at $180. Then it bounced and I bought it at approximately $206 per share in early June 2019.
Like Roku, I bought Tesla near the bottom. Tesla’s stock had been range bound for over 5 years. After the June 2019 bottom, it has rocketed up to $728 per share. The SEC must be convinced that I have insider information now. They are probably spying on me as I type this.
I can unequivocally tell you that I do not have insider information and I do not know Elon Musk personally. I do not even know the janitor at Tesla.
I am simply very bullish on the company. You can read my other posts for my reasons. However, I did not think that it will shoot up this quickly. It would seem that it is due for a correction, but I have no idea what it will do in the short run.
People might deny it, but for most, the most important issue is money. Consequently, the number one political issue at every election for most voters is money. They might disguise it as jobs, healthcare, education, daycare, etc. But those are all money-related. If people had lots of money, they would care less about those. If they had tens of millions of dollars, they would not need a job and not worry about healthcare and education, because they can pay for the best in the world.
Therefore, the most important mandate for the country’s leader is: Has he/she improved the prosperity of voters?
Compare Canadian to U.S. stock performance, since Justin Trudeau was elected as Prime Minister. The S&P/TSX Composite index has gone up 25.1% from Oct 25, 2015 to Jan 31, 2020. Meanwhile, the U.S. S&P 500 has gone up 58.8% over the same period. (S&P/TSX closed at 13,841.90 on Oct 25, 2015 and 17,318.49 on Jan 31, 2020. S&P 500 closed at 2,030.77 on Oct 25, 2015 and 3,225.52 on Jan 31, 2020.)
Below is a graphical representation of the difference, though I was not able to get Yahoo to show the lines to Jan 31, 2020.
Here is more data to show Trudeau’s underperformance.
If Trudeau did not bring in 3 times more immigrants than the U.S. (on a per capita basis), Canada’s GDP growth would be even lower, probably in recession.
This is partly why I’ve allocated 100% of my portfolio to U.S. equities for many years.
Note that immigration is how most politicians try to boost GDP. However, this is not important to voters. GDP for the country does little for them. They care more about GDP-per-person, or more specifically, income. After many years of mass immigration, the average income has been relatively flat. This is because most political leaders are incapable of increasing GDP-per-person. Increasing GDP is easy. Simply increase immigration.
A common term used in the investment world is “draw down”. It simply refers to the amount that your stock portfolio went down in value, which was caused by a correction, dip, crash or bear market in the stock market.
Investors panic over this. They care more about this than gains. That is, their fear emotion about this is stronger than their greed emotion to make money.
Consequently, investment professionals, such as hedge fund managers and investment advisors are very acute to this and try to minimize it. In fact, they have “mandates” to do this, otherwise they lose clients or get sued by clients. Hence, they hedge and create balanced portfolios with fixed income.
However, this is the major factor that causes under-performance, as explained in my article Why Most funds Underperform. Many investors are willing to forego gains in order to avoid draw downs.
Warren Buffett wrote an article about students of Ben Graham and David Dodd, who became super-investors:
These students became full-time fund managers who outperformed the market, by approximately 8-16% per year on average. However, they under-performed in these years (corresponding to lists in their tables):
So, even if you under-perform some years, you can become rich from the stock market. Buffett is the only fund manager who did not under-perform a single year.
They all became rich by outperforming the index over many years. However, during some years, they had “draw downs” that caused their funds to go negative.
Despite these “draw downs”, Buffett considers them to be the best investors in the world. Were they afraid of draw downs? No. Buffett has said that he and Munger have seen their portfolios drop by 40%, multiple times.
If you look at Charlie Munger’s performance in Buffett’s article, you will see that Munger had draw downs of -31.9% in 1973 and -31.5% in 1974. After those two years, his fund dropped by 53%. Most investors would panic and their hair would burst into flames if they experience this kind of draw down.
Despite this, Buffett considered Munger to be such a superior investor that he asked Munger to be his partner at Berkshire Hathaway.
If you freak out over draw downs, you will lose money or be a mediocre investor.
You will also see that Munger’s fund was extremely volatile. As explained in my article Why Most funds Underperform, a Wall Street firm would not consider me because my portfolio was volatile. But, the less volatile your portfolio is, the less likely you will outperform.
There is an update to this. He recently gave the presentation again:
This is a must-watch, as it explains huge disruptions that are happening. According Tony Seba, people will buy solar and electric cars, not to be green for the environment, but to get more green into their wallets, because solar will soon be cheaper than the grid and electric cars are already cheaper than gas cars (it’s just that most people don’t know this yet).
This is a technology, not green, disruption. Many companies related to gas cars and oil are doing to be destroyed. On the other side, millions of people will benefit greatly. According to Tony Seba, there will be:
1.2 million fewer deaths from car accidents around the world
20-40 million fewer injuries or hospitalizations
Millions of hours freed up from commuting
$1 trillion of savings for U.S. households
$1 trillion of increased productivity
Cities will free up huge amounts of land, which can increase the number of parks and homes, which can reduce the cost of housing. There will be increased mobility for elderly, disabled, young and poor. New businesses, enabled by autonomous electric vehicles, will be spawned.
He explained that the cost of batteries and solar have been dropping for many years. If they keep dropping, there are going to be major disruptions. Tesla Energy can possibly disrupt the entire grid. They are starting with possibly replacing “peaker power plants”. Tesla showed that they can replace Australia’s utility company’s peaker power plant. It is not a success because it is green. It is a success because it will save the utility company a lot of money.
One benefit that Tony Seba did not mention is the reduced demand for Middle East oil, which has geo-political implications. This means fewer wars. It also means that Saudi Arabia will have less money to fund and push their ideology to the rest of the world, which they have done for many years.
From an investment perspective, it also means that you should be cautious about investing in any country that makes a significant percentage of their revenue from oil. This includes Canada, Norway and to a lessor degree, the U.S.
You can make a lot of money if you know something that others do not.
Tesla makes the best car in the world, but the world does not know it yet. Over the next 10 to 15 years, there is going to be a lot of blood on the streets, and it is not going to be Tesla’s blood.
Here are the top reasons that Tesla will crush or bankrupt many companies:
1. Best Car in the World
I started researching Tesla in early 2019 and determined that it makes the best car in the world. Hence I bought the stock in early June 2019. On August 2019, Jack Rickard stated: “Tesla makes the BEST automotive vehicle on the planet, barring none, in all respects, including SAFETY. It is just the best car ever built. And I would challenge anyone to demonstrate even partially that this is not so.”
This is corroborated by:
Model 3 won:
Detroit News Magazines 2018 Car of the Year award
Car of the year by Popular Mechanics March 2018 Automotive Excellence awards
AutoExpress Car of the Year 2019
Automobile Magazine 2018 Design of the Year
Model S won:
2013: Motor Trend’s Car of the Year
2019: Motor Trend’s Ultimate Car of the Year – the top Car of the Year in seven decades of publication and naming a car of the year every year since 1949.
As Jack Rickard pointed out, Motor Trend makes its money from advertising, largely from car and parts makers. Tesla does not spend any money on advertising.
2. Fastest Car on the Road
Tesla’s Model S can beat the Lamborghini Aventador in a quarter mile. This is embarrassing…for the Lamborghini.
Tesla’s price is a fraction of Lamborghini’s price.
Scheduled to be released in 2020, the Tesla Roadster is the fastest production car based on several metrics. It can go 0 to 97 km/h or 60 mph in a blistering 1.9 seconds. Yet, its price of US$200,000 is a fraction of Bugatti’s price of US$3,000,000.
For most of my life, my dream car was a Lamborghini or Ferrari. Now, I think they are obsolete. I would never buy one. Supercar owners are now facing a real risk that their cars will devalue after the Roadster comes out. If you know a supercar owner, you should warn them of the risk of keeping their cars.
According to CleanTechnica : “Previously, the top two cars ever tested were the Tesla Model X and Model S. So, with the newly announced data, Tesla owns the top 3 spots.”
There are multiple factors that make the Tesla car safer. One of them is that the centre of gravity is lower because the battery is at the bottom of the car. Consequently, it is much harder for the Tesla to roll over. Due to its structure, the frame collapses less.
Electricity is far cheaper than gasoline. You no longer need to spend time and money every week to go to a gas station. You simply plug it in when it is parked in your garage.
According to Tesla, there are 20 moving parts in a Tesla, versus 10,000 moving parts in a gas car. Even if a gas car has only 1,000 moving parts, that makes the gas car much more prone to failures, maintenance and repairs. With an electric vehicle (EV), there is no more need to replace the radiator fluid, spark plugs, engine and transmission oil, gaskets, filters, etc. Even Tesla’s brakes last longer because most of the time, the braking is done by the motors’ regenerative braking.
5. Smartest Car
Tesla cars can park themselves. That alone makes it smarter than other cars.
However, Tesla’s cars can drive itself on the highway.
Smart Summon is not elegant but is making improvements in each software update.
You can control most aspects of your car, including summoning it, on your smartphone app.
On a regular basis, the software in the car is updated over the air with additional features. Recent updates enabled the car to recognize stop signs and traffic lights. A prior update added Netflix, YouTube and some games.
It is hard or impossible to think of another car that improves after you buy it.
This can be a separate reason on its own. However, due to the difficulty of achieving full self-driving, this is a “maybe” and “nice to have”.
This video from Tesla shows self driving, but it is not released to their customers’ cars and it is not capable of city driving.
This is a complex topic and would require several articles to explain. In summary, several companies are racing to build the first self-driving cars. Waymo is the first company to have robotaxis but they are not truly self-driving because they are geo-fenced to a certain district in Phoenix. Some claim that Tesla is in the lead because its fleet of 400,000 cars are sending back videos of billions of miles of driving to feed the neural network, whereas Waymo has millions of miles.
Whoever achieves self-driving will be able to make robotaxis. Whoever makes robotaxis will make billions of dollars and seriously disrupt the world.
6. Governments are an Existential Threat to Gas Cars
Governments around the world are planning to ban gas cars. Here is the list:
China: Ban announced on 2017 but no date set yet.
Costa Rica: 2050
Sri Lanka: 2040
United Kingdom: 2035
China is the world’s largest market for new car sales. It is also the world’s largest EV market.
This is a huge threat to gas car makers and one of the reasons for the very cheap valuations of GM’s, Fiat Chrysler’s and Ford’s stocks.
Governments will force consumers to buy EVs. The leader in EVs is Tesla. Therefore, governments are forcing consumers to buy Tesla.
Tesla’s lead against competitors are in several areas:
Most people drive approximately 30 miles per day, which means that their EV’s range is more than enough, because they can charge their cars each night in their garage. Despite this, most new buyers have range anxiety with EVs. They want to know that they can charge their cars on the road. Tesla has a worldwide network of destination chargers and super chargers, that are years ahead of competitors and are still growing.
Sandy Munro is an industry and car expert, as he is paid to take apart cars to provide insights to car and parts makers. He praises the Tesla car on several aspects and explains why the Tesla motor is superior to other EV motors.
Most car makers spend billions of dollars on advertising. Because Tesla makes a superior product and Elon Musk’s huge social media following, Tesla does not spend any money on advertising. Despite zero advertising, Tesla’s bigger problem is with production (supply), not demand. According to this news report:
54% of Canadians are willing to go electric. 10% of Canadians are certain to go electric. Yet, only 3.5% of cars sold in Canada are electric. Why? “there’s not enough supply to [meet] demand”
Provinces are starting to coerce car makers to sell EVs. There is a LONG runway before all gas cars are replaced. In fact, EVs are still in the “early adopter” stage of the S curve.
Hydrogen versus Electric
Some companies are trying to make hydrogen fuel cell vehicles (HFCV). Tony Seba provides reasons why HFCVs will not be able to compete against EVs:
EVs are three times more energy efficient than HFCV
You need to build a multi-trillion dollar hydrogen delivery infrastructure.
Hydrogen is not renewable.
Friends do not let friends buy gas cars.
Friends do not let friends start careers in declining industries. Read my article about the industries that Tesla will hurt or destroy.
This article explains why I think Tesla is a great business with the potential to seriously disrupt many companies and industries.
This is not a recommendation to buy the stock, especially given that the stock has already had a huge rally in the past eight months. On a short term basis, I have no idea where the stock is going. It can continue rallying or it can drop 50%.
In 2018, my neighbour asked for a stock recommendation. I mentioned Enphase when it was trading at approximately $6. Shortly afterwards, it dropped approximately 33% to ~$4.
I recommended Roku to my neighbour when it was trading at approximately $44. Shortly afterwards, it dropped 38% to ~$27.
In the long run, the stock usually correlates to the business metrics. Enphase is now trading at ~$32. Roku is now trading at ~$130. But there is no guarantee of this, especially in the short term.
After this, there were difficult years, with some that were negative. 2019 was a stellar year. 2020 is starting off with a bang as well.
Thanks to these, my annual average ROI is back to approximately 20%. This is for the period from July 2008 to January 2020.
But I hesitate to mention this because, as I’ve written in “FOLLOW BUSINESS METRICS, NOT STOCK PRICES“, the most important thing to follow are the business metrics of the companies, not the stock movement. But after 11 years, it should be okay to look at the stock movement.
Going forward, this CAGR will change. There will be more negative, flat and positive years in the future.
According to Jack Rickard, Tesla will destroy these industries:
According to Warren Redlich, a car-accident lawyer, Elon Musk will hurt or destroy the following industries if he makes Robo Taxis:
However, robo taxis will take another one to 10 years to come out, depending on who you believe. The predictions above are predicated on robo taxis mostly and partly on Elon Musk’s Boring Company and SpaceX.
Among Berkshire Hathaway’s biggest holdings are:
Geico (car insurance)
Santa Fe (railroad)
Robo taxis do not even need to come out to affect Berkshire Hathaway’s stock. If enough investors fear that robo taxis will disrupt Berkshire, it will suppress Berkshire’s stock.
I think this is why Uber and Lyft, which have been growing revenues like crazy, is in the dumps with their stocks. I could be wrong, but I think enough investors fear that Uber and Lyft will be put out of business by robo taxis, which is why their stocks are suppressed. Therefore, I would avoid stocks in the above industries.
Uber and Lyft are HUGE DISRUPTERS of the taxi industry. Yet, these DISRUPTERS will be DISRUPTED. Rarely has any disrupter been disrupted so quickly. Cars disrupted horses. But it will be over a 100 years before gas cars are disrupted.
If Elon Musk comes out with Robo Taxis, he will be the biggest disrupter in history and will be the real “Iron Man”.
Kevin O’Leary thinks the best stocks are those that pay dividends. He loves bragging about the “juicy dividends”. Here’s why he’s wrong.
Let’s say a company has $1,000 of capital deployed and it makes $200 profit (20% return). What can this company do with the $200? One of the following:
Invest the $200 into the business, to generate more revenue and to make another $40 of profit (20% return). This will continue to increase the value of the company.
Company cannot figure out how or where to invest the $200, so it gives it to shareholders, as dividend.
Sit on it.
Ideally, the company should do #1. This is what shareholders should want. They invested in the company to get 20% return. #1 is what you see most high-growth companies doing. They re-invest all of their profits back into the company. They put the money into R&D to create new products or services. They buy more stores or factories. They put it into Marketing and Sales to get more customers. With many early phase, fast growing companies, they show little or no Net Income. This is because they plow everything back into growth, in order to make the company more valuable.
#2 is not ideal because shareholders now need to find somewhere else to invest the $200 and try to make 20% return, which is unlikely.
#3 is the worse option. Cash loses 2% of value every year, due to inflation.
Warren Buffett has explained these three options in the past.
Carl Icahn has berated Tim Cook (Apple’s CEO) for sitting on so much cash.
Here is another example of a shareholder who is not happy with the company doing #3:
Berkshire Hathaway is sitting on $120 billion of cash and not doing anything with it. Unfortunately, Buffett is not practising what he preaches.
In Buffett’s defence, it is hard to deploy $120 billion of cash. There are only so many good companies to buy. The majority of companies are mediocre. A small percentage are bad. A small percentage are excellent. He cannot buy small companies anymore. Even if he buys $1 billion companies, he would have to find 120 of them.
Buffett said himself that the bigger a fund or company is, the harder it will be to maintain the same percentage return.
You should find companies that can execute #1 from above. Failing this, then invest in companies that pay dividends.