What Goes Up Doesn’t Always Come Right Back Down

Value. Worth. Two words constantly used when espousing how much something should cost. Be it a fidget spinner for $5 (undervalued!) or Tesla stock. And we seem to hear a lot about what things are worth, especially when indexes and stocks have been having such a bull run. I pointed out in a recent blog about the price of bitcoin (which was written a couple of months ago with bitcoin at half(!) its current price) that things are ‘worth’ what someone will pay for them.

What we need to understand from this is what’s been written by many including me before; the market is always right. Over the years, this cliché has served me well. I repeat it like a meditation mantra when a position is against me and I’m convinced it shouldn’t be. Not quite as quick to say as “Ohm” but definitely more useful to me through the years. We keep getting told the S&P, Dow, and any other broad index you can name is “too high” and will need to go down soon. Why? Well, the reasoning is that these things are overvalued. And we’re told the same for individual stocks. A favorite these days? Tesla.

This is a very popular refrain recently. Heck, even Elon Musk said so a few days ago! This comes just a month and a half after he defended the price. What’s changed? Well, Tesla stock has gone up further since then, but so has the broader market. In the specific case of Elon Musk’s change of mind, it may just come from the fact that he can’t fully explain what’s up with the stock price either. That’s ok. He’s Elon Musk and is probably thinking about more important things. More important even than an upcoming model that many analysts say holds the key to the future of the stock price…unless it doesn’t…

He’s probably spending time thinking about solar power from roof shingles, larger and better batteries for storing power, and a bunch of things involving rockets and space. We can excuse him if the stock price is not the most important thing on his mind. And that’s good. Too many CEO’s survive or get fired based on stock price. People like Elon Musk and Jeff Bezos don’t worry so much about that. They’re busy changing the world.

But what about those analysts that say it can’t maintain this upward move. Same thing we’ve heard about the stock for years. Just Google “Tesla Stock Overvalued.” 2017. 2016. 2014. People want to be contrarians, and many an analyst has made a name, and a career, by making one of those “This is the top” calls and being right. It only takes being right once, as long as it’s loud and very right. The incorrect calls get lost amongst all the other incorrect calls that are constantly made. As a contrarian at heart, I often want to do the same. Thank goodness for charts to keep me honest…and let me know that I, like many others, am just not smarter than the overall market.

Being a contrarian is what can lead to that one correct opinion that makes you famous. It can also lose you a lot of money before and after. The broad indexes have experienced this recently. And the story that illustrates that even better recently is the VIX Index. The “Fear Index.” It’s trading at extremely low levels, and recently reached its lowest in decades. Even with the drama in Washington, it only picked its head up briefly. Now back down it’s gone. Kind of odd when you think about it. But that’s value. It’s worth what people pay. And it’s worth less the higher the stock market goes.

VIX and SPX

That’s the way this one works. Negative correlation to stock prices. Look at the chart. It’s more of a mirror than a Rorschach picture. The volatility has left the building, and no one is expecting it back anytime soon. Except the ‘professionals’ that keep saying something has to happen. Why does something have to happen? Because the crowd has to be wrong. We can go into contrarian views more deeply another time, but really, it’s semantics to me. The crowd is right a lot longer than they’re wrong. And the crowd is what drives the market. Not the professionals. A bit counterintuitive, but so are investments many times.

So what’s the point? The point I’m trying to make is that we can’t always determine what or why. We just need to understand that all we’re really getting are opinions and giving people the opportunity for face time on TV. Or supporting their careers, waiting for those one or two ‘amazing’ calls amidst all the noise they produce. I’m not completely discounting the professional analysts. They do provide a great deal of information to help us make our own decisions. It’s just that oftentimes they’re blinded by their own “intelligence.” We need to always remember that we’re not trading or investing to be right. We’re doing it to make money.

Markets in general and stock prices more specifically are driven by the rest of us. And if we think that Elon Musk can change the world in measurable ways, which I obviously do, then we invest in the person as much as the company. Amazon lost money for years. And the stock steadily went up. Thankfully I never shorted it on the way. But I sure did want to! Because I was trying to analyze too much. And I didn’t necessarily see the bigger picture of what Jeff Bezos was doing. I’ve never wanted to short Tesla. Because that would be like shorting Elon Musk. And to me, Tesla’s “value” is Elon Musk. And I’m a big fan.

Unfortunately, that’s not something professional analysts focus on. They focus on car sales. They focus on current and upcoming competition in the electric car space. They say since something hasn’t been done before it can’t be done now. And the VIX? Where does that fit in here? Well, it does and it doesn’t. There is no Elon Musk behind the VIX. But there are a lot of professionals telling us why the price is wrong. And why it has to adjust. Me? I’m smart enough to know I’m not that smart. I just watch, wait for a sign from the VIX itself, and then I’ll act. Based on the market. Not my opinion. Not my ego. I leave those mistakes to the professionals.

 

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