How a Portfolio Manager Could Like GE but Not Tesla


We don’t usually see Telsa and GE mentioned in the same sentence, and seeing these two on the same plate is definitely startling enough to deserve an article.

We just did another article on Tesla a week ago, and even though this stock is so hot that we could do one every week and still have plenty to say, there are a lot of other things worth discussing in our realm and we do normally want to spread these things out a lot more than this for the sake of variety if nothing else.

Just over the week that has passed since the last article, Tesla is up another 24%, which is a number portfolio managers shoot for over an entire year, an entire good year that is. If you gave them the chance to take 24% on January 1 of any year, or take their chances with having the skills to beat this number, it would be very doubtful that any of them would turn this down.

That’s not a bad haul at all in a single week for a stock that portfolio managers have been afraid of generally throughout their journey upwards on the Tesla hot air balloon. We mentioned how so many people in the investment industry get so spooked when a stock’s price to earnings ratio climbs much above 30, but no one told Tesla’s investors that they need to be afraid of this, or that such a thing even matters, and it actually doesn’t matter at all.

If we do not understand this though, we’ll be making the same mistakes as Hightower portfolio manager Stephanie Link does over and over again. Link is a regular on CNBC and we therefore see how her fears of strong stocks play out 5 days a week, where she very often tells us all about how afraid she is about “overvaluation,” and Tesla is the Devil himself when it comes to this, scaring like nothing else.

Tesla’s price to earnings ratio was already at 800:1 a week ago when we last wrote about it, and both broke the $2000 mark and the 1000:1 price to earnings ratios since. A couple of analysts raised their rating to a hold back then, which is what inspired this last article, and we told you that it wasn’t just a hold or a buy but a buy of the strongest sort we ever see.

You don’t get much of a stronger buy than gaining 25% in a single week, and it therefore remained true to form, but each time it goes up, people like Link get more and more scared of it. This is a pattern that we definitely need to discuss, as it’s a common one both with a lot of investors and even traders, who may also be so frightened of jumping on a rising stock that even their finger on the sell button all the while with a tight stop loss to boot may not even be enough to get them comfortable enough.

Traders who suffer from this flunk out of school though, as this leads to terrible grades overall, and you don’t stay in trading school long getting F’s like this. This robs them of the majority of the good opportunities, as most of the money in trading is made by chasing moves, not waiting for reversals, and you will end up broke fast if you are this afraid to make money and walk away from the trades that cover your losses and provide the extra that traders shoot for.

Being frightened to death of a stock like Tesla isn’t noteworthy at all in itself, and we wouldn’t want to just pick on Link for this, and the list of other popular stock advisors that have made this mistake would be a very long indeed. Link proudly proclaims that she “owns” Apple though, which a lot of people won’t touch either, but Apple’s price to earnings ratio of 35 isn’t all that far out of her comfort zone, and Tesla’s being more than 30 times higher than this simply terrifies her.

In the same sentence though, Link told us how she has been In GE for quite a while and still likes it. This reminds us of the way some questions on IQ tests are posed, where a person likes something but not something else, where Stephanie likes GE but not Tesla for instance, and we’re supposed to see what we can deduce from what people like and don’t like. This one is more revealing than anything you would ever see on an IQ test.

We’ll leave the characterization of GE to Link’s fellow CNBC panelist Kevin O’Leary, who summed it up perfectly when he remarked that GE was the place where money goes to die. That’s how you describe a stock that has gone from $31 in December 2016 and then had the life slowly and steadily sucked out of it ever since, to the $6 that it is now worth.

GE not only crashed more than the market this year, it has been one of the rare stocks that did not bounce. Its value was halved once again and did try to get off the ground afterward, but its takeoff crashed after it barely got into the air again and now lays in pieces at the end of the runway, where it is back to where it tried to take off from in the $6 area.

We don’t have to go into GE any more than to say that O’Leary’s quip is dead on. GE is stuck in intensive care on a ventilator, and the most it can do these days is twitch around in its bed a little, with the family, including Link, standing around the bed and getting their hopes up a little from time to time but each time it tries to regain consciousness it ends up blacking out again and its situation deteriorates even more.

Very sharp traders can even find long plays with a stock like this, in when it starts to twitch involuntarily and out the moment its head hits the pillow again and its tongue hangs out of its mouth, but these take a tremendous amount of skill, enough that we would not even recommend them to traders generally, and especially not to investors who aren’t even interested in getting out of a trade when you need to, let alone know when it is time to go.

This animal bites pretty hard, and this is a stock that tried to make it off the bed twice since the bottom that the market made in March, where you need to see enough of a move to confirm that it might be waking up again, and both times it collapsed. Not getting bit by these trades as its upside moves came to such an abrupt and violent end, going up for two or three days and then being right back on the bed two or three days later is as difficult of a trade as there is.

We saw Bitcoin-sized reversions to the downside without the upside basically, trades that require such tight monitoring that you have to be at its bedside full time and not even anything you could even just check daily without far too much risk of a nasty surprise. Both of its mini-crashes after the big one was in excess of 30%, to get a taste of how wild this old stock has become now that it is in a nursing home where money and people go to die.

In contrast, Tesla has now broken 1000% return from where it started June of 2019 at. This is more than the average investor gets in their entire lifetime. You would have to go all the way back to when GE first hit the market in 1962 to come close to this sort of return in nominal terms. The S&P 500 has done better, especially in recent decades, but this sort of return still took over 30 years to achieve.

It’s even worse than this, due to the effects of inflation. If you put $1000 in the S&P 500 back in 1989 and still held it, you’d get a nominal return of 1000%, but $1000 bought a lot more in 1989 than it does now. Tesla’s little extra return over the 1000% mark covers the little inflation over the last year and 2 months, but you have to go all the way back to 1954 with the S&P 500 to get an inflation adjusted return of 1000%.

Valuationitis Is a Disorder of the Mind That Remains at Pandemic Levels

Stephanie liking GE but not Tesla is beyond incredible, and somehow GE getting massacred doesn’t scare her, but Tesla scares her a great deal, which she readily admits. There seems to be a side of her that is up for such a thing but she just can’t bring herself to do it, because she admittedly suffers from the disease of valuationitis.

Although you don’t see this disease discussed very much elsewhere, as if you suffer from it you don’t know you have it, your condition appears normal enough to yourself, we are free of it and therefore in a position to point it out when we see the symptoms. They are very easy to notice, and anytime you see someone referring to earnings as being the driver of stock prices, they have just told you that they are sick.

This isn’t even a matter of people thinking that fundamental analysts may be paying too much attention to near term earnings, which is certainly true, and thinking instead that longer-term earnings are what matters, which people are shooting for when they ride Tesla as it speeds down the stock highway. The idea that earnings drive stock prices at all is at the heart of this disease, where we need to rid ourselves of this idea completely if we want our minds and our approaches to be healthy.

Someone who knew nothing about these things might ask why earnings matter at all to stock prices, and we wish that someone would put their hands up and ask one of these people this question, and we can’t even think how they would answer this other than just be dumbfounded.

Perhaps their response would be similar to what we found when we did a Bing search on “why are earnings thought to matter to stock prices.” Search engines offer answers to these things at the top of the rankings, and Bing told us that a “stock price reflects the market’s assessment of a company’s value. A company’s value is a measure that depends on its earnings. So, as earnings increase, the value of that company increases.”

If that statement makes sense to you, you have valuationitis, because this describes the disease so profoundly. Needless to say, a lot of investors suffer from this disease, and the distortion of reality that results may even manifest itself as liking GE but not Tesla, to fail this IQ test so miserably.

Where this explanation completely leaves the tracks is the part where we are told that “a stock price represents the market’s assessment of a company’s value.” This statement is patently false, based purely upon delusion, and we only need this one statement to diagnose valuationitis.

This disease is so prevalent that we’re sure that we are not alone in our seeing this as bunk, but we have yet to see this explained properly anywhere else. We find this incredible, as we would think that this should be so obvious or obvious enough that others would spot this big mistake as well.

The heart of this disease can be summed up rather simply. People buy a company’s stock and may think that they are speculating on the company. What they are actually doing, whether they realize it or not, is speculating on the stock. These are far from the same things.

Those who study the stocks themselves don’t suffer from this disease, as they confine themselves to the stock, and whatever is going on with the company itself is correctly not seen as relevant.

We call these people technical analysts, as opposed to the folks who suffer from valuationitis, the fundamental analysts. They have been fighting with each other since the dawn of technical analysis, since the days of Charles Dow, the father of the Dow Jones indexes, although technical analysis got its birth several hundred years earlier in the Japanese rice markets, which is where the Japanese candlesticks that are so widely used today come from.

Valuationitis is a Very Hard Disease to Treat

Fundamental analysis has survived and thrived all this time, and the main reason is that neither side in this argument fully understand that earnings have absolutely nothing with a stock’s price, now, later, or ever. If you don’t hit them at the source of their misunderstanding, you won’t reveal it enough.

A stock’s price and a company’s valuation may be correlated, but a stock’s price does not depend on earnings at all, or any fundamental criterion, and all we need to do is to ask fundamental analysts to explain why they think any of the fundamental criterion they use is predictive, and the most you could possibly hear is babble, just repeating their beliefs and insisting on their being right without even the possibility of justification.

It is demand for the stock itself that puts up stock prices, and this is what technical analysts confine themselves to completely, and what fundamental analysts completely ignore. Valuationitis sees people trade the company, where the company’s value becomes central, and are left even without an explanation as real-life deviates from their view.

Nothing sums up this mistake as eloquently as the explanation from Bing does, where a stock’s price reflects the market’s assessment of a company’s value. This assumes that all market participants will value a stock fundamentally, and if this were true, their view will be right, but this also allows us to look at the disease at the cellular level.

What they do is assume that the stock market values stocks in the same way that they do, and we’ve hit the hammer on the head here as far as discovering the root cause of this disease. This is exactly what they do, where a stock’s price is expected to proceed according to their formulas, but when the market starts to speculate, speculation just isn’t built into their model, as crazy as that sounds when we consider that this is why people buy stocks in the first place.

Speculating on Telsa as much as they have, this blows up the mistakes of valuationitis to the extreme, although the same thing happens to a lesser extent with all stocks, both ones that are rising and falling.

We can think of this as a measure of the temperature of a stock, where warmer is better, and this temperature drives the mood of stocks, and mood drives their prices. Mood doesn’t just drive the price of stocks primarily, this is the only driver of them, what mood they are in to pay certain amounts for it.

When we speculate on stock prices to go up, that is our goal. We don’t care about anything else in fact, nor would it make sense to. If you bought Tesla last year when we told you how far this could take off, even though no one expected to take off as much as it did, the idea here is to make a lot of money, and as you make more and more, your eyes are on the stock as you watch your account balance rise. You don’t care how many cars they make or their unit profits because that’s not how you get paid.

While the company’s fortunes have improved as well, they haven’t improved anywhere near this much and the fundamental analysts are right as far as if this were what we should be paying attention to, this stock has been overvalued beyond belief. That’s not how these things work though, sadly for them.

The bets that people make when they buy a stock arises from their belief that the price of the stock will go up. It turns out that the way that a stock’s price move is dependent upon this betting action. People have been pulling their bets from GE for 4 years now, and with Tesla, the betting has become furious, and this needs to be understood completely independently of whatever is influencing the direction and magnitude of these bets.

There are ceilings to moves, like there was with Bitcoin, where the urge to take bets off the table exceeds the urge for people to bet more on it, and there will be one for Tesla as well, at least with this current move, although it could go up forever theoretically because this is all about beliefs, and nothing else. It doesn’t though because we do get to a point where supply starts to exceed demand, but if we think we can figure this out by looking at anything besides how the betting is going, we are indeed deluded.

These bets will proceed purely according to perceptions, whether it is the perception of a company’s future prospects, people getting in just because it is moving like they did with Bitcoin, and everything in between. Earnings don’t move stock prices, nor does even the perception of future earnings, as the only thing that moves them is the actual thing that moves them, the betting action based upon the totality of all perceptions related at all to the future expectation of a stock’s price.

We may think earnings are important, or anything else is, and unless the market completely agrees with our outlook, we are left wrong, as they have proceeded in a different direction. Taking what is at best a single influencer among many in the ultimate calculation of the value of a stock’s price at any given point in time and then trying to paint this as the whole picture is simply madness, but if you are mad from valuationitis, you won’t understand how mad you actually are, or think anything but that you are right.

Of all the symptoms of this disease, this is the most profound one, where we can even be still happily long GE and relieved that we stayed away from Tesla, as there is no threshold of wrongness that can penetrate our brains if we have valuationitis.

We wonder what those who were shocked that Tesla made it to $400 a share and started becoming more valued than some pretty big automakers are thinking now. They marveled when Tesla moved into second place in the sector, passing VW but still being a distant second to Toyota.

Tesla has not only passed Toyota, they have lapped them, and with Tesla’s current market valuation of over $380 billion, they have more than doubled Toyota and now getting ready to pass the valuation of the rest of the sector combined, with their tiny output of cars.

If you struggle with making sense of this, there is only one explanation. You suffer from valuationitis. There is a cure though, but this disease is nearly impossible to treat, especially when so many people have it and its fundamental manifestation is a complete refusal to examine one’s investing ideas, or to even be open to being wrong about anything outside one’s distorted world.

This is not meant at all to single out Stephanie Link as someone who has particularly lost their way, as there wasn’t anything particularly remarkable about her liking GE but not Tesla, other than the shocking contrast. It is very common for people with this disorder to punch themselves in the face with both fists, the punch that comes with holding garbage and the one that comes by way of missed opportunities, but seeing both fists hit someone’s face simultaneously was particularly revealing.

If we can open our minds just enough to see that, maybe, people are actually speculating on stocks when they speculate on stocks, that the fact that people wanting to own a stock might affect its price, and not wanting to own it may put it down, we can take the first step toward getting out of this cult and finally see our minds start to heal.

Andrew Liu


Andrew is passionate about anything related to finance, and provides readers with his keen insights into how the numbers add up and what they mean.

Contact Andrew: [email protected]

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