Tesla Update. Two Key Lessons.

I took some profits in my Tesla ($TSLA) position yesterday for the first time in 7 years. Technically, this was my second time taking profits, but the last I rolled my profit into Solar City ($SCTY), which was acquired by Tesla a year later.

Tesla Model Y in Red

Tesla’s share price was up over 50% on the week and up over 100% since the beginning of the year. This after a decent 30%+ gain in 2019. To me, the last week of action was an obvious “short squeeze” situation, making it a good time to take profits.

Another thing on my mind was the fact that Tesla stock is now about 10% of our net worth (minus the value of our business) and about 20% of my stock holdings across all of my retirement and brokerage accounts. I’m not too too worried about this. As Warren Buffet once said “If you have LeBron James on your team, don’t take him out of the game just to make room for someone else. … It’s crazy to put money into your 20th choice rather than your first choice.” Tesla is the Lebron James of my investment accounts.

The final thing I was thinking about was numbers from my Simple Tesla Model. A few years ago, I put together a simple spreadsheet to calculate the potential revenue, earnings, and share price of Tesla stock based on the production estimates Elon Musk was putting out. This is the first lesson I wanted to reiterate in light of the action in Tesla stock this week.

Lesson 1: Don’t forget Main Street. Build Real World Models of How The Businesses Behind Your Stocks Make Money.

It’s easy to get caught up in the numbers and calculations of Wall Street. What’s a good PE ratio for a certain sector? This company has grown sales at 50% per year and could continue growing 50% per year for the next 5 years. This kind of math is useful for comparisons and valuations, but you want to make sure you take a step back and think about what that company looks like in the real world (Main Street) after growing revenues 50% for 5 years. Is that REALLY possible?

At the time I built my simple model spreadsheet for Tesla, there were many people talking about how a valuation in the tens of billions of dollars didn’t make sense for a company like Tesla. Traders who were short the stock talked about how Tesla could never make enough money to justify their share price. But when I put my spreadsheet together, I found that if Tesla could sell 500k cars, they’d likely make $28B in revenue, which would justify a stock price as high as $517. If Tesla only got halfway there, they’d be worth much more than the $200 or so they were trading at in 2016.

To calculate in the risk of bankruptcy or larger failure, you would want to discount the price targets of the model to account for this, but we were already assuming Tesla would only hit 50% of their target, never grow past that, and never make money off their other business lines.

I’ve updated this model a couple times, most recently today. The current tab indicates a future share price of $494 if Tesla can hit about 392k cars sold this year. This is BELOW the current price of $734. And so I am much more comfortable selling Tesla stock when it’s trading above the values my models are spitting out.

Again, while I’ve updated the model to account for energy sales and service revenue, it assumes no growth in car manufacturing or those other business lines. If you plug in different numbers for where you expect Tesla to be 5 years out, you’ll get different targets.

I was also reminded of another important investing lesson:

Lesson 2: Stock Prices Go Up Even When Companies are Not Yet Profitable

Many investors have shied away from investing in Tesla because they feared the company would never turn a profit and thus eventually run into cashflow problems. Not even eventually, Tesla’s investments into the Giga Factory and in general have required them to raise money through special stock sales a few times in the past. Each time this happens, the value of your Tesla stock is diluted.

If you wait for a high flying companies to turn a profit before investing, you might be waiting a long time and miss out on huge returns. Another big winner in my portfolios has been Amazon, who famously hit almost exactly $0 profit each year for most of its existence. Only recently have they been showing a profit, and I would guess Bezos and Amazon would invest more to avoid that profit if they had things to invest in. (Or I don’t know, maybe they think they need the cash now.)

In any case, if you waited for Amazon to turn a profit, you missed a large gain from a well run company that is changing the world. The same can be said for Tesla. So how do you invest with confidence in a company that makes no profit? Here’s what I do.

First, I focus on revenues. As long as revenue is growing or likely to grow from current investments, I feel the companies stock is likely to grow in value as well. I lean toward valuation calculations based on revenue.

Second, I think about whether the company will be able to switch their focus from revenue to profits when they want to later. Will Amazon or Netflix be able to raise their prices? Will Tesla be able to lower their production costs? I tend to give these companies the benefit of the doubt unless there are very obvious concerns about this. You can choose to focus on the negatives, like when Tesla was forced to build cars in tents in the parking lot. Or you can focus on the positives that will drive higher production speed and higher sales margins. Things like removing purchase options that slow down production and figuring out the right mix of automated and human-powered labor will improve Tesla’s bottom line.

With more and more people switching to electric cars, Tesla continuing to own the electric car market, Tesla ramping up production in its existing factories and planning on building even more factories, the Model Y coming out soon, and so much potential in their other products… Tesla is set to potentially become a very large company making a lot of money. Tesla stock has generated a lot of returns for its investors and has a grand enough vision to continue doing that. That said, while the stock is temporarily inflated from a short squeeze, I booked some profits. Tesla is still a large percentage of my investment accounts, and I will continue to try to add to my position if and when the stock’s price falls below my fair value calculations.

Trends for Major Indices as of Friday, January 24th 2020

CNBC says American Express earnings beat expectations on strong card fee revenues, shares rise.

Nasdaq

  • Long-term: Up
  • Intermediate: Up
  • Short-term: Up

S&P

The S&P closed just under the 10 DMA, switching the short-term trend to down. We will see if things retrace to the 50 DMA like the Russell 2000 did.

  • Long-term: Up
  • Intermediate: Up
  • Short-term: Down

Russell 2000

The Russell 2000 closed just below the 50 DMA, switching the intermediate trend to down.

  • Long-term: Up
  • Intermediate: Down
  • Short-term: Down

Bitcoin SV Wash Trading

Rick D. at BeInCrypto.com digs into a theory for the recent spikes in the Bitcoin SV price. Is it from a BSV miner mining BCH instead, selling that BCH, then “wash trading” BSV on exchanges which pumps the volume and price.

The original Twitter thread by @vinarmani can be found here.

It’s actually a pretty genius gambit with essentially no downside. He can actually use this tactic to keep BSV at basic parity with BCH.

@vinarmani on Twitter

Trends for Major Indices as of Wednesday, January 22nd 2020

CNBC says Tesla short-sellers could help Elon Musk score a payday worth hundreds of millions.

Nasdaq

  • Long-term: Up
  • Intermediate: Up
  • Short-term: Up

S&P

  • Long-term: Up
  • Intermediate: Up
  • Short-term: Up

Russell 2000

The Russel 2000 closed just below it’s 10 day moving average, changing the short-term trend to down.

  • Long-term: Up
  • Intermediate: Up
  • Short-term: Down

Have a happy Wednesday!

How I Sold My Bitcoin SV Coins

The last time I wrote about Bitcoin on the blog here was back in 2013. Bitcoin had just hit $1000 per BTC and I was still bullish.

Since then, Bitcoin has “forked” a number of times. Similar to open source software, if stake holders disagree about how to build out the Bitcoin software and platform, they can fork the platform and let the market decide which fork to support. It’s not a winner take all proposition either. There is room for multiple variants of cryptocurrency. The Coinbase blog has a good post on what forks are.

Wikipedia has a list of the larger Bitcoin forks. The biggest fork was the Bitcoin Cash fork on August 1, 2017. Bitcoin Cash itself forked on November 15, 2018 into Bitcoin Cash ABC and Bitcoin SV (Satoshi’s Vision).

I could talk about forks and the various pros and cons of each flavor of Bitcion, but for this post I’m going to focus on the technicalities of gaining access to the “new” Bitcoin SV coins and how I “sold” them.

If you hold your own Bitcoin and other cryptocurrencies, this fork thing is going to happen every once in a while, and you’ll need to spend some time to claim your “free money”. These are the steps I used to sell my BSV specifically, but the general outline would be used for claiming any fork. Just different software or exchanges might be involved.

Step 1: Own the private key or seed phrase.

To really “own” your Bitcoin, you need to own the private key for the wallet the Bitcoins are stored in. The actual private key is a 256-bit number. The more typical version you will interact with is the “seed phrase” that your wallet and private key were generated from. This will be 12 to 24 words that almost all wallet software will generate for you when setting up a new wallet.

If you store your coins in Coinbase or something similar, you may not “own” your private keys. This is actually not a terrible idea if you don’t trust yourself to keep your key safe and not forget it. In this case, Coinbase will wait until a new fork gets valuable or important enough to worry about and then split your coins for you and issue you an appropriate amount of coins on the new fork’s chain. They did this with Bitcoin Cash and later with Bitcoin SV. If you want to claim your forked coins earlier though, you’ll need to do it yourself.

My seed phrase then is basically the password needed to spend or move my Bitcoin. After a fork, the same exact seed phrase will work to spend coins on either blockchain.

So I could use my Bitcoin Cash seed phrase to “claim” my coins in Bitcoin SV and move those coins wherever I want. The problem with this is that I don’t necessarily trust the people behind Bitcoin SV or the wallet I would use. I am worried that using the “password” for my Bitcoin Cash wallet to spend my Bitcoin SV will allow someone else to steal my more valuable Bitcoin Cash coins.

So I tried to protect my Bitcoin Cash first.

Step 2: Create a new wallet for your old Bitcoin cash and send your coins there.

I used Electron Cash to create a new wallet. I then sent a test transaction from my old wallet to my new wallet, followed by a transaction to send all of my Bitcoin Cash into the new wallet.

I now have a different set of seed phrase words to access my Bitcoin Cash.

Step 3: Claim your Bitcoin SV using Bitcoin SV wallet software.

I chose to use the ElectrumSV wallet to access my BSV. ElectrumSV is an open source wallet, and while I didn’t compile from source or even double check the code myself for malware or back doors, being open source makes it less likely that this wallet is sending my keys back to a malicious third party.

Once I booted up ElectrumSV, I just chose the options to restore a wallet from my seed phrase and there my coins were.

Step 4: Move your Bitcoin SV into an exchange.

I’ve been investing in Bitcoin and other cryptocurrencies for a while, but I’ve never really used an exchange outside of Coinbase. I’ve created accounts on a few exchanges, but mostly just tested the UI.

I read that the CoinEx exchange is pretty popular, especially for trading BSV, and so I setup an account there. I was surprised that I didn’t need to give too much personal information to start my account. I confirmed my email address, set up Googlel Authenticator, and then I was ready to go.

As a new user, I was able to withdraw up to $10,000 USD worth of assets per day. If you want to withdraw more, you need to verify more information or wait. The amount of BSV I had would only take a couple days to withdraw.

Step 5: Exchange your BSV for BCH or Bitcoin

CoinEx gave me an address to add BSV to my “assets” there. I sent a small test amount, which showed up after a few confirmations.

Step 6: Withdraw your BCH or Bitcoin from the exchange.

I then exchanged that BSV for BCH using the exchange. And then “withdrew” those BCH into my Coinbase account.

After the withdrawl went through (it took about an hour’s worth of confirmations), I moved all of my BSV into CoinEx, exchanged it, and withdrew it to Coinbase.

Step 7: Exchange your BCH or Bitcoin for cash on Coinbase.

You could technically withdraw cash from CoinEx, but since I’m comfortable with Coinbase, I moved my coins there to convert to USD.

In this case, I think I am going to hold onto the BCH for a bit. I also left some BCH in CoinEx to play around with. I’m trying to come up with a trading strategy to test there, but I’m mostly a longer term investor, so I’m struggling to come up with something.

Since I’ve sold my BSV, it has rallied $75 more dollars per coin, while Bitcoin and Bitcoin Cash have stayed flat. I feel that BSV is a scam in some sense, but there might be some virtue to it. I’ve been out of the loop. I think there is some value in making a coin that is useful and good for consumers and users, but also good from a mining standpoint to get them more involved. Maybe BSV will do that better than BCH or BTC.