Tesla is one of a small group of companies that has reached a 1T market valuation. For the most part, I’ve gotten the sense that you have always viewed the stock as overvalued, and as recently as a couple of months ago, you chose Tesla among a list of companies that will not be in the top 10 a decade from now. Can you reflect on watching this stock go to 1T? Did you get anything wrong?
It’s true. I’ve been wrong on Tesla the whole way up.
- I remember in 2017 when Tesla passed GM and Ford in market cap.
- I remember when it became bigger than the two of them combined.
- I remember when it passed the top 7 car makers in the world.
- I remember when it became the largest company ever to enter the S&P 500.
- I remember when it passed the combined value of all the car makers in the world.
- I thought Tesla was wildly overvalued at $50 billion. It just added $600 billion in market
cap in 30 days.
Even though I was clearly wrong on the price of Tesla, and as an investor that is literally all that matters, I never valued my opinion enough to put actual dollars on the line. Never shorted the stock. Never bought puts. Nothing. I just watched in disbelief. So what did I learn being wrong on Tesla? It’s simple. Never get involved in a battleground stock. If a company or the founder is in the news three times a week, probably best to just let other people fight it out.
Now let’s talk about a company that I did care enough about to buy and lost money on.
What do you call a stock that was down 58% and then fell 27% in a day?
On last night’s earnings call, the company announced they were shutting down the Buying business. Rich Barton (transcript) said:
Put simply, our observed error rate has been far more volatile than we ever expected possible and makes us look far more like a leveraged housing trader than the market maker we set out to be.
So what did I learn? I don’t want to get into where I was wrong on the business, that’s above my paygrade. I want to talk about why I lost money on the stock. I’ve been a long-time user of the platform and a fan of Rich Barton. The thesis here was that the bad news, and there was a lot of it, was mostly reflected in the price. I mean, 50% off the highs ain’t nothing. I made 3 separate purchases.
My first one was small, $1,000. The stock was crashing, so I wasn’t trying to be a hero and catch the bottom. But I wanted a little piece to follow the name more closely and add to the position if and when it stabilized. I’m down 31% on the position, so clearly, that stability I was looking for was a mirage.
Zillow was losing money all over the place. Buying houses, it turns out, is difficult to disrupt. This information was out there. I was hoping that most of the bad news was in the price of the stock. I was also thinking that even though there were challenges to the model, that given enough time, they could figure it out. Neither of those came to pass.
So what did I learn?
What I already knew.
“Buy low, sell high” is one of the most garbage pieces of financial “wisdom.” Most of the time when you buy low, you end up selling lower. Jon Boorman taught me this a long time ago but sometimes you have to relearn what you already know. Jon wrote, “If you want to own the strongest stocks, buy the strongest stocks. Buy something that’s already doing what you want it to. Going up.”
His advice goes doubly so for high-multiple stocks. You’re far better off buying them on the way up than on the way down. If you are going to buy a stock on the way down, you must have a long time horizon. Don’t expect that a stock will turn around just because you bought it.
The other thing you must have, and this is critical, is risk management because buying stocks on the way down is a risky endeavor. That can come in two forms. Either has some sort of level where you say I’m out or, put on a small enough position such that if you’re really wrong, like I was, then it won’t hurt too bad. And that’s what I did. I own 7 stocks. Zillow was my second smallest position, even prior to this 26 % drop. So although it hurts to lose 30%, I won’t lose any sleep over this.
So what do I do now? The way I see it, I have two options. Sell, or double down. On the one hand, its enterprise value is just $20 billion. That seems ludicrously low considering the brand, even taking into account the debacle they just went through.
On the other hand, HAVE I LEARNED NOTHING? I’m down just over $1,000 on this position. Sure the stock could be meaningfully higher in five years, but that sure sounds like a bagholder quote if I’ve ever heard one. The reason why I entered the trade has clearly been proven wrong. No need to stay wrong on this one. I just sold it. I’m out. The next time I buy a growth stock down 5 50%, and who am I kidding I probably will, I’ll try to read this post first.
Anecdotal evidence of why I-Buying & Zillow’s plan might be misguided: Last November my parents were selling their home amidst the early stages of the hot property market. While other homes in their area were under contract within days, their house went several weeks to almost a month without a single offer. They had consistent showings, but no offers.
House was built in 2015, no structural issues. The major negative was no yard for pets/families and a GIGANTIC beware of dog sign on the neighbor’s fence right outside their back porch. Anytime a prospective buyer went out on the porch, they were greeted by a barking dog. In the midst of every single prospective buyer shying away for these reasons, Zillow enters the equation.
A Zillow contracted employee comes in for the inspection, simply takes a few pictures with his tablet in the center of the living room and leaves. No visit to the porch, completely checking the box for the inspection without care. Ultimately, Zillow put an offer on the house, which my parents quickly accepted. 3 months later, Zillow sold the house to another buyer for $50k less than they purchased it originally.
That leads me to my point: Zillow’s I-Buying program ignored the most important factor in purchasing a home, as a desirable place to live. They spent zero time considering that when they went to re-sell the home, actual living conditions (having a yard, no barking dog next door) would be important to the next prospective buyers of the property from Zillow.
They treated it as a numbers transaction, thinking any improvements they made to the interior would help the resale value. Clearly, that works in some cases, but the level of disregard to the inspection process and desirability of the house as a place to live were drastically overlooked.
I wouldn’t call Zillow a battleground stock, per see. Certainly not on the level of Tesla. But I understand that to some readers the fact that I said don’t get involved in these battles and then got involved in one of these battles might have sounded, well, weird. The short thesis on Zillow was right. Tip of the hat to the ones that made money.
(Michael Batnick is the Director of Research at Ritholtz Wealth Management LLC.)