If investors should have learned anything from Jeopardy super-champion James Holzhauer's recent incredible run on the quiz show, it's that you should always play your advantage.
Holzhauer possessed such a depth of knowledge that he seemingly had the advantage over his Jeopardy competitors in every category. Thus, his proclivity for sliding in his chips (complete with cheesy hand gesture) and doubling down on "Daily Doubles" was actually a prudent strategy rather than the mark of a cowboy. Just because you're a professional gambler in Las Vegas (as Holzhauer is) doesn't mean you take imprudent risks.
So, I was interested to see a comment on my Thursday Real Money column in which someone called my purchase of puts on Tesla (TSLA) heading into the company's quarterly earnings report "imprudent gambling." Only half that statement is true -- any deployment of capital involves inherent risk -- call it gambling, call it investing, call it what you will.
But it's the accusation of "imprudence" that I take issue with. Frankly, I don't think my move was imprudent at all.
I started following the auto industry as a Lehman Brothers cub analyst at about this time of year in 1992. In the 27 years since then, I've developed a knowledge about car-production economics that's deep and vast.
That's not braggadocio, it's just the residue of having spent many late nights poring over car companies' financial statements. It wasn't always fun, but those late nights, weekends and lack of vitamin D thanks to continuous exposure to artificial light have actually paid off.
That's why I know that Tesla is a big short here. It's not because CEO Elon Musk is so full of himself, is prone to making broad proclamations, was filmed smoking pot with Joe Rogan or does whatever he does when he's not working 100-hour weeks. I don't care about that -- I really don't.
But I do have an advantage when it comes to valuing car companies. I used that to "fade" Tesla stock's pre-earnings run from a $176.99 low on June 3 to $265 just before TSLA's earnings came out after Wednesday's close.
There are a few key indicators that I use to measure profitability for any manufacturer. Unfortunately, my formation of a new venture, Excelsior Capital Partners, means that I have to keep many of those to myself.
But suffice to say the fact that Tesla produced a net loss on record vehicle sales showed me yet again that the company's cars cost more to build than the revenues they produce. In other words, Musk's business model simply doesn't work.
I did share a list of nine stocks that scored poorly on my free-cash-flow valuation matrix in a previous column -- and so far, three of them (Illumina (ILMN) , Netflix (NFLX) and Tesla) have dropped dramatically around earnings news. (ILMN's was a preannouncement; NFLX and TSLA were actual results.)
I've used this phrase in a prior column, but every degenerate gambler in Las Vegas likes to shout: "My system works!" That doesn't mean every gambler is wrong.
That James Holzhauer was seemingly able to carve out a decent living before his Jeopardy windfall by betting primarily on sports, which carry a standard 9.1% "vig" or "juice" (-110 on the gaming sheets) is very, very, very impressive. Obviously, I'm not going to disclose position sizes in this forum, but my firm paid only an $8 commission on my two-way trade on TSLA puts, which netted more than 300% returns over less than two trading days.
Technology and competition among brokerages have produced an infinitesimal vig for stock trading -- a few basis points vs. the 9.1% vig on Vegas sports bets. So, it's easier than ever to gamble on the stock market.
But self-reflection is paramount. Before taking any position, always ask yourself: "Do I really have an advantage on this trade?"
Knowing that Federal Reserve Chairman Jerome Powell and his merry band of men and women are going to prop up the stock market every time it hesitates on its upward glide path isn't an advantage for active traders. It's a boon for buy-and-holders, but it doesn't help you with individual stock trades.
For traders, my success in foreseeing the recent plunges in TSLA, NFLX and ILMN serve as a reminder that there are strategies other than buying and holding that can make you money in this market. If you have an advantage in formulating one of them, by all means use it.