Hypothetical question: If you think a company is worth $100 per share, buy it at $50, and then someone acquires the whole company at $25, were you wrong?
This is perhaps the most perplexing part of the SolarCity story for me. Also by far the most frustrating. After what was easily 1,000 hours of research – conference calls, SEC filings, articles online, press releases, government documents – I feel as though something that is mine has been taken from me.
Equally as interesting is the sudden emergence of experts on the company. 6 months ago I would beg anyone in my inner (and outer) circle to look at the company. Nobody was interested. There were no articles online except for a few by hippie bloggers and the most sophisticated thing about them not directly from the company was what their competitors said about them. In essence, it was a desert of information, and a dry one at that.
Around the time that Jim Chanos and Wall Street started to question the firm and its business model, we started to see real questions being asked. Some of them were legitimate, some were ill-founded, but most importantly, we finally had some discussion. I could compare my work against others who had drawn their own conclusions. And it wasn’t particularly heated, at least at first. The facts really were meant to speak for themselves. And overall the crowd of ‘early emergers’ was really quite a nice group.
Somewhere on the slide down – I don’t know if it was $35 per share, $25 per share, or even sub-$20 per share – but somewhere along the line, there emerged too much information about the company. None of it had any basis in reason, it was all based on feeling, human emotion, trends, and guesswork. But it was also declaratory – far more definitive than the cold, calculating process of investigative work that I had done on the company (or those ‘early emergers’). Even though I had many multiples of time spent on the company vs. these new emerged experts, they were more confident in their approach to communications surrounding the firm.
Any type of discussion or argument I engaged in with the bears was met with little or no detailed discussion. A survey of the emerged experts on the bull side showed a similar level of sophistication. The bulls assumed the bears didn’t understand the long-term growth story and the bears assumed the bulls didn’t know the difference between a balance sheet and a pot to piss in.
A typical argument might look like this:
“You don’t see the $8 billion of debt do you?”
“It’s actually closer to $2 billion because most of it is non recourse.”
“Yeah well there’s no cash flow, you guys are toast.”
“Don’t you know that in the year 2030 we will have solar panels on Mars?”
“You won’t have money to install solar panels next quarter.”
If this reads as bitter then you are missing the point. It is not that I was suddenly disproven or upset by these new players. It just gave me insight into the process of 99% of financial players, or at least those who communicate their opinions publicly.
A New Culture Arrives from Nowhere
It was like living in a ghost town, only to wake up one day and an entire population had moved in. They were a different culture from my own and didn’t care to learn much about my walk of life (or the company they were actively trading).
It is a group of people who value working knowledge of something over in depth study, short-term ism over long-term thinking, belief in the power of majority rules, and entering/exiting a position many times based on any number of non-business reasons. The most obvious being large daily swings.
With regards to emerged experts and the paradigm that we’re in, positioning yourself directly opposite to this behavior is how you can achieve results not correlated with anyone else (or the market).
- Long-term thinking
- 10x time spent on a company vs. an emerged expert (100-200 hours is a good estimate, my 1,000 here was only due to the extreme complexity)
- Business- and valuation- driven investing
- Rejection of herd mentality through independent conclusions
Granted, this behavior led me to a loss in this circumstance. But it also how all major successful investors have positioned themselves over the past 85 years. Successful trading and quant-modeling requires a different playbook, I am simply addressing investors.
One major – massive even – blind spot I had before the SolarCity investment in 2014 was that of takeover risk. It never crossed my mind that a company’s share price could go down (even if for legitimate purposes) and that I could be taken out at a loss. It sounds silly to type this out now, but I really didn’t think twice about it.
I valued SolarCity so highly because of how small the company’s market cap really was: at anywhere from $2.5-5.0 billion, the chance to own the largest future electricity provider in the country at that price seemed like once-in-a-lifetime. And that is how I would describe the deal Tesla is getting on the company, even if the emerged experts don’t agree.
This coupled with the fact that complexity can actually hurt you. When you have to spend as much time as I did (and I’m not a slow study by any means) to fully understand a company, how could anyone else possibly reach the same conclusions? There are around 10,000 public companies in the US after all.
I thought of complexity as a secret friend only I had access to. That I was somehow better than everyone else because of my superior knowledge. In a way, it could have worked out that way, but with the shitstorm of short sellers and emerged experts piling on, it didn’t work out the way I thought it would.
One Final Note: Chanos
This isn’t the fist time I’ve encountered Jim Chanos. He is a particular brand of short seller:
- His bets are short term in nature (nothing wrong with that)
- Typically his narrative outweighs his financial analysis in terms of the content of his short theses (think 80/20)
- His narrative is often right (in the short term, think 1-4 quarters)
- His financial analysis is often very wrong from a long-term perspective
- Blatant factual inaccuracies made on television are not corrected later, even after being disproven
The last point is either insidious or it is ignorant. Given the size of his firm I can’t imagine he is the latter.
I’d also like to add that my first encounter with him was in Dell before and leading up to when Michael Dell took it private. It took a 5 minute scan of a 10-k to know Chanos was wrong on the financial analysis and valuation, but his narrative proved correct for a few quarters. We both ended up profiting off the position – mine just took 1 year to play out, his a few months.
This is a hard one to brush off. I might not have been able to if they were being bought by a private company. Thankfully, I can still participate partially in their future success.
So, was I wrong for being acquired below intrinsic value and underwater? I don’t think so, but the jury’s not out yet. And remember to be aware of these kind of situations.