Making and Losing $306 Million On Tesla
Don’t do this.
Disclaimer / Disclosure long CORZ, WLFC, and SPY
Canadian carpenter Christopher DeVocht claims to have turned $65k into $306 million by YOLOing Tesla (TSLA) calls on margin in 2020 and 2021. In 2022 he purports to have turned that $306 million into… $0. Don’t do this.
TSLA far exceeded the overall equity market in those years, but with enough volatility to cause total annihilation to anyone with enough leverage. And even if you want to invest in Tesla with massive leverage, do it at the security instead of portfolio level. DeVocht got wiped out when he borrowed $15 million against his entire concentrated leveraged portfolio and got it sold out from under him at the worst possible moment. He could have instead invested only the $306 million that he had and taken some fraction of that to invest in Tesla LEAPS, risking only that capital and not everything else. Earlier this year I argued against excessive portfolio leverage, instead getting leverage at the security level such as with Core Scientific (CORZ), the most leveraged bitcoin miner at the time.
Its warrants (CORZZ) were even more leveraged and did even better without risking any of the rest of my portfolio.
No matter how sure you are of your best ideas, you still need to hedge yourself. Calculate expected value with your best upside, downside, and probability estimates. Apply the Kelly Criterion or other tools for sizing based on your edge over the odds. But also take into account the possibility that you are simply wrong about everything. Never take existential risk, firm risk, or personal solvency risk. Blowup risk is always a bad idea because the game is fun, the best opportunities could be yet to come, and because there are diminishing marginal returns above having a chip and a chair.
I basically live on steak, eggs, Greek yogurt, berries and trout. I eat more or less the same thing every day. My favorite steak is Pat LaFrieda’s prime filet mignon, a lean tender cut that I get delivered to my door and prepare myself simply with salt and butter. I love it and am happy to pay for it, but life wouldn’t be that much different if I lived on Costco (COST) broiler chicken instead. It tastes pretty good and is also a great source of protein at a tenth of the price. But life would be radically different if I couldn’t afford that chicken. Never do anything that could put that at risk.
A friend retired at a relatively young age from an event driven investing career with a bit over $100 million, ready to leave his firm but still eager to pursue investing ideas on his own. He simply took 90% of his assets and hedged himself by investing them in a combination of low cost and tax efficient passive funds along with some federally insured riskless savings accounts. The other $10 million he put in Interactive Brokers (IBKR) to pursue his favorite investments. If his best ideas were triumphs, he was playing for real stakes, but if they were disasters, it couldn’t actually hurt his or his family’s day to day lives. And he was a great investor.
Anyone who lacks a full time focus on portfolio management combined with a demonstrably successful track record should question whether they should put more at risk in dollar or percentage terms than he did, at least at an age when he didn’t want to go back to work. Early on, one can rationally take big swings because the denominator can fairly be your assets and lifetime income stream, so nominally an idea might frequently be 25%, 50% or even 100% of your current assets which might be a small percentage of what your assets realistically will be in the future. Later in life, your current assets will be the only assets that you should risk.
I have significant exposure to my best ideas from Core Scientific (CORZ) to Willis Lease (WLFC). But my best ideas are probabilistic. They can always be wrong. I could fail to have good information, could fail to apply good judgment, or events could simply change. There are always ways for the best of ideas to go horribly wrong. Over a quarter of a century of investing, there have been at least one example of each type of failure. And no matter what happens to any investment idea, I never want to be poor.
What should Christopher DeVocht have done and what should I do? Don’t quit. I never want to retire. But for every dollar of CORZ or WLFC or even DeVocht’s TSLA, invest at least a dollar in a low cost and tax efficient passive fund. The S&P 500 (SPY) is fine. A broader index is better. Best of all is a broader index managed to optimize for taxes. Then never increase your active budget as a percentage of your net worth. If returns drawdown the percentage, that decreases your active budget. Take the hint. A lot of the worst gambling behavior is going on tilt as a result of a bad beat. It is rarely the first disaster that ruins you but instead is throwing good money after bad. Don’t.
Hedge yourself. I’m returning to this theme from last year, when I wrote about my active idea to buy SENEA and passive wraps for SPY as well as the indirect way to own discounted VOO via E-L Financial (ELFIF). As it turned out so far, the active idea slightly outperformed. The discounted wrap around the Vanguard S&P 500 was up slightly over 50% while SPY itself returned about 30%.
While passive wasn’t as good as active, it is what allows me to stay alive no matter what so that I can be ready for all of the active ideas in the future.
Today the best place for low cost tax efficient self-hedging is Frec. Their S&P 500 index is fine, but I slightly prefer their CRSP US Total Market index. The difference is inconsequential. Invest $20k or more with a 10 bp annual fee. What makes this so much better than other SPY wraps is that Frec has tax management tools to generate the highest possible after tax returns. Good investment ideas often have only a 60% chance of working (some great ideas have far less than a 50% chance of working but a great expected value because the upside is far greater than the downside). But tax savings work 100% of the time. Avoiding excessive taxes is one of the few things in life that is completely under your control and the benefits compound over time. Get $250 as a signup bonus. But unlike other accounts that I set up simply for the purpose of harvesting the signup bonus then churning that capital into others, this is one I plan on sticking with.
Caveat
The best active ideas can be far better than the passive ones. A passive 50% (or more) is more about the downside than the upside. It is about surviving anything.
Conclusion
I love my favorite investment ideas from WLFC to CORZ, but I like not depending upon their success. Have ways to win in life even when you’re wrong. Never risk poverty.
TL; DR
I love equities and I hate taxes. I can get more of what I love and less of what I hate here.
