I am glad its been a short-trading week! As noted in my last post, I went short on Tesla (ticker:TSLA) and the timing as it always seems to be the case with this bull of a stock was all wrong, again! More on that later, lets begin with the topic of the day, net-worth update for Nov 2020.

The key numbers are:

• Net Worth (as a fraction of FI number) (NW): 88.54
• Liquid Assets/ Debt Ratio (LDR):  2.48
• Cash balance/ Two Year Living Expense (CLE): 1.2

What a month its been! The best ever in terms of the month-over-month percent increase in AVI family net worth! Biden victory, the failure of blue wave to take hold, resulting in a divided government and the vaccine news may all have been in part responsible for the reversal in market trend towards the long trodden small-cap and value stocks. For example, the Russell 2000 index, which is a small-cap market index of the smallest 2000 stocks was up more than 19.5 % for the month relative to a 11.4 % increase in the S&P 500 index, which is predominantly weighted by the top 5 tech behemoths.

Unsurprisingly, the month has been good for AVI non-retirement portfolio as well and its been up >23 % for the month. The odds of markets continuing this uptrend is increasingly diminishing, which is increasingly prompting me to divest assets out of the markets and into cash held in brokerage accounts. As of this writing my portfolio is about 15 % in cash.

I have always believed in the idea of being fully invested. However, in a market that is now more-than-ever bullish, tethering on bubble spectrum (or as Jason Zweig put it recently, markets on fire) it is near impossible for me to find bargains. If anything, I want to revisit portfolio hedging (a topic on which I dropped the ball in the past few months).

Below are some macro-indicators, which are flashing warnings of extreme market valuations

• Buffet-indicator, which is the ratio of US total stock market valuation to GDP is currently flashing about 70 % above fair value, see here
• Shiller PE, which is the cyclically adjusted PE ratio, is hovering about 69 % above the historical market fair value, see here
• Major Indices, all major indices, including the DOW, S&P 500 and Russell 2000, are hovering at or near their all time highs!

Does this mean, market reversion is imminent? Probably not, given where the interest rates are and we see no signs of CPI-inflation. Here are two recent articles (see here and here) that suggest, the bull market may still have room to grow.

Getting back on the topic of Tesla, the company with a market cap >555 B is now trading at valuation above Berkshire Hathaway (ticker BRK-B, market cap ~542 B). In the past two weeks, TSLA has soared 40 %, apparently on the continuing bullishness surrounding the news of inclusion in S&P 500 index.

In the past year Tesla stock has increased 6 folds, where as Berkshire has barely budged. The irony is, Mr Buffet’s firm gushes more profits per annum than total per annum revenue from Tesla. Berkshire is also flush with cash, at last count, >$145 B. Tesla on the other hand has big cash needs, which it is fueling by a borrowing binge and selling stocks in the open market. It is hard for me to fathom who are current Tesla buyers, which there seem to be plenty still!

As for my Tesla short, its been a very painful week but I am in for the long haul! Especially, given the size of my exposure, even if the trade goes totally against me in the short-run, which it very well might, I have the ability to sustain the pain for I truly believe that the odds are stacked in my favor in the long run. Eventually the markets will come to its senses to bring a stock that is trading at sky high PE>1200 back to earth!

Video/Book/Article/Audio for the Week

• Podcast: An excellent podcast interview with Prof. Lubos Pastor on the Rational Reminder podcast. This pod is now a couple of weeks old but worth a listen, especially Lubos’s take on ESG investing, which I found quite fascinating.
• Podcast: Freakonomics two part pod (see here and here) on whether does advertising really works! The findings should scare the bazoka out of the ad funded free-everything model.
• Podcast: Howard Marks on Value Investing with Legends podcast
• Article: 100-baggers, the lost-chapter