Investing in Tesla and the EV market.

maxsteam

JohnWinder said:

Now read on:

Suppose you are at an auction and people are bidding on three items. Here is a key point: people are only allowed to make one bid at the auction, and there will only be one auction of this kind, or anything like it, ever. Assume that the bidders are rational, there is no sentimental value, they are traders who expect to sell the item again at some point, and they are in it to make money. But this is a once-in-a-lifetime maneuver,

I am convinced. I'm investing in CBOX tomorrow, as soon as the markets open. I can see how it's definitely a once-in-a-lifetime maneuver.

JohnWinder

ZingPowZing said:

That is quite an entertaining diversion, John, but the conclusion is incorrect.  

The value of the box is unchanged, regardless of the bidder.

By the same token, whether players in a casino place bets all over the roulette table or on one number the expectation for the house is the same - 36/37. 

I'm still not clear which strategy it is that you think leads to paying over the odds but really, there isn't one. Diversification doesn't change the arithmetic.  

Regret, you're at the limit of my cognitive capacity in discussing this issue, so I doubt I can help either of us. But...

Yes, the value of the box(es) is unchanged from one scenario to the other, and yes, the value of the boxes' contents is the same regardless of who's bidding. But the risk one of the bidders takes by having to pay $99,900 is greater than the risk of other bidders (the diversified ones), in the second scenario, and there is no reward for the former bidder since the contents are the same.

Why take greater risk if it is not rewarded?

The strategy that leads you to paying over the odds, in the box example, is needing to pay $99,900 (to achieve the purchase) even though you were only willing to pay $99,000 when there were no diversified investors pushing the price up above the level you think is reasonable.  I don't know how valid this model is; looks ok to me, but it's worth questioning.

[Deleted User]

JohnWinder said:

ZingPowZing said:

That is quite an entertaining diversion, John, but the conclusion is incorrect.  

The value of the box is unchanged, regardless of the bidder.

By the same token, whether players in a casino place bets all over the roulette table or on one number the expectation for the house is the same - 36/37. 

I'm still not clear which strategy it is that you think leads to paying over the odds but really, there isn't one. Diversification doesn't change the arithmetic.  

  I don't know how valid this model is; looks ok to me, but it's worth questioning.

Where the auction room example is correct is that it acknowledges the value of the box: $100,000. Where it is incorrect is that it changes another mathematical certainty - the probability of the box being empty - from 50% to 55%, to arrive at a $90,000 bid.

I understand the psychological comfort of risk avoidance but, in reality, no casino would offer 10% better odds to someone playing a single number and no stockbroker can afford to sell $100,000 of stock for $90,000. But if the author finds either, please let us know.

JohnWinder

I think you've overlooked a couple of points.

The single box bidder, valuing a box at £90k hasn't re-written the probability of the box containing money away from 50%, rather he recognises that a 50% probability will give him fair value for £99,900 were the purchase repeated a very large number of times. But with only one purchase he could well lose all his money, thus needs a discount from true value to justify the risk being taken.

And yes, the stockbroker can't afford to sell at a large discount, and NEVER has to because there are always well diversified investors who can comfortably pay the full price (or £99,900) as they face no prospect of loss.

The dilemma facing the single stock investor can be expressed in either, but not both, of two ways. Commonly we say 'they're taking on risk they don't need to - idiosyncratic risk'; the other way is to say they have to pay more than what the stock is really worth to them (because the price has been bid up by diversified investors who have effectively removed that risk for themselves, and can justifiably pay the higher price). Either way, it's a bad deal (which might pan out, but that's the nature of gambling and investing doesn't need to gamble in that way).

maxsteam

JohnWinder said:

The single box bidder, valuing a box at £90k hasn't re-written the probability of the box containing money away from 50%, rather he recognises that a 50% probability will give him fair value for £99,900 were the purchase repeated a very large number of times. But with only one purchase he could well lose all his money, thus needs a discount from true value to justify the risk

 It's not about boxes. The shares were down 3p on the day.

[Deleted User]

I don't think the model is useful, John. The author is artfully mixing up two calculations, "What is it worth" and "What is it worth to you." If an individual investor bids up to $90,000, he would be operating at one hundred times the profit margin of the diversified investor, so the completely arbitrary value the author ascribes as compensation for taking on risk would never work. If the individual investor bids up to $99,900, he will get a different outcome to the diversified investor but en masse the cohort of individual investors will fare the same as the consortium.

I know that the author has pre-empted that logic by saying that the auction is a once-only event that the investor is "forced" to bid on - sort of a posh Deal Or No Deal - but the expected outcome is the same over any time period, any sample. 

There are many reasons for spreading risk, but don't do it on the assumption that, overall, it leads to a better outcome, which looks to be the conclusion to be drawn from statements such as "the individual investor overpays.". That would be incorrect.

Thrugelmir

Credit Suisse has little option but to take it fully on the chin following the collapse of Archegos Capital Management hedge fund blowup. 

JohnWinder

Ignoring Credit Swisse for a moment, we’re perhaps now only arguing over whether I’ve been too loose with those few words ‘the one stock investor overpays’.

I agree, the author is distinguishing between ‘what it is worth’ and ‘what is worth to (the one stock investor)’. It’s an artful argument, but I don’t think he’s confusing those two ‘values’.

He’s saying that the individual stock investor SEEKS a 100-fold profit, compared to the diversified investor, because he’s taking on more risk, namely losing the lot or getting £200k for the price of £90k. But the single stock person ISN’T granted the reward for taking on more risk than the diversified investors because he can’t buy the box at his required price as the diversified buyers have bid it up to £99,900. There is no reward available for taking diversifiable risk, so don’t take it on (by buying only one box, unless you're a gambler).

ZingPowZing said:

If the individual investor bids up to $99,900, he will get a different outcome to the diversified investor but en masse the cohort of individual investors will fare the same as the consortium.

There are many reasons for spreading risk, but don't do it on the assumption that, overall, it leads to a better outcome, which looks to be the conclusion to be drawn from statements such as "the individual investor overpays.". That would be incorrect.

True about the cohort en masse, but it’s irrelevant to the individual who chooses the wrong box as they lose out completely. The other individual stock buyers win big time, getting £200k for £90k. That’s why it’s like gambling.

I don't think anyone's arguing spreading risk leads to a better outcome, and to think thus, you may have misquoted in writing 'a better outcome results from not overpaying the way individual stock investor has to'.

What I wrote was: ‘(they, the single stock investor would) pay more than the stock is really worth to them’ ie more than they feel comfortable to pay considering the risk(s). That's the argument anyway.

[Deleted User]

JohnWinder said:

 There is no reward available for taking diversifiable risk,
Agreed. It makes no difference to the expected outcome.

so don’t take it on (by buying only one box, unless you're a gambler)
I don't think that can be applied as a general rule. For example, the post you quote goes on to say:
"The point is this. You hypothetically hold only, was it Apple and Amazon? As an investor in the Vanguard Total Stock Market Index Fund, I hold Apple, Amazon, and 3,562 other stocks. I have "only" the general risk of the stock market as a whole. IMHO that's a lot of risk, but you, obviously are taking more risk than I am. However, you and I pay exactly the same $2,012-or-whatever/share for Amazon stock."
Since he wrote that, the Vanguard Fund is up 44%
But Amazon is up 69%
And Apple is up 138% (plus dividends)

I know that many are deeply "invested" with the idea of diversification but, if you like control, holding a handful of investments, rather than thousands, helps to clarify the outlook for the individual stock picker.  

Ciprico

I bought into L&G Battery Value-Chain UCITS ETF   (batg)  to get some hopefully tempered exposure to the EV market. Their holdings contain a few car manufacturers - but also companies who mine the materials that go into batteries...

Spectulative - but the fund seems to avoid the mad swings of the sexy and fashionable EV companies...

WISDOMTREE ISSUER PLC BATTERY SOLUTIONS UCITS ETF USD ACC (GBP) (CHRG) is another fund aimed more at unsexy miners.

Batteries could also have an interesting part to play away from cars in energy storage.