Global Macro Trading Journal

From Ira Sohn
"Social Capital’s Palihapitiya Likes Tesla 2022 Convertible Bonds
Chamath Palihapitiya recommended owning Tesla Inc.’s 2022 convertible bonds, saying they protect potential upside and downside. He called Elon Musk “our generation’s Thomas Edison” and compared Tesla to an early-stage Apple Inc. "

Perhaps this is a great example of the new active investing method I'm developing now. The guy is bullish, has a convex view of what Musk can do and yet finds a way to protect his downside and control for risk. When I have time I plan to do some work on TSLA and check out these bonds to see what kinds of protections are avaliable but overall I do think his thesis makes sense.

Just a 10% chance that he is right and Musk is the new Edison/Jobs means that the stock is probably undervalued or at the very least, it isn't crazily valued. The bears think they can ignore the possibility that Musk is a genius because they got this contrarian bug inside of them that goes against anything that is unusually bullish. But its deeply flawled to do that when there is open ended risk (for a "short" position). If Musk is a genius, the kinds of things he can invent/develop/create in the car/solar field might very well change the face of humanity and if it does, the payoff can be exponential. I'm sure AAPL looked expensive after it went up 20x from the IPO, yet it can kept going and going and it will probably be the first $1T company

AAPL is another one where the skeptics never kept a tally of their skepticism. Lots of them said Android was going to kill the iPhone, that Cook wasn't Jobs, etc etc. And here we are at $150+ a share
 
AAPL is a great example, also, that a genius running a company long enough might be able to create a culture that lasts even AFTER he dies. He will put in place values, priorities, methods and develop a brand that will have lasting power. So a buyer of TSLA now would benefit from that too. Musk is young so this isn't a big deal but in the future it might.
I also purchased a Musk audiobook recently that I plan to listen to in order to try to understand him better
 
Its interesting that in the case of Bitcoin, its easier to see the potential, you compare the current market value of Bitcoin vs of Gold. As a result, a lot of people can understand might this thing might be very valuable, there will still be plenty of skeptics but even the skeptics can understand the bull case.

But in the case of Musk/TSLA, its more complicated, because a lot of the bullish thesis doesn't have numbers, projections or anything like that. Its a simply a sentence 'Musk might be the new Edison', saying this to skeptic is like throwing gasoline into a fire. The guy will go nuts, yet its very non-robust to fade that thesis because when it works, the payoff can be so large. He wont be wrong by a little bit, he will be wrong by a giant mile. The payoff can be so large that it is unknown and unbounded. Its not like bitcoin where you can have an idea of how much it can rise by looking at gold, TSLA could be a $10,000 stock in 20 years or it could be a $0. Point is, you know how much you will lose but the payoff is unlimited. There is a lot of convexity there

That's why I try to think in terms of convexity as an asset class, I want to have a percentage of my capital invested in convexity bets at any given time so when I get lucky one day, I get a large payout. A payout that will pay for all the losses plus give me a good profit. But I want true convexity, for instance buying stock puts looks like a true convexity bet but it has limited upside. A stock can only go to $0, but calls have unlimited upside, equity positions do too. I want unbounded convexity bets in my asset allocation. TSLA might fit the bill, probably not the greatest entry here as the stock is on a tear but I do like the fact that he merged with Solar City (perhaps this is why the stock is such a run), now you get all his innovations in that field too. I plan to check those convert bonds soon
 
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If you think about it, the ideal situation would be if Musk traded a share of his lifetime earnings. That way you would get ALL his sucesses (including SpaceX and his future companies). But of course, he is not crazy to do that, he wants to keep it for himself a lot of that stuff. But when TSLA merged with SolarCity, shareholders got another source of inventions/lifetime earnings in addition to the car industry. Perhaps thats why the stock went into the run that it did (at least partially)
We all know got to know a few people in our lifetime that we thought 'Damn, I wish I could buy this person's stock, his future sucesses, etc'. TSLA might be such opportunity. I wish that I had fully understood all of this years ago as I would have gotten involved in true convexity bets at much better prices but perhaps a solution is to wait for companies like this one to run into temporary trouble and face a good sized decline so I can get it at a better price (and hence, cut down my downside/risk)
 
I think the key about these convexity bets is to avoid them when they are popular themes. Like Bitcoin right now, its probably a bad time to buy as the price action is probably drawing a lot of speculative capital into that, which sends the price higher, etc etc. Its likely that you will be "overpaying" by buying when its a popular theme. I put overpaying in quotes because no one knows for sure if you are truly overpaying given that its an unbounded investment that is repricing. You would have to be able to know the % chance of giant up moves and the size of those moves, which is impossible. But I do know that when something is a popular theme, I will probably be paying more than I should have, especially if I'm more patient. By having the better entry prices I can decrease my risks/downsides which improves the reward to risk ratio (Cramer + PTJ)

So I want to be buying crypto currencies when a site goes bust and they are down a lot in a short period (The SEC denial of the bitcoin ETF was probably a good point to start an initial position). TSLA when it misses earnings and skeptics are all over shorting the stock, etc etc

My GREK position was along a similar line, the stock market there had done nothing for 2 years, which created a risk level (the lows), the upside is unbounded, when a market is down 90%+, the sky is the limit. So far it has been working out, but even if it wasn't and I stopped out, I would still make that bet again
 

Chamath Palihapitiya explaining his TSLA thesis. The most remarkable part is that he did all that without an indian accent
 
I see that IB does not allow trading in any of the TSLA bonds, so that convert is out. I don't think its a huge deal because there is probably a way to mimic those bonds by buying the stock, way OTM puts and regular sales of a small part of the stock position (to mimic the coupon from the bonds), and an smaller overall position. Unless those converts were being distorted down relative to the stock by something. Either way I don't think buying right now fits my criteria of not getting in when a theme is popular, TSLA is too popular right now and the price action is too strong so its not a good entry point, but I'm sure in 6-12 months there will be a good entry.

I'm sure a lot of people thought they missed out AAPL, GOOG, AMZN when it was they were up huge but at some point, they went out of favor, as they seem to do for a while every year and then they resumed their march up. So that's what I plan to do there
 
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