“STONES” REQUIRED TO EXCEL AS L/S EQUITY PORTFOLIO MANAGER
Headlines:
1. Pain Ought To Be Expected.
2. The Outcome = Always Uncertain.
3. A Metaphor For Life.
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Managing Risk Capital = A Chosen…Yet Extremely Stressful Profession.
The Potential Financial Rewards Are Irresistible…
But The Pathway To Achievement Is Typically Tumultuous.
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The Primary Tactical Goals Of A L/S Equity Portfolio Manager =
1. Elevate “High Water Mark” +
2. Maximize Sharpe Ratio +
3. Optimizing Capital Allocation/Utilization
While Recognizing That =
4. Returns Are Not Time Linear +
5. Research = Cornerstone Of High Conviction +
6. Investing/Trading = Art…NOT A Science +
7. Liquid/Transparent Markets Are Preferred +
8. Risk May Only Be Precisely Measured In Hindsight
And Appreciating Esoteric Factors =
9. Humility…As Markets Can Exact Brutal/Sudden Pain +
10. Psychology’s Significant Impact On Market Pricing +
11. Experience/Instinct = Monumental Attributes +
12. Accepting Responsibility For All Decisions +
13. Financial Media = Backward Looking
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Equity Market Cycles Are Akin To Fingerprints…
Each One Is Unique…Determined By Dynamic + Unpredictable Inputs…
Including An Occasional “Thin Tail” Event On The Bell Curve.
Thus…Managing A Portfolio Of Equities Through Variant Cycles…Requires A Release Of Absolute Beliefs…
Especially The Most Dangerous Belief…
That There Is A Repeatable Process That Is Universally Effective…All The Time…
Because There Isn’t…As The Market Frequently Shifts Its Stylistic Favor.
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So…At The Very Least…A L/S Equity Money Manager Must Be Intellectually Agile…
Not Only With Idea Generation…But Also With Capital…
That Is…Sizing Of Positions.
And Managing Capital Is A Crucial Skill-Set…
As Much As Sector/Security Selection.
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Because Most Trades…Involve Capital Draw-Down…
Especially In A Contrarian/Value Oriented Approach.
So…As A Respected Mentor Of Mine Once Asked Me…
“HOW MUCH PAIN CAN YOU TAKE?”
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You See…Just As L/S Money Managers Have A Job To Do
i.e. Maximize Returns + Sharpe Ratio etc…
So Do The Equity Markets Have A Specific Job =
That Is…To Test Your Convictions…
By Imparting Capital Draw-Down Pain On Market Actors…To The Point Of Extreme…
1. Fear +
2. Frustration +
3. Impulsivity +
4. Panic…
That Can Yield Emotional + Erratic + Irrational Investment/Trading Decisions.
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Thus…How To Counter The Market’s Actions To Debilitate + Weaken You?
First Of All…You Need To Accept + Recognize The Market’s Role To Torment…Because It Is Real.
Secondly…You Must Figure A Way To Channel Capital Draw-Down Pain To Your Advantage.
To Do So…Pain Must Be Bisected + Simply Defined As:
1. Price Erosion = Capital Draw-Down +
2. Time Erosion = Duration of Price Erosion
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Naturally…Price Erosion Stings…
And Is Intensified By Time…
As Both Separate Elements Compound…With Every Counter-Price Day + Week + Month.
You Feel Increasingly Defeated + Demoralized.
Naturally…You Question Your Hypothesis…Your Investing/Trading Gut…Your Research…Pretty Much Everything…
Because You Are Currently Losing…No Matter If Driven By Beta Or Idiosyncratic Stock/Sector Issues…& It Is All Too Clear.
It Seems Defeat Is Certain…Just A Matter Of When To Capitulate.
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But…What If…Somehow…As A Losing Position[s] Capital Depletes…
Within A Portfolio of Just 10-12+/- Concentrated + Margin-ed Positions…
You Are…Paradoxically…Even More Optimistic About That/Those Current Losing Position[s]…
Than You Were When The Positions Were Initiated?
Is That Even Possible…Or Just Plain Delusional?
Well…It Is Absolutely Possible…
And If You Wish To Excel In This Business…You Better Believe It.
Otherwise…Markets Will “Eat You Up”…
As Evidenced By The Average/Modest Life Of A Hedge Fund = 3 Years…Which Is Not Much Of A Career.
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More Importantly…Even If You Are The Rare Portfolio Manager Capable Of Being Energized About A Current Losing Position…
That Is Not Enough…Not Even Close.
You Must Be Willing To Act + Commit More Capital As The “Draw-Down” Mounts.
And This Might Be The Most Difficult Task Of All.
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So…As The Title Of This Post Indicates…Committing More Capital…At These Precarious Price Points…
Requires “STONES.”
And BTW…Even If You Have The “STONES”…[And Most Certainly Do Not]…
It Is Entirely Possible…You Just Might Be Wrong…Once Again…For A While.
But If You Deeply Understand How To Evaluate A High Quality + Market Leading Company’s Underlying Assets + Liabilities + It’s Capital Structure [Equity + Debt] + Its Ability To Generate Free Cash Flow [Not Zombie Companies]…Or Vice-Versa For Short Positions…
Maybe Even Get Paid A Decent Dividend While You Wait [To Cover Margin Costs]…
Evaluate Executive Leadership’s Legitimate Commitment To Shareholders …Or Vice-Versa For Short Positions.
And…If You Started To Accumulate The Position When The Chart Already Looked Dire…And The Valuation Metrics Were Ridiculously Reasonable…Or Vice-Versa For Short Positions…
More Often Than Not…
It’s A Matter Of When You Will Be Proven Correct…Not If You Are Indeed Correct.
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So…Though Challenging…You Must Eradicate The Recency Bias Imprinted In Your Brain + Recognize That Past Decisions In This Security….
That Thus Far Have Proved Incorrect…Have No Impact On The Success Failure Of Current Decisions.
Because Rare + Great Ideas/Positions [Long or Short] Do Not Become Bad Ideas/Positions Just Because Price Action is Not Immediately Cooperative…
Typically…It Just Means You Are Early…Despite Best Timing Efforts.
And The Benefit To Being Early Is That You Have An Opportunity To Build A Larger Position At More Favorable Prices [Long or Short].
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Further As Price Moves “Against”…Provided The Hypothesis Remains…Generally…In Tact…
This/Those Position[s]…Are Only Becoming Increasingly Asymmetrical…
Which Is The Ultimate Objective…To Initiate At Price Points Where Reward Swamps Perceived Risk.
And Positions Are ALWAYS The MOST Asymmetric At/Near Price Extremes.
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So…As You Stare Into That Dark Universe Of Price Uncertainty…
Contemplating A Positional “Press”…
All You Have To Rely On = Your Gut + Your Research And…Most Critically…
The Vision To NOW SEE WHAT OTHERS WILL ONLY EVENTUALLY SEE…
It Is Both An Exhilarating + Scary Moment…
Especially So…Because We Are All Taught To Avoid + Shun Uncertainty…
Rather Than Stepping Deeper Into It.
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Which Leads To The TS Eliot Quote Presented At The Top Of This Post…
“Only Those Who Will Risk Going Too Far Can Possibly Find Out How Far One Can Go.“
So “Pressing” A Position…With Considerable Capital…At This Specific Pain Point…
Is It “Going Too Far”?
Maybe…Maybe Not…As Only Time Will Tell…
But At The Very Least…You Are In The “Too Far” Zip Code.
Still…If You Are A Truly Experienced + Judicious + Skilled L/S Equity Portfolio Manager…
You Actually Become Increasingly Comfortable With The Inherent Discomfort These “Draw-Down” Moments Present…
And Of Course…You Most Certainly “Press”…Because…The Asymmetry Is Just So Compelling.
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Moreover…This Comfortable Discomfort…Is Discomfort Nonetheless…
And Must Be Intellectually Silo-ed…
So As Not To Spill-Over + Discomfort-ably Influence Other Positions In The Portfolio…
So You Are Severely Vigilant…
Yet Cognitively Balanced…With Both Capital + Ideas…
Continuously Challenging Both In The Portfolio…
While Also Allowing Your Positions To Organically Contend With Inevitable Market Tests.
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Now…What About That/Those Pained Position[s]…Do The Idea[s] Work Or Not…And How Long Until The Outcome Is Determined?
Well…As An Optimist…Because You Cannot Operate In This Business From A Weakened Position Of Fear…
The Belief…ALWAYS…Is That Price Will Reverse Course…And Head In Your Preferred Direction.
And Usually…When That Does Occur…It Happens Very Quickly…
As In Time…The Counter Price Tension Reaches A Crescendo…
Sort Of Like A Beach-Ball Pushed Deeper + Deeper Beneath The Water’s Surface.
Then Suddenly…When The Pressure Is Released…That Ball Launches Far Above The Waterline…And Vice-Versa For Shorts.
And Alas…With The Price Change/Reversal…The Perception/Reality Of The Company’s Future Prospects…In All Likelihood…Change Too.
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Furthermore…A Peculiar + Tortuous Feature Of This Investing/Trading Scenario Is The Concept Of Time As…
There Is No Reliable Linearity Between The Duration Of Pain + The Duration Of Time To Reclaim/Replace The Pain…With Gain.
For Example…Many Months Of Agonizing Losses Can Be Recaptured In Days/Weeks…If Capital Was Scaled + Wisely Deployed.
Which Assists In Explaining Why The Greatest Pain Points Ought To Be Embraced…
Versus The Most Fearful + Weakest Holders…That…
At Extreme Pain Thresholds…
Are Consistently Flushed…To The Eventual Price…Where There Is…Almost…Nobody Left To Liquidate…And Vice-Versa For Shorts.
Thus…Not Much Incremental Capital Is Required To Push The Stock In Your Preferred Direction…
As Price Must Be Adjusted Much Higher To Draw Any Meaningful Sellers.
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In Some Ways…This Complicated Investing/Trading Plot…
Perhaps…Can Also Serve As A Metaphor For Life’s Pains…
Whether The Pain Is Emotional or Interpersonal or Psychological or Sociological or Spiritual…And Sometimes Even Physical.
For Those Experiencing Consequential Pain…Pavlov’s Response Mechanism…
All Too Often…Predictably Registers As…
1. Bail or
2. Cleave or
3. Discard
…At The Very Worst Time
…As Avoiding Any Pain…At Any Cost…
Irrespective Of The Collateral Damage…
Is Priority #1…#2…#3.
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Thus…A Prime Opportunity To Say “Yes” To The Pain…
To Clearly/Creatively Discern It + Learn From It + Re-Frame It + Understand It…
Is Now Lost.
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And This Is Not Only A Loss…
But Also A Waste…Primarily Because…
Much Of The Tactical Pain…Typically…
Has Already Been Endured…
And…Is Not Indefinite.
Now…That Prior Pain…
Is Nothing More Than Soured + “What If” Reflections…
Probably Then Stashed In A Cerebral Dark Box…
To Some Extent…Forever Festering…
Like A Wound That Is Never Properly Treated.
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So…This Hampster-Wheeled Cycle…
For So Many…
To Bail + Cleave + Discard…
Only To Start Over…Again + Again…
With The Same Conclusive Pain…
Yields No Legitimate Benefit Other Than A Dubious Skill Of Continually…
“Re-Setting The Board”…
Commonly Resulting In A Life Of Frustration + Neutrality…At Best.
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A Dramatic Axis Tilt Focused On…
Accepting Chaos + Pain + Volatility…
As Legitimate Moments Of Aspiration + Opportunity…
However Inspired…Is Unlikely And Unwanted…By Most.
Though…It = Possible…
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So For The Few Seeking Entry Into A Riskier Clique…
Be Informed…Of A Few Qualitative Hindrances…
To Both Navigate + Negotiate.
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You See…Life’s Daring + Risky + Savvy…
That Believe A Quite Painful Dilemma Can Be Successfully Flipped + Inverted…
May…Perversely…Stimulate A Skeptic’s Clouded + Distorted Lens.
As To Them…The Pain Filled Status Quo…Is Irreversible + Permanent.
And Since “Anxiety/Misery Loves Company”…
Attempts To Poison + Thwart An Optimist’s Hope May Initiate.
Specifically…With Inaccurate Presumptions + Fears.
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Just A Nasty + Pernicious Cycle That Is So Unpleasant To Encounter.
Therefore…To Withstand…Takes Courage Of Convictions + Principles…aka “Stones.”
Especially To The Ignorant Critiques…From Those Forever Gripping Tightly To Certainty + Ultra-Safety.
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So If “GOING TOO FAR” Is…
Both Compulsory + Desired…
You Better Have Serious “STONES.“
But Then…How Else To Determine…
“HOW FAR ONE CAN GO.”
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Protected: FIXED INCOME MARKETS SLAUGHTERED BY FED “FLIP”…WHAT NEXT FOR BONDS + RATES?
Protected: U.S. DOLLAR = OVER-ARCHING SOVEREIGN IMPLICATIONS
Protected: EVERY EQUITY MARKET HOUR…$878M OF BONDS = PURCHASED BY THE FEDERAL RESERVE
C3.ai: ABSURD + EGREGIOUS INSIDER SELLING
Headlines:
1. Executives Focused On Selling Stock…Rather Than Software.
2. No Stock Sales Price Is Too Low.
3. Insiders Take NO Risk….Why Should Investors?
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AI = Both An Acronym For “Artificial Intelligence” And The Stock Symbol For Software Company C3.ai…Which Despite Its Brief History…Already Fascinates.
However, The Fascination Is NOT C3.ai’s Business Model…Which
1. Burns Cash
2. TTM Revenues = $183.2M
3. TTM Revenue Growth Rate = 17%
4. Equity Cap = $5.891B = 32.20x TTM Revenue
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So For Now…C3.ai Seems To Be Just Another Richly Valued Technology Stock…With Excellent CEO Pedigree [Tom Siebel]…A Sexy Corporate Name…And A Well Stocked Board of Directors…Featuring Condoleezza Rice.
The Post IPO Price Launch Has Reversed Quite Substantially [Peak to Trough = 74.32%]…And Seems To Be Deserved…As Company Fundamentals…While Decent…Are Not Extremely Compelling…
At Least According To Deutsche Bank’s Research Analyst…Who Recently Commented…
“The artificial intelligence market in the enterprise remains nascent, with companies slow to expand AI use beyond initial pilots and science projects.”
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Anyway…The Fundamentals At C3.ai Are Really Just A Sideshow.
Because What C3.ai Really Seems To Be…Rather Than A Software Company…Is A Publicly Traded Entity Providing Extreme Affluence [via aggressive insider share liquidations] To It’s Board Of Directors And Senior Executives…Despite…To Date…Not Much Commercial Market Success.
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Of Course…It Is No Secret…That Serving On A Board Of Directors = Akin To Getting Paid For Not Doing Too Much…Other Than Typically “Rubber Stamping” Mundane Corporate Administrative Matters.
Frankly…It’s An Exclusive Club That We’d All Like To Join.
Especially Because The Compensation…For Participating In A Handful Of Quarterly/Annual Meetings…Is Very Handsome…$250K/Year = Not Unusual…As Well As…In Most Cases…Very Attractively Priced Stock Options.
And This Is Where The Story At C3.ai Becomes Increasingly FASCINATING.
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As The Above Weekly Price Chart Indicates…The Dollar Value Of Recent Insider Selling [the first since the IPO] = MASSIVE...As Insiders Have Already Reaped 46% More Dollars For Their Accounts Than The Company Raised In Its IPO.
To Be Precise…$567M For ALL Directors + Senior Executives…As Well As A Combined $333M For Client/Investor BKR [Oil Service Giant Baker Hughes] And Investor/Board Represented TPG [Texas Pacific Group].
And All This Selling Occurred In Just Two 2 Brief /Legitimate Time Windows Within The Past 4 Months [3.10.21 – 4.23.21 & 6.10.21 – 6.22.21].
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For Perspective…The Combined Dollar Value Of Insider Stock Sales Equates To 4.91x C3.ai’s TTM Revenues…And These Revenues…As A Reminder… Generate No Free Cash Flow.
That A Cash Burning + Relatively Slow Growing “Growth” Company…Such As C3.ai…Can Generate Almost $1B Of Income/Wealth For Insiders = Very Good For Them…But Very Bad For Public Market Investors Of C3.ai…As The Insider Selling…No Doubt…Has Further Weighed On The Share Price of C3.ai.
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Naturally…There Is Even More Intrigue To This…Primarily…INSIDER SELLING MACHINE.
#1. No Sales Price Is Too Low.
Insider Selling Was Initiated In March ’21 With The Share Price Already Down 53.77% From It’s All Time Price High And Near Its Lowest Trading Level…Since The IPO.
But Those Low Prices Did Not Deter…As Insider Sales Were Boldly Executed…Until Pausing…At A Further Depressed Level In Late April.
The Insider Selling Window Opened Again In Early June…With The Stock Down Even Further From Late April…And Another Torrent Of Shares Hit The Market.
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In All…Over 12.5M Shares Were Aggressively Dumped Into The Market… Generating Roughly $951M Of Proceeds For Insiders.
#2. Insiders Take NO Risk.
That Old Cliche…No Risk = No Reward…Certainly Does Not Apply At C3.ai…
As The Cost Basis For Most Of These Share Sales = Effectively Zero …According To SEC Form 4 Filings.
Thus…With A Cost Basis Of Zero…There Is No True Risk…As You Can Effectively Lose Nothing?
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#3. No Optimism.
A Captivating Feature Of These Share Sales Too = Most Insider Stock Was Sold On The Same Day That It Vested…Even With The Price Down Significantly From It’s December ’20/February ’21 Price Peaks.
So…The Urgency To Sell…While Not Unusual For Somebody With Much At Risk…Is Peculiar For “Insiders” Without Much Financial Risk…Given The Cost Basis Of Their Shares Was Close To Zero.
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Plus…With The Share Price Down So Dramatically…In A Very Short Period Of Time [see above price chart]…It Seems That None Of These Directors/Insiders So Much As Even Paused…For A Nano-Second…To Think…
“Perhaps I Should Just Hold On To My Stock For A While And Then Liquidate If The Shares Bounce Back Up A Bit“…
Especially Since The Company Does Position Itself As A Pure-Play In A Hyper-Growth Technology Sub-Sector…And Who Would Know That Better Than Top Insiders At The Company?
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#4. Institutional Shareholders Are The Current “Bag-Holders.”
While Insiders [including EVERY MEMBER OF THE BOARD OF DIRECTORS] Liquidated Large Share Positions…Resulting In Ridiculously Risk-less Profits + A Tanking Stock…
They Sold To Institutional Investors…Who Paradoxically…Have Much At Risk.
Thus…The Perceived Alignment Of Interests That Most Institutional Investors Seek…Between Company Executives/Insiders + Public Shareholders…Certainly Does Not Exist At C3.ai.
Actually…There Appears To Be Quite A Bit Of Market Conflict…Especially With Shares Continuing To Move Down And To The Right…
As Almost All Investors That Acquired Shares Of C3.ai…AFTER The IPO Started Trading…Have Lost Money…Other Than Short-Sellers “Covering” Their Positions.
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The Insider Selling Will Likely Continue At C3.ai…Without Pause…No Matter The Conflicting Optics Between Company Cash Burn + Insider Cash Build.
However…As The Size-Able Insider Selling Continues At It’s Current Pace…
C3.ai’s “Totally Cool” Corporate Name…Might Take On An Entirely New Meaning…As In…
C3 = “See” You In “3” Weeks/Months For More Insider Selling.
ai = “a”dios “i”nvestors…As Lopsided Insider Compensation Agitates.
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