Dealing With Orthogonal Opinions in a Rational Way While Investing
How To Go About Analyzing Differing Opinions Regarding Companies That An Investor Is Invested In
Dealing With Orthogonal Opinions In a Rational Way While Investing
Stocks Discussed: Nikola (NKLA) and Bumble (BMBL)
Disclosure:
Paradise Divide Capital, or “the Fund”, may hold positions in the securities mentioned in this article. It will be made clear to readers if Paradise Divide Capital has a position in a security discussed. This is not investment advice, but rather purely informational and educational.
Introduction:
In June of 2020, one of the hottest stocks in the market was Nikola Motors. Nikola offered what seemed like an intriguing and innovative solution to clean energy vehicles: hydrogen powered vehicles. Groups of investors poured a large amount of money into the company, and on June 15th 2020, the company reached a valuation of 26 billion. At the time this was a greater valuation than Ford Motors. The only difference was that Nikola had never produced a vehicle and their technology was fictionary, and Ford was doing 127 billion dollars in revenue per year. This type of inefficiency is fascinating, but is not the point of this article. I just thought it would be interesting to point out.
With Nikola’s meteoric rise inevitably welcomed naysayers. The short sellers, or the people betting against the company and would profit if the stock price fell, were public about their viewpoints. The CEO of Nikola at the time, Trevor Milton, was public in his hatred for the short sellers. During the month of June, he would frequently tweet about his disdain for short sellers and even at some points threaten and personally attack the people who bet against his company, Nikola.
Today, Nikola’s valuation is around 1/7th of what it was back in June, and it should be worth zero. In September of 2020, Hindenburg Research, the company that is famous for its “short reports”, published a short report calling out a large amount of fraudulent activity in the business. First off, the technology that the business was predicated on was not real. They had deliberately deceived investors into buying their stock and believing in the technology by lying. There were also fraudulent financial practices and widespread deception over the viability of the business that was spread by its CEO, Trevor Milton.
On July 29th, 2021 the SEC, or Securities and Exchange Commission, filed a lawsuit against Trevor Milton and the DOJ, or Department of Justice, indicted Trevor Milton for securities fraud. That day, he paid a bail of 100 million dollars and will face trial for his offenses in the next couple of months. They specifically cited his Twitter comments, which were mentioned above, in their indictment.
I tell this story for a dual reason. One, I think it’s just an amazing story. But, I think it shows how a person could not deal with people betting against something he was invested in, and as a result of him not being able to deal with it, he finds himself disgraced and facing years in jail.
Analysis:
Obviously most investors will not find themselves behind bars for their intolerance, or refusal, of orthogonal, or contrasting, opinions. But, what an investor will likely find themselves doing is not being able to rationally analyze a company they are invested in or a different opinion, and the investor could lose large amounts of money as a result. Eliminating any preexisting bias or loyalty to a company is one of the best things that an investor can do.
Today, we will explore my biggest investing failure, a failure that resulted in material losses in the Fund. On February 12th, 2021, the Fund initiated a position in Bumble Inc (BMBL) on its second ever day of being a publicly traded company. I will first tell you my original thesis for buying the stock, and then I will discuss the bear, or negative, opinion of the company. I originally bought the stock because I believed in the future growth of online dating, I believed in the advertising power of a social network like a dating app, the market for IPO, or initial public offering, was extraordinarily hot and I believed that it would persist, and I thought that the market was underpricing both the growth and the revenue of Bumble.
After my flawed thesis, my first mistake came in my initial position sizing. Paradise Divide Capital likes to initiate positions at around 1.5%-2% of the Fund's total value, but instead of this relatively conservative beginner position, I decided to make Bumble a near 6.5% position in the Fund. For context, this is around what the Fund’s position in Mastercard and Apple are, which are both mature companies that the Fund has added to over time. I was taking way too much risk with this high of a position because the company was so new and nascent.
Over the next month, I frequently encountered orthogonal opinions, or people who were betting against Bumble. I cast away these opinions as crazy, unfounded, and ignorant. I did so out of wanting to be right so badly and wanting to preserve my ego. I felt like I couldn’t be wrong. The people betting against the company presented rational arguments like the lack of a moat around the business, the lack of advertisement on the site, issues with management, issues with subscriptions, and more. I ignored these differing opinions because I wanted to be right more than I wanted to be rational.
Sure enough, over the next few months, Bumble’s stock did nothing but go down. Instead of evaluating the reasons why I was invested in it, and maybe sell the stock, I increased the size of my position in the company many times. I put myself in a position where I needed to be right. But, despite me injecting liquidity in the company, its stock continued its downtrend. At one point in May, my position in the stock was down over 40% and my position in the stock was down thousands of dollars on paper.
At this moment of despair, I began to think critically about the company. I created a long list of the problems that I saw with the company. I read people’s work who were betting against Bumble and their arguments made sense. I came to terms with the fact that my initial thesis was highly flawed and that once Bumble recovered to a level that I could sell it at, I would sell it.
Somehow, from its lows in May, Bumble stock rallied 45% and I sold my entire position. I ended up taking around a 20% loss on the position and have since made up my losses from the money that I got from selling my shares of Bumble. But, in the end, I lost thousands of dollars on my Bumble bet because my ego and bias overshadowed my critical thinking.
I think the lesson here is more nuanced than it might seem. Yes, I made a mistake in investing in Bumble. But, the bigger mistake came when I failed to look at differing opinions of the company. I let my ego and cockyness supersede rationality and I lost money. I think that mistakes are great and nobody can expect to make money on every company that they invest in. But, when an investor refuses to evaluate all opinions because of a bias, that is where the destructive mistakes come from. I don’t want to convey that investors shouldn’t take risks, and I don’t regret investing in Bumble, but I think that investors should welcome opposing opinions.
Conclusion:
If you made it here, thank you all so much for reading. It truly means the world to me that you would take your time to read this. If you have any questions or need me to explain something, or go deeper on something, I would be more than happy to do that.
I had never heard of the word “orthogonal”! Great piece.