The Sad Story of My Own Investor PTSD – The Wayfair Saga. But I’m Sticking With My Housing Stocks.
The investor PTSD, or “fat tail” investment concept.
The idea is to take advantage of others’ irrational fears or enthusiasms to identify cheap or expensive stocks. The basic concept is simple. When viewing the future, we have in mind some range of outcomes that probably looks like a normal statistical distribution:
But if the actual outcome is one of the tails of that distribution, it shocks us. For example, 15 years ago, a common assumption was that national home prices never go down. Well, 10 years ago they went down by a lot. That shocking experience changes our view of future outcomes to a “fat-tailed” distribution:
In other words, going forward we over-estimate the possibility that the worst – or best will occur.
My Wayfair short thesis.
Wayfair, as my May 23 post explained, is an online furniture retailer. It has adopted the Amazon business model of deferring earnings for many years in favor of growing market share. Amazon pretty much invented and perfected this business model. Amazon’s success created its own fat tail – investors are now eager to catch the next Amazon.
Outside of two very early years, Amazon deferred profits, but it didn’t lose money. But Wayfair’s losses have been steadily increasing, as this chart shows:
Source: Company reports
To me, then, Wayfair’s stock is really an option – an option that over the next five years the competitive environment will break right and give company a following decade or longer period of strong profits. That seems very far from clear, so my initial very rough valuation was $20 a share. The stock was $85 on this past May 23, so I suggested that you short it, as I had.
The Wayfair tail event
Wayfair’s next earnings report (Q2) after my suggestion was even worse than the market expected, at a loss of $1.13 per share. EPS expectations went from a roughly $2 loss this year and next to $3 a year. Boy, was I smart, right? Here’s what happened to the stock:
Source: Yahoo Finance
Yikes! The stock nearly doubled! I had managed to short one of the market’s best-performing stocks between May 23 and September 14, when the stock hit $150.
That obviously was a shock to me. $150 a share, for a stock I thought was worth $20, was not an outcome I had considered. Clearly a tail event. But that tail grew pretty fat in my mind.
Reality sets in.
Tech-heavy NASDAQ hit its recent peak on September 4, and was barely below that level on September 14. But it soon went into a tailspin, falling 13% by October 29. Wayfair, thankfully for me, went with it, falling to about $110. Then on the morning of November 1, Wayfair reported its third quarter earnings. A loss of $1.67 per share! Again way above predictions. The stock opened down $19 a share, to $92. Over the next two days, stock analysts lowered their EPS estimates for 2018 and 2019 to close to $4 a share, nearly double the losses expected when I first shorted the stock.
Now for the sorry punchline.
I had learned two things since my initial short. First, Wayfair is capable of losing far more than I thought, which rationally should lower my target price to below $20. Second, investors are even crazier for Amazon wannabes than I thought, and $150 a share for Wayfair’s stock has to be considered in the realm of possibilities. So what won out, reason or emotion?
I shamefully admit that I was hit with investor PTSD and I covered my short, for roughly breakeven. My brain said “OK, $15 here we come”. My heart said “Stop the trauma and sell the stock”.
I am a mere mortal. Me! I’m as surprised as you.
But At Least I’m Sticking With My Housing and Airline Stocks.
They are other PTSD stocks, whose story I won’t burden you with again here. But I retain my love – and ownership – of mortgage insurers MGIC (MTG) and Radian (RDN), homebuilders Pulte (PHM) and Lennar (LEN) and American Airlines (AAL).
A great new example of housing PTSD comes from the respected Yale economist Robert Shiller, who called the internet bubble of 1999 and the housing bubble of 2006. But I think these comments he made last Friday will end up showing that even the great ones (like me and Mr. Shiller) can get investor PTSD:
“Now that home price growth has slowed for five straight months, there appears to be no question that the U.S. housing market is taking a turn. ‘This is a sign of weakness that we’re starting to see. And it reminds me of 2006 … Or 2005 maybe,’ Yale Economics Professor and Nobel Laureate Robert J. Shiller told Yahoo Finance…”
Avoiding investor PTSD is hard to do. I failed miserably with Wayfair, as this post explains. But I’m hanging in there for the long-run with housing stocks.