Chasing Asymmetry with Tesla

and Stanley

    Growing up in the Chicagoland area in the mid-1970s, Bag was blessed to attend many graduation/birthday parties at his uncle’s house. He routinely had multiple grills going all day, turning out a seemingly endless supply of sausage, hot dogs, burgers, and ribs. Inside was a buffet table with samsonite-sized trays of ziti, crinkle fries, sliced cold-cuts, garlic bread, and, of course, mom’s potato salad - which Bag wouldn’t touch with a stick. He preferred the dessert table, which was stocked enough to keep us kids jacked up on sugar all day. Bag’s uncle had a pool table in his basement that kept several adults occupied gambling their paychecks. For those who liked to gamble but couldn’t play pool, there were always plenty of card games, including Pinochle, Gin, Cribbage, and Poker.

    Bag wanted in those games, but sadly, they were expensive and, for the most part, were adults only. Even today, nearly 50 years later, Bag can close his eyes and, through the thick layer of wafting cigarette smoke, picture the coin-piles and stacks of bills in front of each of his aunts & uncles.  Once in a while, Pops would need a bathroom break and allow Bag to sit in for a hand or two. His advice was always the same: “No chasing inside straights.”  Back then, poker was all 5-card draw and 7-card stud. A straight in one of those games was about as close to a sure thing as you could get. The way Pops saw it, inside straights fail to hit 90% of the time, so he would routinely fold them. To him, winning a big pot 10% of the time was not enough to quell the pain of losing 90% of the time.

   Folding all those straight draws never sat right with Bag. Pops never considered drawing to inside straights as a risk-reward calculation where the reward occasionally justifies the risk. If there was $20 in the pot, and it cost a dollar to try and hit the inside straight, the way Bag saw it, it’s worth chasing. Sure, nine times out of ten, a dollar will be lost - but hitting it one time in ten wins $20, more than enough to cover all the losses. Offering 20-1 on a 10-1 shot is a significant imbalance on the risk-reward scale. The technical term for this imbalance is “Asymmetry.”

  Exploiting asymmetry is valuable in poker, but there is no place where it’s more useful than in the investment world. Legendary investor Stanley Druckenmiller emphasized the value of asymmetry when he said, “It’s not whether you’re right or wrong that’s important, but how much money you make when you’re right and how much you lose when you’re wrong.” This means investing money into an enterprise with a high chance of failure can be warranted, provided the return outweighs the risk. The tricky part is being able to quantify risk. As a society, we are remarkably poor at this. Conventional wisdom in the investment community is likely to blame, as their mantra is to avoid risk by not putting all your eggs in one basket …. in other words, diversify.

  The problem Bag has with worsification diversification is philosophical.  Diversifying is playing “not to lose” instead of “to win.” It is the investment equivalent of mindlessly folding all those inside straight draws. You won’t lose the dollar, but you will never win the $20 either.  Once again, we turn to Stanley for more investing wisdom: “The way to build superior long-term returns is through preservation of capital and home runs.”  Diversification will help with the “preservation of capital” part, but it will never get you the Home runs. There are no diversified portfolios that will provide 20x, 50x, or 100x returns over the next decade. Getting those Home runs requires being on the right side of an asymmetric bet and having the conviction to swing for the fences with a meaningful percentage of available investment capital.

  Surveying the current investment landscape, there are plenty of asset classes to diversify capital and earn a meager return, but few options for potential Home runs. Considering that the M2 money supply (dollars in circulation) has been growing at 15% per year, any investment must return 15% annually just to break even in purchasing power. Stocks are always an option, but which one? Playing it safe and buying the S&P index would historically yield 11%, well short of the 15% hurdle rate. Bonds return less than half of the S&P, so they are no prize. US residential Homes have been appreciating at 10% per year for a decade. Generating another 5% annually in rent playing landlord might get you over the hurdle, but it’s no easy ask. Bag is bullish on Gold, but even there, it is difficult to make a case for returns of 15% per year going forward.

   So parking capital in any of those asset classes is, as Stanley would say, nothing more than a place to preserve capital. There is no world in which any of these asset classes is up 20x or more by 2030. Swinging for the fences will require finding some asymmetric investments where the upside dwarfs the downside. Bagholder will give you his three favorite asymmetric investments today, which all have an obvious path to 10x or more by 2030. Bag has written extensively about the first two, so we will only mention them briefly. The third, we will discuss at length below.

  The most asymmetric bet on the planet, by a mile, is Bitcoin.  US politicians on both sides of the aisle are now embracing it. As a result, Nation-states, Pension funds, and US banks (led by JP & Wells Fargo) are all starting to build positions. Bitcoin, the only fully decentralized computer network on the planet, has compounded returns of 126% per year for 15 years WITHOUT any of these entities investing. Bag is of the opinion the fixed supply of Bitcoin and the trillions under management by these (hungry for return) institutions all but ensure 10x your money by 2030 is the worst case.

Another one of Bag’s favorite asymmetrical bets is physical silver. Just like Bitcoin, it is a little over a 1 trillion dollar market today.  Admittedly, the potential upside returns of silver are somewhat muted compared to Bitcoin, as there is no imminent tsunami of institutional demand about to pile in like there is with Bitcoin.  What silver has going for it is both shrinking supply AND growing industrial demand that is not sensitive to price. In other words, silver could rip higher, and demand from manufacturers would not slow as they need it for their solar panels, EV batteries, tomahawk missiles, cellphones, etc…. There is only one way to reconcile dwindling supply and sharply rising demand, and that is with substantially higher prices.

  The third compelling asymmetric bet Bag wishes to discuss today is Elon Musk’s Tesla, currently trading at about $175. Bag has recommended a short position on Tesla in the past. The thesis on the short was a simple one….If Tesla is a car company, pricing its stock based on metrics relative to its peers merits a stock price under $20. Even today, Bag still believes there is a 90% chance that is where the stock is headed. So why is the stock at $175? The reason is the asymmetry. Elon is not just drawing to an inside straight; he is drawing to four of them.

  The first inside straight he is chasing is AI. Elon has said himself, “Tesla is not a car company; it’s an AI company.”  While Bag is skeptical about AI in general, it cannot be denied that the investment community is showering AI companies with capital. Whatever company comes out the other side of this AI gold rush as the standard bearer will explode in price - much like Nvidia in the last few years. One thing is certain: Nvidia won’t be exploding from here, as they have no proprietary AI, nor are they looking for any. They are just the company selling the AI picks & shovels (chips). If Elon manages to strike AI gold with those chips, it could power his stock for decades.

  The second possible driver for a big move in Tesla stock is the energy storage business. Elon already owns the lion’s share of this market with little or no competition. As of 2023, it is roughly a 250 billion dollar-a-year market that is expected to be north of 2 Trillion by 2030.  For years now, governments worldwide have thrown mad cash at wind farms (and solar farms). The problem with those farms is their electricity production is intermittent at best, and thus cannot be depended on when demand surges. The workaround is energy storage units that can bank most of the energy produced to be available during peak demand. The biggest customers for these units today are Governments spending other people’s money, and we all know, Government is not sensitive to price. Bag believes the Energy storage wing of Tesla alone, could easily 10x the stock price by 2030, because if there is anyone who has mastered the art of sucking on the government tit, it’s Elon.

   The third straight draw he is making, and probably the hardest to hit, is the “Optimus Bot,” a robot capable of performing repetitive tasks around the clock without complaint or the need for days off.  The market to replace all manual labor is the BIGGEST market in the world. Airlines, restaurants, and box retailers from Home Depot to Walmart are just a few of those who would jump at the chance to rid themselves of the headaches that come with a human workforce. Unlike the energy storage business, there is a lot of competition currently working on robots. Elon has a first-mover advantage because Tesla has the money and the factories needed to mass-produce immediately. Elon says the prototypes are already sweeping floors, removing garbage, and performing other mundane tasks in his factories. He also claims he can build them at scale for 20k each. Fact is: the demand would still be limitless even if they cost five times that.

   The fourth and biggest straight draw for Elon is full self-driving (FSD). There is plenty of competition, but Elon is the only one using a camera system instead of some mix of GPS and radar. In terms of miles driven per accident, his system is far superior to the competition. For those convinced that the YouTube videos of Tesla cars blowing stop signs are the rule and not the exception, ask yourself: Why is the insurance on a Tesla half the cost of Bag’s Honda?  If there is one group of people capable of separating fact from fiction regarding the number of accidents, it is insurance company bean counters.

  Elon is currently charging $100/month for his FSD tech. With FSD outperforming human drivers by a mile (no pun intended), it is only a matter of time before insurance companies lobby the government to decree that FSD (like seat belts) must be standard in all vehicles. At that point, a decade from now at most, after all the rival car companies have kissed Elon’s ring to get the tech, there is a distinct possibility EVERY car on the road will be paying him $100 a month, assuming he is kind enough not to raise the price. The kicker is nearly the entire $100 falls right to the bottom line. With about 1.4 billion vehicles on the road worldwide, the math is staggering. Those who don’t want to pay the $100 can still get where they are going via Robotaxi. Oh yeah, those will belong to Elon too…

   Admittedly, many of these straights Elon is drawing to might be long shots. He could whiff on all of them, which would likely crater the stock. But if he hits just one, the stock is an easy 10-bagger from here. If he gets two of them, 25x would be a conservative estimate and make Tesla the world’s first 10 trillion dollar company. The asymmetry of that bet is very appealing to Bagholder. In the interest of full disclosure, Bag is swinging for the fences with a considerable percentage of his net worth in both Bitcoin and physical Silver … Tesla, not so much, yet. As always, none of this is investment advice - do your own homework. If you like something, my recommendation would be to follow the wisdom of Lord Stanley, who said:

  “When you have tremendous conviction on a trade, you have to go for the jugular. It takes courage to be a pig.”

  That looks like Bag right there, after a full helping of Asymmetry!