Today felt good. Carvana was up 32% and some of my Carvana options were up 43%. I’m still down big on Carvana, but we’re in the early innings (hopefully) and it felt good to see Carvana going in the right direction today.
I bought Carvana for the first time a few months ago at around $25, it doubled to over $50, and then it sank all the way to below $8. It’s been a wild few months. I’ll reflect on some lessons I’ve learned and some Carvana updates below.
Your Stress Is Not My Stress
As one of the greats taught me, stress reduction is my full-time job. And lately I’ve been feeling stress about Carvana, and the crazy thing is that it wasn’t even my stress that I was feeling.
Tonight I was watching Real Housewives of Salt Lake City (why are Whitney and Heather fighting?), and John Barlow, on a dinner date with Lisa, said something very insightful. He said that after his divorce, he read a lot of healing books and he learned that other people will try to put their problems on you because it makes them feel relief from those problems. And of course, then you feel the burden of those problems they just dumped on you. So you have to protect your space. Very smart.
You’re probably asking what this has to do with Carvana. Well, in the last week, as Carvana tanked, I put myself in the shoes of fund managers who had huge positions in Carvana and for some reason I found myself thinking about what they might be feeling, thinking about the issues they might be dealing with, and so on.
What you think ends up being what you are, so naturally I started to feel more stress and worry about Carvana than I actually should have been given that I knew it was a risky bet going in and because my position was only a 10% bet. I was taking on their stress! Or at least my perception of what they might be dealing with.
Why did I do this? Probably two reasons. First, I think I want to be fund manager one day, so I might find myself in a similar situation at some point (downturns happened to almost all the greats when they managed money for clients), so it was natural to want to check into that scenario and see what it feels like. And second, Twitter is a sewer. I’ve been on Twitter too much lately and I see all this gossip and all these comments and it’s disgusting. That muddied up my thinking and got to me.
But thankfully, John Barlow set me straight tonight. I don’t manage outside money, I don’t have to deal with others’ expectations, I feel comfortable with my bet sizing, and I understood the table stakes when I sat down for a round of Carvana ownership. I knew exactly what I was getting into, I knew why I was getting into it, and I did it in a way that I feel comfortable with. So why daydream about others’ situations and feel that unnecessary stress? I shouldn’t, and it was a good lesson learned. Moving on.
My One Carvana Mistake
Buying Carvana was not a mistake. But given the risk of wipeout, I should have added protection. Seth Klarman has a very interesting quote in a New York Times article about climate change. In that article he is talking about existential risks, and he says even if the risk was only 5%, you’d want to hedge against it. And then he relates that mindset about climate with what he does with investing, and he said:
“One thing we try to do,” he said, “is we buy protection when it’s really inexpensive, even when we think we may well not need it.”
Going into Carvana, I knew bankruptcy was a risk. That’s why I kept my bet to 10%. But knowing what I know now, I should have bought protection. Using options, I could have limited my downside. I could have limited my downside to a 30% loss, and this would mean that I was only risking 3% of my capital. The price I would have had to pay is that my gain, if things work out, would always be 30% less than my gain would be if I didn’t buy that protection.
But that not-as-great outcome on the upside would have been acceptable. I would have been risking 3% of my capital for a potential 35 bagger with 10% of my capital.
Heads I get a 35 bagger, tails I lose 3%. That’s good enough for me.
But I didn’t have that protection skill set at the time, and now the protection is too expensive, so onward we go. Maybe one day I’ll be really happy that I didn’t buy the protection.
Probabilistic Bets and Venture Capital
Is Carvana value investing? No, I don’t think so. To me, value investing is buying something for less than it’s worth with a limited to non-existent downside.
Carvana is more akin to venture capital investing. Heads I win huge, tails I lose huge. The secret ingredients here are the odds of winning and losing. Carvana was a probabilistic bet. I think there’s a big chance Carvana survives, and if they survive, I think they’re going to be worth many multiples of what the market cap has been lately, and I was willing to make a 10% bet on it. There’s nothing wrong with this, many investors invest in different kinds of investments. I despise dogmatic thinking. My intellectual curiosity led me to Carvana, and I’m glad it did.
Some Encouraging Signs
Check out this quote from a rival executive in a recent story about Carvana in the Financial Times:
“If they can stay solvent for next year, Carvana will be the future of car buying,” said a rival car executive.
That was a good sign to me. If a rival is thinking that, that means something to me.
Another encouraging sign was the recent insider buys from two directors. Insider buying is a strong positive signal, but it’s not a sure sign of good things to come. I remember from a few years ago when a number of Chesapeake Energy insiders were buying heavily, but natural gas prices didn’t rise fast enough and they went bankrupt.
Finally, one more good sign was from the Q3 earnings call. Ernie Garcia said that if you look at customers who used cash to buy their cars, the company grew over 20% year over year in the quarter. I believe the underlying demand for Carvana’s service is there, it’s just a really rough time right now for the used car industry.
And that’s the deal with Carvana. They’re not in control of their own destiny. Given their debt situation, and given the industry they’re in, to a large extent they’re at the mercy of the Fed. If interest rates go too high for too long, Carvana won’t make it. How high is too high? How long is too long? I don’t know.
Some smart investors seem to think Carvana has one to two years before they’d need to access additional capital. Let’s see what happens.
The March Continues
I simply cannot imagine a world where Carvana does not exist. The offering is too good and too needed compared to the existing alternatives to not thrive.
Carvana will thrive and Carvana will take massive amounts of market share. But to do that, first Carvana has to survive.