Week #37: Druckenmiller on the Future; Big Short 2.0; Media Doom and Gloom

The 25 Worst Stocks in History; One Fake Genius

Today at a Glance:

·   One Quote: Envision the Future

·       One Big Short 2.0 Deja Vu and Delusion

·       One Outlook: Doom and Gloom

·       One Titanic Tumble: The 25 Worst Stocks in History

·       One Documentary: The Fake Genius: A $30 billion Fraud

One Quote

Envision the Future

…(Y)ou don't want to buy (companies) when earnings are great because what are they doing when their earnings are great? They go out and expand capacity. Three or four years later, there's overcapacity, and they're losing money. What about when they're losing money? Well, then, they've stopped building capacity. So three or four years later, capacity will have shrunk, and their profit margins will be way up.

 So, you always have to sort of imagine the world the way it's going to be in 18 to 24 months as opposed to now. If you buy it now, you're buying into every single fad every single moment. Whereas if you envision the future, you're trying to imagine how that might be reflected differently in security prices.

       -Stan Druckenmiller

I took away three things from this quote.

✔️First, it reflects the mentality of a long-term trader as opposed to an investor.

Druckenliller’s focus is on price movements over the next 18-24 months.

That’s a far shorter timeframe than “forever”-the favorite holding period of Warren Buffett or Charlie Munger.

✔️Second, despite his extraordinary track record, Druckenmiller is far from infallible. He famously bought $3 billion in tech stocks at the very peak of the market in February 2000. He’s also made a number of bearish calls over the past decade that have been wrong.🎲

✔️Third, think of Druckenmiller’s quote when analyzing a stock like at NVIDIA. Scenario plan NVDIA’s earnings and market position in 2025 -2026.

What will the competitive landscape be?

Is it possible for a stock to grow into a valuation that justifies its trading at 35x sales?

“Never say never.”🤭

But as Scott McNealy’s famous quote on SUN Microsystems suggests, NVDIA is about as close as it gets.

And yet… Druckenmiller himself is famously long NVDA - and expects to be for two or three years.

Go figure.

One Big Short 2.0

Deja Vu or Delusion?

Big Short hero Michael Burry is making waves again with a massive $1.6 billion bet against the stock market.

Burry famously predicted and profited from the 2008 housing bust. That netted huge profits for his investors. He catapulted him to fame when chronicled in Michael Lewis’ “The Big Short.”

Later, he was immortalized on the silver screen with Christian Bale playing him in the movie adaptation.

Yet since 2008, Burry’s calls have been hit or miss.

He’s wavered between bullish and bearish over the years. And his doomsday predictions have stubbornly refused to pan out.

What’s more, an investor buying the S&P 500 after his warnings would've scored 34% annualized gains.

Making 34% per annum zigging while Burry tells you to zag is hardly a ringing endorsement.🤔

Now, SEC filings show his Scion Asset Management snapped up put options on the S&P 500 and Nasdaq 100.

Specifically, Burry bought puts on S&P tracker SPY worth $866 million and on QQQ, which tracks the Nasdaq 100, worth $739 million.

Put another way, he’s betting 90% of the face value of his portfolio that stocks will fall hard by the end of the year

So is Burry’s big new bet a brilliant contrarian call or another dud?

Time will tell.

But I'm skeptical of any investor's consistent prescience- whether that is Burry or Druckenmiller.

Time has been unkind to other market one-hit wonders like Ellaine Garzarelli (1987 crash) and Hank Paulson (short MBSs in 2008).

One Outlook

Media Doom and Gloom

Online news media outlets are fighting a war to grab readers' attention. Sensationalized "clickbait" stirs up strong emotions rather than informs.

The data confirm this.

➡️ The use of anger-inducing headlines has skyrocketed 104% since 2000. Fear-based stories have jumped 150%. Disgust is up 29%. Sadness by 54%.

At the same time, neutral and positive news coverage has declined. The shift toward gloom and doom pander to our instinctive response to threats.

➡️ The negative news elicits stronger reader engagement. People are likelier to click, share, and comment if angry or afraid. No wonder media companies ignore neutral and upbeat stories in favor of the negative.

➡️ The media ignores the rise of negative coverage.

The media relies on itself for oversight and accountability. However, reporting these distortions highlights an industry-wide conflict of interest. Pointing out these distortions militates against their interests.

The bottom line?

Media value clicks over journalistic ethics and quality. Such practices border on predatory. They deliberately manipulate our emotions.

Keep that in mind before succumbing to the tyranny of the negative headline.

Source: Via Maverick Research on Substack

Titanic Tumbles

The 25 Worst Stocks in Modern History

Among publicly listed U.S. companies, the 25 worst stocks have lost shareholders a collective $1.2 trillion since 1926.

Put another way, just 0.1% of all stocks have led to 14% of all cumulative losses in shareholder wealth.

Among the 25 worst-performing stocks since 1926, three key factors emerge as contributors to massive shareholder losses: fraudulent accounting practices, overhyped IPO valuations detached from profitability, and challenged industries prone to unrealistic growth claims.

Among the 25 worst-performing stocks since 1926, three key factors emerge as contributors to massive shareholder losses: fraudulent accounting practices, overhyped IPO valuations detached from profitability, and challenged industries prone to unrealistic growth claims.

 By understanding these red flags, shareholders can protect their portfolios from the next WorldCom-like wipeout.

➡️1. Accounting Fraud Led to Massive Losses

Among the 25 worst stocks since 1926, accounting fraud is a common thread leading to massive shareholder losses.

Companies like WorldCom and Lucent Technologies relied on fraudulent accounting to inflate financial results.

➡️2. Overhyped IPOs Disconnected from Profitability

Recent IPOs like Rivian, Coupang, and Doordash entered markets with enthusiasm disconnected from profitability. High valuations without profits are a recipe for losses.

➡️3. Struggling Industries Overrepresented

Specific industries, like telecoms, are overrepresented among the biggest shareholder wealth destroyers.

Eight of the 25 worst stocks belong to telecoms that struggled with surplus capacity and pricing pressure.

WorldCom claimed it was managing these industry trends better than competitors. In reality, it was cooking the books. While sector downturns impact all firms, unrealistic growth claims should raise skepticism.

Conclusion

In summary, fraudulent accounting, overhyped IPOs, and challenged industries contributed to the 25 worst stocks, destroying over $1 trillion in shareholder wealth. With vigilance for these red flags, shareholders can avoid losing wealth on déjà vu's next WorldCom.

One Fake Genius

A $30 Billion Fraud

Sam Bankman Fried (SBF) recently had to give up his comfortable digs on the Country Club that is Stanford’s campus for prison, Brooklyn.

SBF had been under house arrest since the collapse of cryptocurrency giant FTX in November 2022.

Before his Phoenix-like rise and fall. Sam Bankman-Fried was the world’s youngest billionaire and crypto’s Gatsby. Who was this rumpled guy in cargo shorts and limp white socks who catapulted, practically overnight, onto the Forbes billionaire list"?

You can expect to hear more about SBF in the coming weeks with the October 3^rd release of Michael Lewis’ new book on SBF- Going Infinite: The Rise and Fall of a New Tycoon

Until then, I recommend this documentary, available for free on YouTube.