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1/ Short treatise on $tsla price hysteresis: Functionally overpriced products sell to status niche valuing rarity, via fashion signalling (“I can afford to blow money for show.”)
2/ A price drop to increase sales must be large enough to generate news to reach buyers who weren’t able/interested at previous price point. Sales spike briefly as marginal buyers are attracted by news, then decay back to equilibrium level.
3/ This process can repeat a few times before pattern is noticed and each sales spike will be lower. And the residual image of exclusivity starts to wear down as more and more downmarket products are seen with declasse people.
4/ Status brand analogy to story stock price: a stock trading at multiples of fundamental valuation on a narrative will decline in steps, each major decline generating news that attracts BTFDers. Succeeding declines generate lower new interest until pattern becomes clear.
5/ Index funds are cheap to manage and generate little trading. As component stock prices change each position’s value “manages itself.” Trading costs used to be high and sales still generate cap gains and losses which can irritate taxable customers.
6/ But bubble valuations of some components will destroy value in a Black Swan decline, as int’l index funds holding big Japan positions discovered in 1992. And punishment of disciplined value investors by Fed ZIRP has depleted their number and influence.
7/ “Style” funds of major fund families are more than ever hidden index funds, buying a roughly cap-weighted basket of issues more or less close to their stated style. In practice the performance goal is *not to underperform,* since for most customers stickiness and inertia rule.
8/ Clients redeem funds en masse when you underperform similar funds by an amount large enough to be notable. And falling AUM is deadly to fee revenue. Fund managers who can outperform have been able to start their own hedge funds for two decades, hollowing out fund companies.
9/ No one working the big families now is that rare bird, the consistent alpha generator. Many funds now buy and hold “names” deemed to be growth stocks without much analysis of fundamentals. By not looking under the hood $tsla can be held as a technology growth company.
10/ Every incentive to ignore negative news is in place until the news gets so bad fund holders start to redeem *because* they look for the name in your holdings and question your judgment. $tsla is reaching that point. So funds are exiting.
11/ A name signalling shiny future prospects becomes a name associated with loss and failure. The sales channel where there is still some skeptical diligence (bonds) doesn’t care about that, but has credit quality concerns. The “float on a cloud of PR” game is ending for $tsla.
