My Biggest Win & Loss of 2022
Missed on Russia, Hit Big On Carvana.
My Biggest Win & Biggest Loss in 2022
This has been one hell of a year to be an investor in the markets. It certainly has been the year for long volatility and while I welcomed all of it, and hope that it stays, there was a big miss. Reflecting on the biggest loss and biggest win this year is something that helps me to understand where I could have done better and I figured sharing it here would help me, and maybe you as the reader as well.
When we started this year I was spending my time in Puerto Rico where I've moved part-time (and may be full time pending more thought).
I was well aware of the potential war starting in Ukraine and I was in tune to what the Fed was doing.
But even with what I deemed to be a handle on markets I got one trade wrong and at that, really, really wrong.
I remember that day. It was a Sunday and I was out in Old San Juan having drinks with friends.
Which, is a big change for me but considering the time zone down here it makes it easier to enjoy the weekends because I don't have to be up at 4am to prepare for the day.
When that news hit I instantly, and I'll explain this in a moment, got on the horn and shorted some WTI Crude light near $130s.
And over the next week I started to look around.
I worked in this idea of inflection investing into my framework over the past two years after chatting with another money manager who spoke to me about it.
In essence, I look at situations where there is an inflection or catalyst set to occur.
Mispriced assets or situations where a position can be taken where Wall Street misses the idea entirely.
Now that can be a company, macro-view or a specific situation in general, not just say, a CEO change or a product change.
In this case it was Russia.
I took a position via $RSX call leaps. The way I saw it was that this would be resolved relatively quickly, and further, that the market was missing something.
That idea, in part, turned out to be right on the oil short - but it was not a max risk or even quarter risk position.
But on $RSX that idea failed and it turned out I was the one who missed something.
$RSX, and many other Russian listed securities, we're delisted.
The thing with inflection points is that if you can get it right you are in early and can see larger returns.
But, if you are wrong, you can lose a little.
The issue with $RSX is that it was delisted which means the investment is market to a $0.
Not much you can do and a hard lesson.
I will say this and this has been a part of my risk management structure is that I am certainly glad that, even with my inflection thesis, that I deployed the trade via LEAPs.
By that, my risk was quantified so while it still hurt to miss, the loss was mitigated.
The hard part about missing is the mental capital that is spent and I'd be lying to you if I said that (even with that WTI Crude short working out well) it did not mess with me to start the year.
It put me in a hole on my returns and starting the year like that is not ideal.
But, I'll say this, the younger me would have whined and complained about it and not pivoted to 'fighter-pilot' mode.
And I am glad I did because that same month is when I began my short campaign on Carvana, which, has been the best trade for me in 2022.
https://thelongvol.com/2022/05/11/carvana-the-masterclass-scheme/
There were some solid wins this year being on the right side of the markets. We saw a lot of technical inflections made in both equity indexes as well as individual names and sectors.
Carvana and the auto-industry, at large, started a bearish inflection which is likely in the 6/7th inning, in my opinion.
Now this idea on Carvana was something that I had been tracking for a few years mainly because I know a bit about their past and the entire dual stock class structure, among other items, put it on my 'shitco' list.
Well, we had a catalyst that started to begin in November 2021. The Fed notes started to (quietly) discuss rate hike potential.
Given the used car market being cornered by Carvana and the fact that, even in a bullish used car market, they had still been losing money.
I said something similar a year ago which Forbes quoted in a recent article.
Growth companies, which Wall Street deemed Carvana to be, can lose money for a while but eventually they need to earn a profit.
We were in an era of these ShitCos that were able to thrive in a zero-interest rate environment.
And take a look around, Carvana was not the only one to suffer, a lot of growth companies have seen their valuations crater.
However, in the case of Carvana the inflection was the fact that interest rates were rising and that they were very close to being out of cash.
I began the short in February small.
But the death blow came when Apollo and PIMCO picked up their bonds and it was the deal-terms on those bonds that clued it in, ergo, I increased my short position.
This ended up being a max risk position for me as I was pretty convicted in this. The one thing that did concern me was as we got to $30's that it would turn into a $AMC/$GME situation.
Which, it sort of did on a short, but brief short-squeeze.
The market usually tells you when to exit and in this case I was confident that it was a $0 which is why I had a re-short after that but, even then, the big short was all but over.
The interesting thing of this particular idea is how so many institutions got it wrong and by that I mean major 'value investing' hedge fund guys.
For me, it provides me (humbly) more confidence in my hedge fund as I open it up publicly in Q2 next year.
I will say this as it relates to catching the start of inflections.
In the case of Carvana catching this in Feb-April was key, before the market, at large, realized what was going on.
Today, everyone is discussing it which makes the short harder to execute to do the threat of short-squeezes, higher borrow fees and higher implied vols on the options chains.
So, inflection based themes do work, both positively and negatively.
Conclusion
2022 was certainly interesting for a lot of cycles that have ending and eventually, in certain sectors, are just starting to begin again.
I do think that we're going to continue to see a lot of volatility going forward for 2023.
And I certainly do not believe that passive management is coming back for a while, in fact, Howard Marks agreed in a recent note he put out.
That's a positive for an active fund manager like me so hopefully I am catching the start of an active investing inflection as my hedge fund gets out of incubation and ventures out into the world.
This article is presented for informational purposes only, is an opinion, and is not intended to recommend any investment, and is not an offer to sell or the solicitation of an offer to purchase an interest in any current or future investments. Any such solicitation of an offer to purchase interest will be made by a definitive private placement memorandum or other offering documents.
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