Carvana - A Lesson in Game Theory
If you followed me at all over the last two years you know I was one of the first big shorts in Carvana.
I’d been tracking this name for the past 4 years waiting to short it heavily. (at least what I thought was ‘big’ at the time)
In Feb 2022 I got my chance and in April of 2022 I got my chance to add to it.
But I had covered most of it near $30s on the into April and May because I was scared to hold because of short squeezes.
That squeeze happened in June 2022, and it’s happened again here in 2023.
The point of this post is to discuss the idea of game theory a little when it comes to trading the markets.
You see, there are two sets of traders out there, at least as how I see it.
You have the day trader dildos who look at price charts and indicators and all they see is price. They don’t know what a company does, why it does it and to them it’s just price on a screen.
You have fundamentally driven traders/investors. People that understand macro, balance sheets, how all of this actually really works.
The thing is this. Neither one of them is really right.
It takes a combination of both, in my view, to do this.
Was the company fundamentally worthless last year? By standard accounting, pretty pretty close.
It traded to $3.55.
But in this environment (and I’d argue throughout human history) defining value of something is not always that clear.
Game Theory Applied
Markets are irrational.
So, part of that short and part of that stock at this point is this idea that game theory applies to it.
Here is game theory as defined by Britanica:
game theory, branch of applied mathematics that provides tools for analyzing situations in which parties, called players, make decisions that are interdependent. This interdependence causes each player to consider the other player’s possible decisions, or strategies, in formulating strategy. A solution to a game describes the optimal decisions of the players, who may have similar, opposed, or mixed interests, and the outcomes that may result from these decisions.
So, in certain situations, you have to consider the outcomes and decisions of other players at the table.
In this case the other traders/market participants.
It's not a secret; we’re in an era where retail trading has exploded.
It’s the reason I covered most of that position back in May/June 2022.
Because of the fear of a squeeze, not because my short thesis changed.
And that’s true today. YTD that stock is up massively.
And most people buying it don’t have a clue why or (and this matters more) care why.
To them it’s up and that’s all that matters.
And can you be mad at it? No, not really.
All you can do is navigate it and take part in it because that’s where the edge is.
And what are you going to do, argue with that?
How can you?
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A Change in Perspective
The last 3 months or so I’ve had a huge change in perspective on my trading playbook because of this.
There was a trader I know who cleared about $2 million the past 2 months on Carvana long. He loaded up because of the short interest and the idea that people we’re going to squeeze it.
I can’t even be mad at it. Here is is, made more than I did from $150-$30 (on my short0 and he traded it better.
The change it had for me requires me to be part ‘day trader dildo’ - where I just see price and situations and capitalize on them and part fundamental/macro investor.
That’s the best mix.
And for me that’s hard to do because running a book over the years of risk made me run it from a portfolio manager perspective.
Where there had to be weighting of what positions were in the portfolio, max position sizes, thought and reason behind the ideas - all of which I had.
But for me to excel back to larger, shorter-term gains, there had to be a complete change to the playbook.
Being a trader and being a portfolio manager are two different things.
I know a lot of REALLY REALLY smart investors and PMs but that doesn’t always translate into profits/P&L.
So, the fine mix of separating trading v. investing is key and that is incredibly hard to do when you tend to “know too much” because you see what actually should happen and have to reconcile that with what IS HAPENNENING.
The great ones can make that change.
You can talk about systematic trading, back testing or whatever you want but without taking into account other factors, like market participants, you miss a big part of the puzzle.
Do I still think Carvana equity is close to worthless - legitimately, yes.
Will there be a time that it trades sub $10 again? Yes, I certainly think so.
But is it worth fighting the market on this with any size right now?
You have to play the other players at the table sometimes and not your cards.
This is one of those situations.
Thanks for reading.
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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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