It's easy to dismiss this as luck. It's maybe some luck, but also a non-trivial amount of skill. Same for buying and holding Bitcoin early and not selling on the way up. There are people who have a knack for knowing when to get in early, or for constructing the right narrative. It's too easy to dismiss such success as luck and ignore the skill element.
It's possible to have rationalized that Carvana would benefit from the trend of rising interest rates and middle/lower class being forced to sell their cars that they bought during Covid, at fire sale prices to Carvana's benefit.
Covid saw a surge in car sales due to stimulus checks and low interest rates. As the stimulus spigot stopped and interest rates surged, living expenses also surged, as did interest on debt. This forced buyers sell their cars at unfavorable prices to resellers like Carvana, who are able to resell at a profit.
This is an economic narrative that I only rationalized in hindsight, but someone who was smart enough could have done so 1-2 years ago before the stock had gone up so much.
One of the comments mentioned that he has another 60 million in another account.
Regardless, when looking at trading this size, despite superficial framing of the post it begs to be looked at through a professional lens. I'm not an expert on Carvana, but I have run an institutional account and have traded Carvana on and off over the last five years.
The first notes that come to mind:
Trading necessarily involves "luck and skill", although there are more suitable frameworks and metrics to use. Every trade thesis and every position has uncertainty. Even the best minds in trading, like Drunkenmiller, bat about 60% on trades that a group of high performing individuals may bat 55% on. The core of trading is generating alpha/edge and managing risk. The latter is arguably more important, since baseline returns of financial assets (beta) already has built-in positive expected value/compounding.
>There are people who have a knack for knowing when to get in early, or for constructing the right narrative.
I would agree with that, although some may disagree. In short, there is some art. I love constructing narratives, and I love having a dynamic (dare I say fun/stimulating?) array of starter positions. It keeps the curiosity and exploration aspects alive in a grim world where spending a life staring at banks of screens burns most people out.
That said, it's not enough. The artistry, assuming it's even there, is not enough. The world is path dependent, uncertain, has fat tails (on both the upside and downside) and stories like this always have survivorship bias. People often want to talk about the success cases rather than the cases where things go the other way. My best casual trading friend lost everything because he got hyper-focused on a thesis like OP did. Very heart-wrenching. The sad thing is, he was right, and it later turned out that the name we were shorting was heavily influenced by the soon-to-transpire 100 billion dollar Archegos blowup. During the 2020 meltdown, I remember seeing a flood of activity a few minutes before market close, and it turned out to be the liquidation of one of the big volatility trading firms in Chicago. Entire floors of people instantly without a job, due to a tail event and bad risk management. And that's what it comes down to, risk management.
17->54 is a 3x return. The numbers are big so it's a great story to read but a 3x return on a trade is not that outlandish, especially if you have a thesis that has an edge. In trading, it's better to look at trades in the term of R, which is loosely a quantified word for risk versus return. On a portfolio level you can look at sharpe ratio or even better something like Sortino which takes into account drawdowns. Good trades have high R. Good traders have smooth returns without major drawdowns. Lose 50%, gain 50%, and you're not back at par. If you are trading volatile assets, you need to be monetizing the volatility. You need to be anti-fragile as Taleb would put it. Volatility and risk in a portfolio or even in a trading position can be seen as something that has a budget. After all, it's extremely easy to lever up something like Berkshire 200-300%. Returns need to be viewed through a risk-adjusted lens. So now that we're looking at the story a bit more rationally and the right juices are flowing, here's the issue that is just impossible to get past.
97% drawdown.
Even if the thesis is amazing, even if the trader has artistry, " riding out" a 97% drawdown is too much. It's a failure of risk management. It's great that he's apparently living in the best of all possible worlds, but even if someone has edge and high conviction, this is just an unforgivable red flag. Nobody is right 100% of the time, and if you are taking 97% drawdowns, you need to be right 100% of the time to survive. Yes, sometimes it can be appropriate to take large concentrated bets, but I'm almost certain that this is a case of poor risk management. This looks like the equivalent of going "Full Kelley" (Kelley Criterion is a mainstream and generalized quantified framework for bet sizing that traders and poker players necessarily have an intuitive understanding of). You never go full-kelley because there is uncertainty and the information that you are using as an input. The equation will spit out that you should be taking 100% bets with every favorable coin flip/poker hand if you go Full Kelly and don't modify the utils that you are optimizing for. Uncertainty doesn't just exist in outcomes. It also applies to what you believe and the theses is that you create. They are beholden to outside forces and your own ignorance and biases. Let's take your thesis that you backwardly constructed (which is a prescient point - financial media and discussions often focus on backward constructed narratives, when it's often best practice to reconstruct how the world was before you knew, and analyze if it was a positive expected value and well-sized bet taking into account other outcomes that could have happened but did not. There are some very important variables that I was also considering alongside the generalized sort of thesis that you had when I was trading this name. The capital stack was incredibly important because they are loaded on debt and debt markets were chaotic and unpredictable during COVID and during the hiking cycle. We could have seen stagflation, the Ukraine war could have spurred another supply chain crisis because of energy inputs, etc. There was a lot of uncertainty in places like geopolitical risk (places that are very unpredictable that was feeding straight back into things like Fed policy response). The insiders are convicted felons and while I won't pursue this path, they were unloading a massive amount of equity and unless OP has had backroom discussions with the Garcias, there was always a lot of grey area around this area, even if OP had informational edge. The name was also a hedge fund hotel and illiquid, so flows were extremely important. Once some classes of hedge fund and players exposed to certain factor baskets reversed, the name was extremely vulnerable to massive moves. Because they had to roll debt, these factors directly impacted their ability to do things like issue converts and put the company's solvency at risk. Etc. As for how this played out, it was very much a Goldilocks scenario as far as the economy went and especially when it came to what the Garcia's were able to accomplish in their shady little world.
A trader can't be willing to take a 97% drawdown in a company that is run by convicted criminals, a company that has extreme levels of debt that would go bankrupt if they can't refinance, etc. I rode out a 75% drawdown in a large concentrated bet not too long ago, but I was dynamically hedging it and only took a 25% drawdown on the position over the year that the drawdown was happening in the underlying. As soon as catalysts started to reverse, I lifted the hedges and continued trucking along. If you are talking to insiders or running a blog and apparently have some sort of informational edge, you shouldn't be taking 97% drawdown. It doesn't add up.
Maybe the other 60 million that he didn't talk about is an amazing low-vol portfolio that outperforms the greater market, and when you add that to this position, it sums to a great risk-adjusted return profile. All I can say is, I strongly doubt it, but hey, the world is uncertain so who knows. As for my view, hopefully they take their money from the casino pull and put it somewhere anti-fragile that compounds.
It's possible to have rationalized that Carvana would benefit from the trend of rising interest rates and middle/lower class being forced to sell their cars that they bought during Covid, at fire sale prices to Carvana's benefit.
Covid saw a surge in car sales due to stimulus checks and low interest rates. As the stimulus spigot stopped and interest rates surged, living expenses also surged, as did interest on debt. This forced buyers sell their cars at unfavorable prices to resellers like Carvana, who are able to resell at a profit.
This is an economic narrative that I only rationalized in hindsight, but someone who was smart enough could have done so 1-2 years ago before the stock had gone up so much.
Regardless, when looking at trading this size, despite superficial framing of the post it begs to be looked at through a professional lens. I'm not an expert on Carvana, but I have run an institutional account and have traded Carvana on and off over the last five years.
The first notes that come to mind:
Trading necessarily involves "luck and skill", although there are more suitable frameworks and metrics to use. Every trade thesis and every position has uncertainty. Even the best minds in trading, like Drunkenmiller, bat about 60% on trades that a group of high performing individuals may bat 55% on. The core of trading is generating alpha/edge and managing risk. The latter is arguably more important, since baseline returns of financial assets (beta) already has built-in positive expected value/compounding.
>There are people who have a knack for knowing when to get in early, or for constructing the right narrative.
I would agree with that, although some may disagree. In short, there is some art. I love constructing narratives, and I love having a dynamic (dare I say fun/stimulating?) array of starter positions. It keeps the curiosity and exploration aspects alive in a grim world where spending a life staring at banks of screens burns most people out.
That said, it's not enough. The artistry, assuming it's even there, is not enough. The world is path dependent, uncertain, has fat tails (on both the upside and downside) and stories like this always have survivorship bias. People often want to talk about the success cases rather than the cases where things go the other way. My best casual trading friend lost everything because he got hyper-focused on a thesis like OP did. Very heart-wrenching. The sad thing is, he was right, and it later turned out that the name we were shorting was heavily influenced by the soon-to-transpire 100 billion dollar Archegos blowup. During the 2020 meltdown, I remember seeing a flood of activity a few minutes before market close, and it turned out to be the liquidation of one of the big volatility trading firms in Chicago. Entire floors of people instantly without a job, due to a tail event and bad risk management. And that's what it comes down to, risk management.
17->54 is a 3x return. The numbers are big so it's a great story to read but a 3x return on a trade is not that outlandish, especially if you have a thesis that has an edge. In trading, it's better to look at trades in the term of R, which is loosely a quantified word for risk versus return. On a portfolio level you can look at sharpe ratio or even better something like Sortino which takes into account drawdowns. Good trades have high R. Good traders have smooth returns without major drawdowns. Lose 50%, gain 50%, and you're not back at par. If you are trading volatile assets, you need to be monetizing the volatility. You need to be anti-fragile as Taleb would put it. Volatility and risk in a portfolio or even in a trading position can be seen as something that has a budget. After all, it's extremely easy to lever up something like Berkshire 200-300%. Returns need to be viewed through a risk-adjusted lens. So now that we're looking at the story a bit more rationally and the right juices are flowing, here's the issue that is just impossible to get past.
97% drawdown.
Even if the thesis is amazing, even if the trader has artistry, " riding out" a 97% drawdown is too much. It's a failure of risk management. It's great that he's apparently living in the best of all possible worlds, but even if someone has edge and high conviction, this is just an unforgivable red flag. Nobody is right 100% of the time, and if you are taking 97% drawdowns, you need to be right 100% of the time to survive. Yes, sometimes it can be appropriate to take large concentrated bets, but I'm almost certain that this is a case of poor risk management. This looks like the equivalent of going "Full Kelley" (Kelley Criterion is a mainstream and generalized quantified framework for bet sizing that traders and poker players necessarily have an intuitive understanding of). You never go full-kelley because there is uncertainty and the information that you are using as an input. The equation will spit out that you should be taking 100% bets with every favorable coin flip/poker hand if you go Full Kelly and don't modify the utils that you are optimizing for. Uncertainty doesn't just exist in outcomes. It also applies to what you believe and the theses is that you create. They are beholden to outside forces and your own ignorance and biases. Let's take your thesis that you backwardly constructed (which is a prescient point - financial media and discussions often focus on backward constructed narratives, when it's often best practice to reconstruct how the world was before you knew, and analyze if it was a positive expected value and well-sized bet taking into account other outcomes that could have happened but did not. There are some very important variables that I was also considering alongside the generalized sort of thesis that you had when I was trading this name. The capital stack was incredibly important because they are loaded on debt and debt markets were chaotic and unpredictable during COVID and during the hiking cycle. We could have seen stagflation, the Ukraine war could have spurred another supply chain crisis because of energy inputs, etc. There was a lot of uncertainty in places like geopolitical risk (places that are very unpredictable that was feeding straight back into things like Fed policy response). The insiders are convicted felons and while I won't pursue this path, they were unloading a massive amount of equity and unless OP has had backroom discussions with the Garcias, there was always a lot of grey area around this area, even if OP had informational edge. The name was also a hedge fund hotel and illiquid, so flows were extremely important. Once some classes of hedge fund and players exposed to certain factor baskets reversed, the name was extremely vulnerable to massive moves. Because they had to roll debt, these factors directly impacted their ability to do things like issue converts and put the company's solvency at risk. Etc. As for how this played out, it was very much a Goldilocks scenario as far as the economy went and especially when it came to what the Garcia's were able to accomplish in their shady little world.
A trader can't be willing to take a 97% drawdown in a company that is run by convicted criminals, a company that has extreme levels of debt that would go bankrupt if they can't refinance, etc. I rode out a 75% drawdown in a large concentrated bet not too long ago, but I was dynamically hedging it and only took a 25% drawdown on the position over the year that the drawdown was happening in the underlying. As soon as catalysts started to reverse, I lifted the hedges and continued trucking along. If you are talking to insiders or running a blog and apparently have some sort of informational edge, you shouldn't be taking 97% drawdown. It doesn't add up.
Maybe the other 60 million that he didn't talk about is an amazing low-vol portfolio that outperforms the greater market, and when you add that to this position, it sums to a great risk-adjusted return profile. All I can say is, I strongly doubt it, but hey, the world is uncertain so who knows. As for my view, hopefully they take their money from the casino pull and put it somewhere anti-fragile that compounds.