re: just bought Tesla stock today at $357

quote:

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To be sure, bubbles -- and the crashes that follow when they burst -- are rarely defined by the armchair pundits who like to throw around these terms with abandon. The Harvard researchers employ the following definitions: A bubble is a sharp price run-up over a two-year followed by at least a 40% drop over the subsequent two years.

The probability of that 40% or more price drop rises as a function of the magnitude of the prior two-year return. When the price run-up is 100% or more, they found the probability of a crash becomes 50%. When the price run-up is at least 150%, that probability becomes 80%, and as price run-ups become even bigger, a crash becomes "nearly certain."

These probabilities are summarized in the table below. To put them in context, consider that Tesla's stock has produced a trailing two-year gain of 162%. Tesla's gain relative to that of the S&P 500 Automobile Manufacturers Index has been even higher, at 209%.

Price run-up over prior two years Probability of a drop of at least 40% over subsequent two years

50% 20%

75% 36%

100% 53%

125% 76%

150% 80%

The odds are even worse than this table suggests, furthermore, given several other factors that the Harvard researchers found to increase the odds of a crash. One is acceleration, defined as how much of the trailing two-year return came most recently. This clearly is a factor for Tesla, since it's only been in recent weeks that its stock has gone parabolic.

Another factor increasing the odds of a crash is an inflated price/earnings ratio. This also applies to Tesla, of course, since it currently doesn't even have a P/E, given that it lost money over the last 12 months. Its forward-looking P/E, based on estimated earnings per share over the next 12 months, is 85.7, according to FactSet -- more than four times higher than for the S&P 500 .

Note carefully that the Harvard researchers' model is not a commentary about Tesla as a company or its mission. Their model instead is solely based on past price performance

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