Friday I suggested an Excel spreadsheet that would let you plug in any WheelTug / Borealis assumptions you wanted.  Thanks to Patrick Johnson, here it is.  (Can I just take a moment to say how great it is to have a Patrick Johnson?)

The most important variable is: “chance of success.”  My scary smart friend Chris Brown thinks it should be set to below 3%.

Aristides’ Chris Brown:  “As of now, they have deals signed with those 14 airlines, but no orders have been booked.  I won’t further analogize to other companies that have used metrics other than orders for the purpose of generating investor excitement, but it is a huge distinction and deserves to be mentioned.  I believe they have less than a 3% chance of commercial success.  My estimate is based upon similar companies with a long history of operating losses, spectacular claims of expertise and innovation in many fields, difficulties with securities regulators, essentially no institutional ownership, and non-traditional forms of financing themselves. But I am rooting for myself to be wrong. Would love to see you strike it big.”

If you plug in 2% as the chance of success (being the first number I can think of offhand “less than 3%”), it seems to me you should then plug in 5% as the discount rate — or whatever rate you expect to be earning on risk-free assets in the years ahead — because the “risk” here was already taken into account by setting the odds of failure at 98%.  In that scenario, if you stick to the rest of the assumptions pre-loaded in the spreadsheet (though feel free to change them), the stock today “should” be selling for $8.  Give it a 20% chance of success — still low, but 10 times as great — and today’s stock price, reasoned through in the same way, “should” be $78.

“Less than 3%” is a sobering assessment, and Chris — while having no special knowledge of this particular situation — is not someone whose opinion is to be taken lightly.

But I still think he’s wrong.  At least when it comes to his phrase “spectacular claims of expertise.”  I know what he means; and 14 years ago I saw this as a red flag, too.  But at least one of those claims — this revolutionary electric motor technology — seems now to be well past the “claim” stage: you can see videos where it is successfully driving a Boeing 737.  Can your electric motor fit inside the nose wheel and do that?

And what about the WheelTug partnerships with players like Parker Hannifin and so many others?

To that one, Chris replies: “Uni-Pixel the first time around had a deep partnership with Samsung (which failed). The second time around it had preferred customer agreements with Intel and Dell (who were actually paying UNXL millions of dollars up-front, before any product was to be delivered), and a manufacturing JV with Kodak. Still seems to have failed.  Your brain is prone to over-stating the pre-test probability of success here because you’ve experienced so many successes in your life. It’s just a hard-wired heuristic error. If you took the sample in a different mathematical way, for example, what % of companies with a $50-100 million market cap and no revenue headquartered in Gibraltar eventually achieved a $1 billion market cap, you’d come up with a very small pre-test probability of success, so even when you added in the aspects of the story that are favorable to you, you’d still come up with a very low post-test estimate of success.”

Chris recommends Daniel Kahneman’s Thinking, Fast and Slow, $2.95 for the e-book version.

Amazon Best Books of the Month, November 2011: Drawing on decades of research in psychology that resulted in a Nobel Prize in Economic Sciences, Daniel Kahneman takes readers on an exploration of what influences thought example by example, sometimes with unlikely word pairs like “vomit and banana.” System 1 and System 2, the fast and slow types of thinking, become characters that illustrate the psychology behind things we think we understand but really don’t, such as intuition. Kahneman’s transparent and careful treatment of his subject has the potential to change how we think, not just about thinking, but about how we live our lives. Thinking, Fast and Slow gives deep–and sometimes frightening–insight about what goes on inside our heads: the psychological basis for reactions, judgments, recognition, choices, conclusions, and much more.  –JoVon Sotak

I have a great friend who sees probabilities in a different (and spectacularly wrong, though endearing) way: something will either happen or it won’t, so there’s a 50/50 chance either way.  No, I keep telling him . . . but in this case, I wouldn’t mind terribly if he were right.  With a 50% chance of success and an arguably aggressive 20% discount rate (aggressive on the theory that you’ve already accounted for the risk by assuming a 50% chance of failure), the stock “should” be $100 today.

One interesting thing about probabilities of this sort is that we’ll never know whose weighting was fairest.  Chris could be correct in assessing the chance of success at 2% — even if it succeeds!  But how can you tell whether it should be 2% or 20%?  Or 50?

I own a ton of this.  I wouldn’t dream of selling any here.  I think the chances of success are way higher than 3%.  But I wanted to be sure you had the benefit of Chris’s thoughts — and a spreadsheet to plug in assumptions of your own.



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