Oh yeah baby. This the post you have not been waiting for – all Tesla all the time. Here are three things about Tesla I think I am thinking about:
1) Tesla and short-termism. So, Tesla is talking about going private. The main reason for this is supposedly because the stock creates all sorts of short-term distractions that are not aligned with the long-term goals of the company. I always find this to be an odd view. If you want long-term shareholders who don’t get distracted by short-term noise then be more explicit about the type of investors you want. This is precisely what Warren Buffett does. He does not cater to short-term oriented investors and Wall Street with their conference calls and analyst demands. He realizes that the business of Wall Street research is big business that can create a conflict of interest between the way the business is run and the way the stock is perceived. He’s always been very clear about this and he attracts a more long-term oriented shareholder as a result.
Now, that’s easier said than done when your stock is heavily shorted because the shorts have to constantly put pressure on the company because being short stock forever is a losing game. In other words, short sellers are inherently short-term. But the answer there is that you have to deliver better results. For instance, if Tesla is indeed going to be profitable in H2 of this year (as they claim) then you’d think that that would be enough to kill the shorts and satisfy long-term shareholders. But all of this makes me think that Tesla is not in fact going to be profitable and that the pressure from shorts will remain warranted as a result. In other words, the short-term pressures aren’t going away because Tesla quite simply isn’t succeeding at the rate that they were expected to. So Tesla has no other option than to worry about short-termism if they remain public.
This brings us to thought 2….
2) Tesla and advertising. Tesla has a $0 marketing budget. They rely entirely on word of mouth and organic news to generate buzz about their business. This is really interesting in the scope of the stock market because nothing generates buzz quite like Tesla stock and the way Musk talks about the stock. You could make a strong argument that Tesla’s most valuable asset is actually its public stock price because it is a near daily source of media attention.
Now, you might say that Uber or AirBnB are also private and they have no problem generating buzz. Sure, but they also spend boatloads on advertising so it’s an apples and oranges comparison. The auto industry is an intense battle for consumer eyeballs. The big automakers spend billions on advertising every year. So having a big fat zero on the marketing expense line is a huge advantage and much of the buzz around Tesla comes from the fact that it’s a public company that is constantly being talked about.
But there’s a problem here – let’s go back to thought 1. If the stock is a primary source of media attention then the business is largely dependent on the stock being public. Which would mean Tesla has its own short-termism conflict here – they need the public stock because of the buzz it generates and the short-term media attention it drives. But the stock is also a huge distraction to the business of Tesla even though the stock is a source of media demand that drives demand to the real business.
So here we are. Now we have to scratch thought 1 because Tesla cannot think long-term because their advertising relies on being short-term. And so going private could potentially hurt the company in more ways than it helps because the public stock is a constant source of media buzz and advertising. GAHHHHH!!!!
This is getting too complex so let’s move on to thought 3….
3) Tesla and Indexing. Now, I have to make a confession here. I have a general theory about private companies:
no one knows as much about a company as the people who run that company. And even they know less about how to make that business succeed than they probably think.
I can’t tell you how many times I read an article by a financial journalist or market pundit and roll my eyes at how they’re telling someone to run their business. It goes against everything we know about beating the market and stock picking and how virtually everyone is bad at it. Sure, someone’s gotta run businesses, but as a business owner I know that the best people to manage and make decisions about those businesses are the people with intimate knowledge about that specific business. The rest of us should mostly just shut up and kick back.
This is, in short, the entire basis for indexing. None of us can really predict how a business will do better than the people running it so most of us are better off keeping our mouths shut about this stuff. Yeah, it’s fun to spout off and theorize about these things and I certainly love/need feedback about my company, but the reality is that no one really knows what twists and turns will come about that impact Tesla in the future. Elon Musk doesn’t even know, even if he knows better than the rest of us.
So, in many ways, Tesla is a perfect case study in why you shouldn’t pick stocks. At first they were the impossibly small competitor in the world’s most competitive industry. Then they were an outside bet on a world changing type of vehicle. Then they became the most expensive stock and widely shorted stock on the market. Tesla stock has fooled people at every step of the way.
So, I guess what I am saying is, ignore everything I’ve written here and just buy an index fund.
Mr. Roche is the Founder and Chief Investment Officer of Discipline Funds.Discipline Funds is a low fee financial advisory firm with a focus on helping people be more disciplined with their finances.
He is also the author of Pragmatic Capitalism: What Every Investor Needs to Understand About Money and Finance, Understanding the Modern Monetary System and Understanding Modern Portfolio Construction.