Invest-ability Daily 27/10/21: Tesla-mania

Why Tesla’s surge should remind us to embrace our inner bear

I didn’t want to write about Tesla this week, mainly because everyone else is. But I suppose you can’t really ignore the craziest story that I can ever remember in the stock market history that I’ve experienced – and I worked through the dot com boom and bust. After a 15% jump this week Tesla is now a trillion-dollar company, and that matters to all investors, whether you like it or not and even if you don’t have any direct exposure to it.

Firstly, I think I should say that I admire Tesla’s rather eccentric founder, Elon Musk. The man has transformed several industries already – payments, space transportation and cars – and threatens to do so again with communications via Starlink. He is the epitome of the modern entrepreneur – big thinking, hardworking, technically minded, always questioning, comfortable with risk, and fair. And he is a master of the image – even when Tesla shares took a beating when Mr Musk was filmed smoking the devil’s lettuce with podcaster Joe Rogan, you couldn’t help but admire his chutzpah. That’s no doubt what has helped make him a favourite of the meme investing crowd – and, like them or not, they are a powerful force in today’s markets (for now at least).

All in all, Musk is a hard man to bet against, which is perhaps why so many people no longer do – short positions against Tesla’s shares have fallen to the lowest level since the company came to market in 2010, and anyone still hanging on will be deep in the red after this week’s move that took the company past the trillion-dollar mark. Even the famously persistent Michael Burry of Big Short notoriety has given up.

It is, however, still very easy to make a case against Tesla – or, at least, against the valuation ascribed to it. The latest move skywards came after the company revealed an order for 100,000 vehicles from rental company Hertz, worth around $4bn. That’s a nice lump of business, which will help it get to its target of 1m cars this year. But as many people have pointed out, that still means it’s market cap equates to a million dollars a car.

That’s far in excess of any other carmaker, and I’ve always had my doubts that Tesla would be the company that really brought electric cars into the mainstream, even if it had been the first company to thrust them into the public eye. Once the vested interests and sunk costs elsewhere in the broader industry had been worked through, I felt that one of the big guns would take a concerted stab at the electric car market and leave Tesla in the dust. I’d put a few quid on Volkswagen being one of them – it’s planning for 50 per cent of production to be electric by 2030 and 100% by 2040.

I may be missing the point that Tesla is far more than just a carmaker, and that it’s light years ahead of rivals in developing autonomous vehicle software – and as I wrote last week, self-driving vehicles do indeed have the potential to be transformational to the logistics industry in particular. But right now, it’s still anyone’s guess when truly autonomous vehicles will be road-ready, unless you happen to be Missy Cummings, new senior adviser for safety at the National Highway Traffic Safety Administration, who has regularly suggested that it won’t be any time soon. Let’s just say she isn’t a fan.

Musk and other Tesla supporters have dismissed her scepticism out of hand, which is partly why I’m writing this – because it shows that just how much division there is when it comes to the stock market’s biggest names (Facebook being another) and how much confirmation and endowment bias is at play. Basically, if you don’t like something that someone says about a share you own, simply shout it down. And given its prominence in many a passive investment vehicle, many people now own Tesla and are shouting down the bear case.

So, here’s an idea – instead kick the tyres of shares you own, ask difficult questions, stress test the story (which a lot of the time is all many an investment case is) and embrace the bear case to see if you’re still happy to go along for the ride. It might save you a messy pile-up when fundamental reality eventually replaces meme-power as the sensible basis upon which to invest. And that could come a lot sooner than EVs replacing the world’s internal combustion engines.

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