Tesla Motors (TSLA) is a bubble and is worth pennies in comparison to its current market valuation.
Tesla Motors will change the world; those that have already been burned shorting the stock have only begun to feel the pain that they will incur if they don’t cover now.
Those two statements are about as opposite from one another as you can get – and if you went and read any articles about Tesla on SeekingAlpha (not too many are published here on GuruFocus, which says a lot about the different crowds on the two sites), you could find a seemingly endless number of people in the comment section that are 100% certain that one of those two statements is undeniably true.
For those ready to tune out, don’t worry – this article isn’t about Tesla. I have nothing to add to the conversation: I can’t begin to understand the company’s technology, let alone estimate its sustainability (the company’s disclosure on patents in its 10-K doesn’t do me any good). What I’m more interested in discussing are the people who “know” how this will all play out. Now, I must admit, I’ve made one key assumption: I believe that most of the people discussing Tesla don’t have the first clue what they’re talking about, either from a financial (even rough, “back of the envelope” calculations) or technological perspective (quite important in determining the success – and sustainability – of Tesla’s business model); if you stop for a quick read of the aforementioned comments, I’m sure that you’ll agree.
The unfounded conviction of a seemingly large number of market participants despite any background knowledge or research (with TSLA being a prime example) is a truly astounding phenomenon. Unsurprisingly, the great investors of our time take a different approach, following the wise words of Thomas Watson Sr. – “I'm smart in spots, and I stay around those spots.”
In a Forbes interview in 1987, Phil Fisher said the following when asked about what kind of companies he liked: “My own interests essentially are in manufacturing companies that in one way or another can expand their markets by taking advantage of the discoveries of natural science. In other fields, such as retailing and finance, there are excellent opportunities, but I feel this is one where I am more qualified. I think a weakness of many people's approach to investment is that they try to be jacks of all trades and masters of none.”
This is astounding when we consider that Mr. Fisher made these statements at the age of 80, with more than half a century of investment experience. Even then, Phil Fisher still saw no reason to stray beyond his core competency (his success with investments in Motorola and Texas Instruments (TXN) over many years prove that was a wise decision).
Speaking of Mr. Fisher, another of his quotes is appropriate here. This is from the list that I wrote about the other day (here): “There are a relatively small number of truly outstanding companies. Their shares frequently can’t be bought at attractive prices. Therefore, when favorable prices exist, full advantage should be taken of the situation. Funds should be concentrated in the most desirable opportunities… For individuals, any holding of over twenty different stocks is a sign of financial incompetence.”
These concepts are related, if not one in the same: Many people attempt to become a jack of all trades, and as a result become a master of none. It’s much the same for the investor that owns a little bit of everything, and when all is said and done “owns” nothing; they’ve done a lot of buying and selling to end up in a spot that is essentially identical to what they could’ve achieved with no work and at a lower cost (trading, taxes, etc) via an index fund. In fact, studies have shown that, if anything, they’re bound to end up on the wrong side of the divide in comparison to the major indices due to poorly timed decision-making (buy high, sell low).
The solution is clear: concentration and conviction, with that conviction supported by analysis and facts; Berkshire Hathaway (BRK.B) was built upon those two pillars, and Warren Buffett’s most notable investments all fit the bill - from American Express (40% of portfolio after the salad oil scandal) to Coca-Cola (the investment was equal in size to approximately three years of operating earnings for Berkshire in the late 1980’s) to Burlington Northern (the purchase price is equal to ~10% of Berkshire’s current market cap). Charlie & Warren went big when they acted, and it’s paid off; even today, Berkshire isn’t the index fund that many paint it out to be: at the company’s current market capitalization of $265 billion, five names – American Express, Coca-Cola, Wells Fargo, IBM, and Burlington Northern (assuming a similar multiple to UNP, CSX, etc) – account for nearly 50% of Berkshire’s underlying value.
The point is that it’s okay to say “I don’t know” – but on the few occasions where you do know, act accordingly.
Very few people can make an informed decision about Tesla – on the buy side or the sell side (there’s a reason why smart people like Jim Chanos don’t short stocks based upon valuation alone). Figuring out the important questions that you should be asking – let alone answering them – is easier said than done; failure to address critical questions can leave you with a false sense of confidence, and lead to a permanent impairment of capital.
A great example is competitive threats: whether or not General Motors (GM), Ford (F), and others will stymie TSLA is simply unclear at this point in time - yet it’s a critically important piece of the puzzle; considering that GM spent more than $7 billion on R&D in FY2012, or more than 26X what TSLA spent in the same year, this cannot be glossed over as immaterial (Ford spent roughly twenty times more than TSLA).
There are people out there that could gather and distill the core arguments and facts involved and put together a logical estimate of what the coming years will bring; I’d bet that the vast majority of people with a current interest in Tesla (long or short) couldn’t – or have not – done so.
I’m of the mindset that intelligent investing requires intense self-reflection; action that is rooted in behavioral biases must be sought out and eliminated swiftly. Many people jump from one stock to another, racking up confidence from the winners and finding scapegoats for the losers; they’re flipping coins, and it has no place when we’re talking about something like saving for retirement. Even worse, many can’t recognize that what they call investing is really gambling.
The best course of action is to move on when you’re at a competitive disadvantage; recognizing that reality is an arduous task. Missing a few winners that are near the edge of your circle of competence is a small price to pay to avoid the true disasters - like buying a tech stock at the turn of the century only to see it crater 80% or 90% in a few months’ time (as an example, Pets.com went from IPO to liquidation in less than nine months).
Don’t get caught up in the game, even if it’s just a small piece of your portfolio; this stuff is like poison – with some luck, you’ll start to believe that you actually know what you’re doing. It’s a dangerous road that can result in disaster. Let the media and the bloggers worry about the “hot stocks” of the day; there are plenty of other companies out there - almost all of which are under less focus than Tesla, Facebook (FB), and Apple (AAPL). Find the spots where you can truly excel, and stick to those spots; if you’re the guy who can honestly say that you’ve done the research and will long/short Tesla, more power to you (I think you should require a minimum commitment of time and money if you make that call, but I’ll save that discussion for another day).
When you find yourself with a screaming opportunity that’s based upon thorough analysis, don’t move gingerly - act boldly. Otherwise, stay away; leave the gambling for Vegas.
About the author:
I think Charlie Munger has the right idea: "Patience followed by pretty aggressive conduct."
I run a fairly concentrated portfolio, with 2-5 positions accounting for the majority of my equity portfolio. From the perspective of a businessman, I believe this is sufficient diversification.