It has been fascinating to watch the Tesla (TSLA, Financial) story develop over the past few years. The company is probably the most loved and hated business on Wall Street.
Most of the hedge funds that have a position in the stock seem to be short the company. That's based on my own experience of writing about these investment vehicles over the past few years.
Meanwhile, the investors who are betting on Tesla's success seem to be mostly retail investors. Of course, there are exceptions to this rule, but these are just my observations over the past few years.
It is too early to say that Tesla has proved its critics wrong, but with the stock trading above $700, it is clear that the business is not the struggling basketcase some would have you believe.
A huge impact on the world
There's no denying that this business has had a massive impact on the world, especially the automobile industry.
When Tesla first started out on its mission to produce a range of electric cars that people actually wanted to buy, the number of electric vehicles already on the market was minuscule. There were only a few vehicles with low ranges and terrible design. However, the market now looks entirely different. There's no doubt that Tesla has been hugely instrumental in driving the rest of the auto industry to change.
That being said, even though the company's product was quite revolutionary (and remains so to this day), there was never any guarantee that it was going to be a good investment. There still is no guarantee that it will be a good investment. Both the airline and auto industries were revolutionary, but neither has produced consistently positive returns for investors.
The same can be said with tech stocks. How many of the sector's first movers are still alive today? Facebook (FB, Financial) is the world's largest social network now, but it wasn't the first. Google (GOOG, Financial) wasn't the first search engine and Amazon (AMZN, Financial) wasn't the first online delivery company.
The challenge for investors
This presents a considerable challenge for investors. How do we select companies that have both the potential to change the world and generate good returns for shareholders at the same time?
We may look to Warren Buffett (Trades, Portfolio) for the answer to this question. One of the Oracle of Omaha's favorite sayings is, "really successful people say no to almost everything."
To put it another way, most of the time, it is better not to have a position than to own a losing position. Because it is so challenging to select the companies that are going to change the world, it is better to stay away until they have proven their success. That's the great thing about being an investor - there is never any requirement to invest in a particular company or asset.
There is always a stream of businesses that are trying to change the world. Most of these companies fail, and only a few succeed. Trying to pick those with the potential to generate returns for shareholders in their early years is virtually impossible, as proven by the fact that around 95% of all venture capital firms fail to make a decent enough return to justify the risks their investors run.
Rising losses
Initial figures suggest that short-sellers lost $2.5 billion in one day this week betting against Tesla. That's in addition to losses booked over the past seven months.
These are all unnecessary. We don't know if Tesla will be successful or if it will fail, but there's no need to bet against the stock just because you don't want to bet on it. Investors can just say "no" and look for attractive investments elsewhere.
The stock might double again from current levels, or drop to zero. We just don't know. Sometimes it is better to stay on the sidelines rather than trying to second-guess the market. This is not just relevant to Tesla, but to many other businesses as well.
Disclosure: The author owns no share mentioned.
Read more here:
- The Sequoia Fund's Founders on Patience
- Warren Buffett: Don't Ignore One-Off Costs
- Warren Buffett: Why It Does Not Always Pay to Buy Transformative Business Inventions
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