Last May I wrote the following: “One company pulled off the greatest automotive engineering feat in 50+ years, the other added garlic to their crust. Example #23084324 that picking stocks is hard:”
That didn’t mark the bottom for TSLA, but it was pretty close. Around the same time, they had to do an emergency debt and stock offering because they were about to run out of cash. But look at what has happened to the stock since…
TSLA is now more valuable (by market cap) than GM, Ford, and Honda combined. And most of that growth has come in just a few months!
You might think the tide has finally turned. The electric car revolution must be in full swing now, right? TSLA must be crushing their production targets, outpacing the competition in sales, and increasing profitability. You’d be wrong:
- Over the last 12 months net income was -$827,091,000.
- Revenue between Q2 and Q3 2019 declined
- The SEC took a special interest into Tesla’s accounting methods
- At the public reveal of the highly anticipated Cybertruck, this happened
One last comparison: Ford had $9 billion in net income last year. TSLA has a cumulative -$5.9 billion in net income going back to 2007!
How is this happening? In cruel irony, this meteoric rise is at least partially coming at the expense of people who wanted TSLA to fall the most. Here are a few oversimplified ways to express an opinion about a stock:
- Like a stock? Buy it
- Really like a stock? Buy it with leverage. If you have $1,000, you can borrow another $1,000 to get $2,000 exposure to the stock.
- Don’t like a stock? Don’t buy it
- Really don’t like a stock? Short it. This involves borrowing the stock from somebody (Person 1) and selling it to somebody else (Person 2). Sounds confusing, but the point is that you make money when the stock falls.
Important Disclaimer: Buying with leverage and shorting are two of the best ways to go broke very, very quickly. I absolutely do not recommend these strategies unless you fully understand the nuances, payout structures, and risks, and even then, I don’t recommend them. Given the complexities involved, these trades are best left to professional traders who like to live on the edge.
Last June, nearly 25% of all TSLA shares were sold short. When traders short a stock and it continues to go up, they not only lose money quickly, but they might be forced to close out their position by buying the stock back from Person 2 (or anyone else who owns it) and returning it to Person 1. As the stock continues to rise and traders who are short get tired of losing money (or they’re running out of money) they need to close out their position by buying the stock, potentially bidding up the stock price up even higher, exacerbating losses for everyone else who is short. This vicious cycle is called a “short squeeze” and is seemingly a large part of the reason why TSLA has gone parabolic.
To recap:
- Traders bet that TSLA was going to fall
- Presumably this bet was based on the idea that the company was struggling, and by looks of the financial statements, they were correct
- Even though they were at least partially right about Tesla the business, they were terribly mistaken about TSLA the stock
- TSLA’s recent performance has made that an incredibly expensive mistake
I have no prediction on what Tesla’s stock will do next, but this seems like the textbook example of the famous Keynes quote, “the market can remain irrational longer than you can remain solvent”. A lot of these traders are intelligent people with vast amounts of experience and expertise in evaluating businesses. Even when their thesis is right, the stock market can make them look silly. The prescription for not looking silly is simple: diversify, keep costs low, and take a long-term perspective. Warren Buffet said it best, “Both large and small investors should stick with low-cost index funds.” His use of the word “investors” is important – Investors are patient with their portfolios and in it for the long haul. Traders are trying to make a quick buck, often with disastrous results.
Disclaimer: Truepoint Wealth Counsel is a fee-only Registered Investment Adviser (RIA). Registration as an adviser does not connote a specific level of skill or training. More detail, including forms ADV Part 2A & Form CRS filed with the SEC, can be found at TruepointWealth.com. Neither the information, nor any opinion expressed, is to be construed as personalized investment, tax or legal advice.