The Allure and Perils of Elon Musk: My Investment Experience with Tesla
As we get to the end of the year, I vividly remember what my outlook was at the start of the year from a macroeconomic perspective and what I inferred was likely to happen over the next couple of years from a stock market perspective. That informed what I thought were suitable stocks to add to my investment portfolio for 2023. I had sat on more cash than normal during 2022, as my investment approach risk appetite during 2022 was in serious “defensive mode”. Tesla was the wildcard that I had always thought was a good long term investment, and the price, while still rich for my appetite, was in my view as cheap as I thought that I would ever see it. Knowing how volatile the stock was (Tesla stock price had fallen 65% during the course of 2022), seeing it as relatively cheap to its historical price and with my outlook for the business still being bullish, you would think that BUY was a simple decision.
Allow me to indulge, as I share my own personal investment experience with Tesla. I have been following Elon Musk and Tesla, the stock and the business, since 2016. I knew of Elon Musk, but only got into a more informed perspective when reading his then autobiography by Ashlee Vance titled Elon Musk: Tesla, SpaceX, and the Quest for a Fabtastic Future. It goes without saying, that being a South African, reading about a man some referred to as “a real life Tony Stark” who happened to be born in South Africa, written by an author who was born in South Africa, put me at risk of falling in love with the story and making a bad investment decision. So, I had to really watch my thoughts and beliefs with an added level of objectivity seeing as Tesla was a vehicle for me to bet on Elon Musk. But at what cost…
So in 2016, when I looked at the Tesla story, and factoring that on the back of the book I was reading, I was now in awe of the man at the helm in terms of his vision, his determination, his risk appetite and ability to see concepts through to fruition, the only thing holding me back was the valuation. No matter how I imagined Tesla to grow in the next five years, my Discounted Cash Flow Model was giving me “Computer says NO!”, however unlike Carol Beer in Little Britain, the model was not being unreasonable.
The Tesla stock price was then $207.61 (split adjusted it was about $13.84) making for a market cap valuation of $27.42 billion then! That was very rich relative to other more established motor vehicle manufacturers, who were selling significantly larger volumes in vehicles than Tesla. I understood the promise of Autonomous vehicles that were in the plan for Tesla, but this company was a bet on Elon Musk getting a whole lot right, so that was already a risk of my investment going to either be worth more or worth zero. I remember Elon Musk announcing that he was ramping up production, and changing the Tesla 2020 plan to 2018, as the target date of when they want to be producing 500,000 cars per year. At that time (May 2016), Tesla was producing 80,000 cars per year. So in two years, Tesla would be producing more than six times their current rate of production.
Considering that the Model S design refresh was already two years late, Elon Musk was promising to pull off the Model 3 in that time frame and not repeat the mistakes of the past that proved how difficult it was to produce, even when the idea was clear. What kept on playing at the back of my mind though, with my growth assumptions, was that Musk had up to that point been producing “toys for the rich” with his fleet of cars, which is not a volume game. “If you look at where he is going, he is disrupting the auto industry and I think he will land it” I thought to myself. I did think that there would be risks for Tesla as the traditional vehicle manufacturers would not let a minnow eat their lunch if they saw that there was a market for electric vehicles. Thinking that, and being fully aware of Tesla’s cash flow getting squeezed and that they would keep having to go to market to raise cash inflow, I let my belief in the story override my model. With all the risks I had identified as making the likelihood of business failure high, I bought some Tesla stock. “I am betting on Elon Musk!” my notes read.
My conviction was tested within a matter of months. In July 2016, news broke of a regulatory investigation into Tesla on the back of a fatal car accident that had occurred where a Tesla was being driven in “auto-pilot”. The market’s reaction was not dramatic, but it did cause the stock some headwinds. I then also got my first feel of the Tesla over promise and under deliver strategy. Vehicle deliveries released for the second quarter were lower than the deliveries from the first quarter. This in spite of production exceeding 18,000 vehicles for the first time.
Tesla’s stock was down 4.91% in June 2016, up 10.60% in July, down 9.7% in August, down 3.76% in September, down 3.09% in October, down 4.21% in November and by the time it got to December, I was fully tested and came to the conclusion that I was not battle ready to own this stock! As the price rallied 12.82% in December, I did not wait to realise the entire return, I was happy to exit stage left when I was at break even from the price I had paid in May, with a 2% odd profit.
My notes from December 21 2016 read, “I am not so sure about my investment thesis anymore. It's a punt I still want to take, but currently the amount would be significant to my portfolio to lose, seeing as there is more trouble to overcome before it becomes easier for the business to operate with less inherent risks. I still support them, and want them to succeed, but one of the triggers for today was the news that they did increase their credit facilities with Deutsche Bank. This after two months ago, Elon Musk said there would be no need to raise cash. The consistent over promise and under deliver culture bothers me a lot. Tesla needs to really deliver on the car production and delivery side of things.” The market cap at the time was $34 billion.
I knew at the time that it was a knee jerk reaction to speculation, and if my portfolio could cushion the blow if big losses were realised in the Tesla stock price, I would have held on. However, given my circumstances, it was safer for me to sell. As I followed Tesla and its prospects being realised, while overcoming the short sellers, overcoming the need to keep constantly raising capital, I simply resigned myself to it being “the one that got away”. Tesla eventually hit the 500,000 vehicles production target in 2020 (as per the original plan), and their ability to scale production of Electric Vehicles is second to none as compared to western countries vehicle manufacturers as they produced 930,422 in 2022 (so almost double).
You would have thought that Tesla being relatively cheap at the beginning of 2023, would have me in pole position to be able to press that BUY button. Well I did, and this time my holding was no more than a couple of days. While this time around, I was braced for the volatility of the stock, I foresaw an easier runway for the business than I did in 2016 and their prospects of survival are materially higher., I see them as one of the handful of manufacturers that will be left standing if the world does transition to all Electric Vehicles and we abandon the Internal Combustion Engine. Although my pros way exceed my cons on Tesla as an investment, I cannot stomach it as part of my portfolio. The evidence is clear that I do not have the risk appetite for it, and so I am happy to have the exposure I have through holding the S&P 500 Index ETF.
With hindsight, I can easily measure that I made 2% and lost out on making a further 532% on my investment if I had not taken issue with Elon Musk’s maverick approach to running a business I had invested my hard earned money in. When I had a second chance at the investment vehicle in January this year, I bailed and lost out on making a further 90 percentage points odd this year. That is my opportunity cost for not taking that risk! I may not have gained these returns, but I certainly did not lose anything either.
Risk is so mercurial, in every sense of the word. It is hard to articulate in such a way that we all understand it the same, and even when we do understand it the same our tolerance of risk differs from person to person and at an individual level the tolerance of the same risk is not the same from moment to moment. It does not mean that choosing to not manage risk is a better alternative. It just means that “know thyself” if you want to manage and take acceptable risks.