As electric vehicle company Tesla hits US$1 trillion, Pie’s CEO + Founder Mike Taylor takes a look back.
Tesla was up 43.65% for the month of October, a key milestone as the company now has joined the US$1 trillion club, alongside Google, Amazon, Apple and Microsoft.
With Elon Musk at the helm, the American company’s rise has been staggering, and unbelievable to watch. Some of you may even own Tesla shares yourself. Good on you.
Given Tesla’s meteoric rise and the fact that Pie Funds has not owned it at any point, I thought it was worth diving in to understand firstly, how Tesla has become one of the world’s biggest companies and secondly, why we missed it.
Tesla ticks the boxes
Early in my investing career I learned about how the valuation of some businesses can defy logic. Famous economist and investor John Maynard Keynes first coined the phrase “castles in the sky” in 1936 to describe this effect, when investors believe fairy-tale stories about businesses to justify the valuation. I believe, in order to build a metaphorical castle in the sky you need the following conditions:
1) A product that captures the imagination of the masses
2) Revolutionary new technology
3) Ability for the masses to easily invest in the company behind the phenomenon
4) A globally charismatic leader or founder to spread the story.
I believe Tesla ticks all these boxes, including the bonus of having the enigmatic genius, Elon Musk, at the helm. And it is the intersection of these four points, equally rare, but combined freakishly rare, that has led to Tesla becoming a US$1t company well before the business fundamentals justify it.
There’s huge hype
The current hype is electrifying, yes I went there, with everyone from kids, to Wall Street, to boomers, believing that Tesla has a massive lead in EVs and nobody can catch them. I guess it’s the hope that could Teslas be for EVs what the iPhone is for mobile devices. Despite New Zealand’s love affair with Apple, globally iPhone’s market share is only 13.7%. Asia and Africa are big markets, remember. Currently Toyota is the world’s biggest seller of vehicles with an 8.5% market share. If we generously gave Tesla the same market share as Toyota, then why should Tesla be worth more than the US$246b valuation ascribed to Toyota? I’ll leave you to argue that one in your head.
We focused on fundamentals
I/we/Pie missed Tesla because we focused on the fundamentals as that is consistent with our stated investment strategy. It’s almost always how investors miss the truly great stock market winners.
Lastly, passive money. Don’t underestimate the effect this is having on the market. Passive funds are forced to buy more of a company just because it goes up (on a relative basis vs everything else). Where active managers assess all kinds of variables, index funds and other ETFs simply buy more as it goes up. Conversely, they are forced sellers if the price starts falling. So beware of that for the future one day if you hold a giant that goes out of favour.
In summary, finding these companies (then holding for 10+ years through all conditions) is like finding a pot of gold at the bottom of a rainbow. Good luck. One possible way would be to search for the fastest growing brands each year. Certainly, you don’t want to start with the fundamentals, otherwise you wouldn’t own them. These types of businesses almost never trade with a conventional valuation. The other quick check for these great companies – ask yourself, what is the product like and what do my friends and family think of the brand? If you’re coming up with green lights, then it’s worth a closer look.
I leave you with this quote from Keynes: “In this kind of world, there is a sucker born every minute. And he exists to buy your investments at a higher price than you paid for them”. But at the end of the day, who is the sucker, the professional investor like me who dismissed Tesla as ridiculously overvalued four years ago, or the amateur who bought because they saw a castle in the sky. I guess that all depends on timing. But, this is not one party that you want to arrive late to.
Information is current as at November 2021. Pie Funds Management Limited is the manager of the funds in the Pie Funds Management Scheme. Any advice is given by Pie Funds Management Limited and is general only. Our advice relates only to the specific financial products mentioned and does not account for personal circumstances or financial goals. Please see a financial adviser for tailored advice. You may have to pay product or other fees, like brokerage, if you act on any advice. As manager of the Pie Funds Management Scheme investment funds, we receive fees determined by your balance and we benefit financially if you invest in our products. We manage this conflict of interest via an internal compliance framework designed to help us meet our duties to you. For information about how we can help you, our duties and complaint process and how disputes can be resolved, or to see our product disclosure statement, please visit www.piefunds.co.nz. Please let us know if you would like a hard copy of this disclosure information. Past performance is not a reliable indicator of future returns. Returns can be negative as well as positive and returns over different periods may vary.