What I read today July 13, 2020
Elon Musk is now richer than Warren Buffett after Tesla stock rocketed 11% on Friday. That was a market cap gain of c$28 billion. More than Ford’s market cap of $24 billion. In a single day.
Valuing Tesla on traditional value metrics is pretty much impossible. Its multiples are higher than most SaaS tech businesses and the company has never made a meaningful enough profit to even allow it to be included in the S&P500! To justify the bull case one must believe that more than electric vehicles displacing ICE ones, the self driving future is here and your Tesla will be a robo-taxi earning income for you as you watch Netflix on your couch.
It’s become the definition of what used to be called a story stock but nowadays I would call a meme stock.
The original concept of the “meme” was a neologism coined by Richard Dawkins in his book the The Selfish Gene. Whilst the gene was the self-replicating unit that spread our base biology, the meme was the self-replicating unit that spread an idea. It could be a symbol or a practice but like a gene it would replicate in its hosts/ evolve by natural selection (the best memes win out)/ mutate and spread through the behaviour of their hosts.
Whilst it took millenia for genes to spread through the population, a meme as an idea, can transmit as fast as it takes to send a message. Which in the internet age, is essentially instantaneous.
Elon is a master of the meme. Like Trump on Twitter, he’s aware of how to poke the bears, how to mobilise a rabid following and how to stay just on the side of legality (or what can be proved for now).
What he’s managed to do is spread the meme that Tesla stock is a 4-20 middle finger to traditional finance and that all those people who care about things like cash flows and earnings are missing out on a rocket to the moon. Well there’s nothing that gets investors more excited than the thought of others making money. We’re at that stage of the cycle where people are day-trading their unemployment checks.
Meanwhile sophisticated long-short and value funds are shutting down from under-performance as I mentioned in an earlier story. The markets become so volatile that missing 5 days of trading would have cost you 30% and scuppered your entire year. Capital allocators have a short time span so there is little sympathy if you are lagging your benchmark for more than a quarter. This performance anxiety and envy is causing us to revert to meme thinking. What’s the best and fastest way to make a buck? Give in and go with the flow.
We know this has occurred throughout history. The greatest minds in human history have fallen prey to it. From Benjamin Graham in the Intelligent Investor
Back in the spring of 1720, Sir Isaac Newton owned shares in the South Sea Company, the hottest stock in England. Sensing that the market was getting out of hand, the great physicist muttered that he 'could calculate the motions of the heavenly bodies, but not the madness of the people.' Newton dumped his South Sea shares, pocketing a 100% profit totaling £7,000. But just months later, swept up in the wild enthusiasm of the market, Newton jumped back in at a much higher price — and lost £20,000 (or more than $3 million in [2002-2003's] money. For the rest of his life, he forbade anyone to speak the words 'South Sea' in his presence.
If Isaac Newton was able to see the bubble in the South Sea, sold out at a great profit, only to reinvest double down and lose his shirt in the bubble, what chance have we?
I don’t want to be a downer but this movie does not tend to end well. Bull markets don’t tend to die of old age, but when they die there does usually tend to be a company which is the symbol of that time. In the dotcom boom it was the Pets.com/ Webvans, in 07 it was Lehman Brothers. If there is/ was a company that would be the one for this market I’d have to believe it’s Tesla. Even though Warren’s fallen down the billionaire rankings, I think he’d still say “price is what you pay; value is what you get”.
Other
Quibi is a high profile platform with billions behind it and prestigious founders in Jeffrey Katzenberg and Meg Whitman. It was going to be the future of media with it’s short videos perfect for people to watch whilst commuting or on their office breaks. So far its at <1% of its projected subscriber base.
Wirecard brings back the age-old story of analyst coverage and the lack of skeptics. Having seen how the sausage gets made, it tends to be that analysts cover a wide range of companies and to get the info and numbers to make their models work they often need to have conversations with management. Analysts with negative coverage often tend to get blackballed by management so to make their jobs easier analysts will often give the companies the benefit of the doubt. The origin of the proverb “whose bread I eat, his song I sing” is appropriately German “wessen Brot ich sein Lied esse, singe ich”.
Covid has led to a global shortage of bicycles.
Where did JR Tolkein get his inspiration for The Hobbit and The Lord of the Rings? Perhaps from a Roman ring, an ancient theft and a curse.