I hate Tesla stock.
Tesla embodies the contradiction to every investing rule I follow.
It has no basis in Value Investing or Dividend Investing.
BUT, I’m not here to launch another attack on Tesla stock fundamentals. That’s been done a hundred times over. Yet, with every negative article I read the stock price creeps higher and higher. Defying gravity, fundamentals and, in my opinion, common sense.
To be honest, I’m so tired of reading ‘experienced’ investors countless articles lamenting the stock and recommending people sell or short.
They all failed to see this gravity defying rise;
Have people really forgotten how the stock market works?
The purpose of this article is to outline an important lesson everyone, the bulls and the bears, can learn from Tesla’s continued rise.
I would never buy Tesla at anywhere near the levels the shares have ever traded at. Yet, if I had bought shares when my friends did I’d be close to doubling my money right now.
Why does this rise defy logic?
- The company burns cash like no tomorrow
- New shares are consistently being issued (Meaning you own less of the company as a shareholder)
- Reports appear to emphasize cars shipped as performance indicator (A sure sign of poor financials)
- Negative earnings
For a rehash of the countless bearish (and somewhat tiring by now) articles check this SeekingAlpha feed;
WHY do Tesla shares keep rising - despite poor performance - and what can we learn from this?
Could it be that all of the bearish articles based on the company’s performance and fundamentals is wrong?
But most authors have neglected a very simple yet easy to forget rule.
The market, ultimately, works on supply and demand.
The more the demand for a stock, regardless of earnings and performance, the more the stock will rise and people LOVE Tesla shares.
You see, Tesla isn’t considered a car manufacturer by the market. It’s considered a tech stock, and tech stocks love to bubble!
Rewind to 1999 and the Tech Bubble will tell you how crazy company valuations can get, and how the bubble will eventually burst.
THIS SHOULD BE A WARNING: Poorly performing companies' stocks will keep rising as long as people keep buying.
Tesla isn't measured by its financial performance. It's measured by the hype its fans manage to generate, the personality cult surrounding Elon Musk and the visions of a new world he propagates.
Elon Musk is hailed as a genius, a pioneer and a great of the twenty first century.
(rightly so I'd say).
But this is the problem.
Even if people don’t believe in Tesla’s stock and performance they believe in Musk.
So what's the lesson?
1. The Stock Market works on supply and demand and not on the fundamentals of stocks.
2. Poorly performing stocks will continue to rise as long as there is investor demand for the stock.
3. Eventually demand will run out and the bubble will burst, but only fools need guess when.
How can I take advantage of this?
Here's the EXCITING bit.
Just as poorly performing stocks can be pushed higher by hype and anticipation - Some stocks that are performing well can get pushed lower by negativity and short-term pressures.
Here's an example of some negativity I took advantage of;
In Mid 2016, Flower Foods was coming under increased pressure due to a lawsuit it was facing.
This lawsuit had no effect on the company's fundamentals nor its performance.
Investors just got spooked. - The stock price dropped from around $18 to close to $14.
I swooped in, bought some shares, got paid some dividends and by the new year everything was sorted and the stock price rose.
The Stock Market is a weird and wonderful place.
Poorly performing stocks (in terms of fundamentals) can continue to rise whilst stocks that are performing well, or just hitting small blips, can fall significantly.
Sure, Musk talks the talk when it comes to Tesla.
His vision is romantic, futuristic and frankly - EXCITING. This helps breed demand.
But, these are not reasons to invest in a stock. One should invest based on current stock fundamentals and not for an individual (Musk), hope or a romantic vision.
One should also take advantage of short-term negativity surrounding out of favour stocks that have solid fundamentals.
The intelligent investor should be interested in boring stocks that churn out consistent results year to year, decade to decade, and avoid taking an erratic bet on a company that may be the future.
As always - I don't make a penny from this blog, so a share would really go a long way!