InvestNow News – 14th November – Pie Funds – A Message from Mike: The record rise of Tesla
Article written by Mike Taylor, Pie Funds – 5th November 2021
This month CEO and Founder Mike Taylor discusses the record rise of Tesla.
Tesla: How it did it happen, and why did we miss it?
Well investors seemed to have survived another October, historically a month that (in some years) coincides with sizeable market moving events. Whether the month of the year and negative events are completely correlated remains a mystery, although many swear by the investing phenomenon or so-called Halloween Effect, (sell in May and go away, to return after Halloween). In fact, I interviewed a Dutch professor, Ben Jacobsen in 2012 who produced a detailed research thesis on this investment strategy with strong empirical evidence to support his theory. From 1950 to 2013, the Dow Jones Industrial Average had an average return of only 0.3% during the May to October period, compared with an average gain of 7.5%, thereby confirming the thesis.
However, since 2013 this strategy has underperformed buy & hold with the belief perhaps that because it’s now a widespread theory, that it has been arbitraged away.
Regardless of whether it holds true to this day, enough people believe it and I, for one, certainly believe that the market has some seasonality. However, it was not to be this year, with the SP500 up around 7% in October and up 10% for the Halloween Effect period. Note, the SP500 is up an impressive 24.4% YTD though, a stark contrast to the NZX50 which is still in negative territory for 2021!
Market returns for the month of October were driven by some of the world’s biggest companies. But, mainly Tesla which was up 43.65% for the month. Wow! Tesla has now joined the US trillion-dollar club, alongside Google, Amazon, Apple and Microsoft. Given Tesla’s meteoric rise and the fact that Pie has not owned it at any point, I thought it was worth doing a deep dive to understand firstly, how Tesla has become one of the world’s biggest companies and secondly, why we missed it.
Tesla, $1t. How did it happen?
Tesla manufactures electric vehicles (EVs), solar panels, and batteries for cars and home power storage. It was founded in 2003 by American entrepreneurs Martin Eberhard and Marc Tarpenning and was named after Serbian American inventor Nikola Tesla. Tesla Motors was formed to develop an electric sports car. Funding for the company was obtained from a variety of sources, most notably PayPal co-founder Elon Musk, who contributed more than $30 million to the new venture and served as chairman of the company, beginning in 2004 and later becoming CEO. In 2008, Tesla Motors released its first car, the completely electric Roadster. In company tests, it achieved 245 miles (394 km) on a single charge, a range unprecedented for a production electric car. In 2010, Tesla went public and raised $226m with a valuation of, wait for it, $1.7b. A decade later, pre-Covid Tesla was valued at a “mere” $180b but is up 6x to $1.1t since the pandemic began. Interestingly, both Daimler and Toyota owned stock in Tesla but sold in 2014. Bet they regret that now!
In 2020, global car manufacturing was 78m and while Tesla has a growing share, it still represents less than 2%. Wall Street estimates Tesla will produce 1.3m cars in 2022 up from a forecast 1m in 2021, but well up on 500,000 in 2020 and 250,000 in 2018. With Tesla’s current market cap of US$1.1 trillion and <2% market share, it’s worth noting you could buy all of the car manufacturers in the world for $1.7t. A truly staggering comparison. I’m prompted to ask you the popular question that today’s kids use. Would you rather? Would you rather own all those other car brands, or Tesla?
Tesla does sell batteries and solar panelled roofing, but vehicle sales accounted for over 83% of revenue in 2021.While we are on revenue, Tesla’s revenue ranks the company at 89th on the S&P500 vs 5th in terms of market cap.
How did I miss that?
Researching for this article I read a story on how a Singaporean individual has made $7b from investing in Tesla. Stories like these fuel the fire on the mania.
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 $1t company well before the business fundamentals justify it.
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 a 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.
Investment team update
We have recently hired Senior Investment Analyst Michael Goltsman based in Sydney. Michael will be responsible for conducting research on Australasian equities and providing investment recommendations for the Australasian Growth Fund with the view of becoming its Portfolio Manager within the next 6-12 months.
Prior to joining Pie, Michael worked at Ophir Asset Management as a Portfolio Manager. Before that, he was previously based in London working as head of Citi’s UK Small & Mid Cap equity research team. He’s an outstanding addition to Pie and we’re excited about having someone of his credentials adding further depth to the Investment team.
Michael has already hit the ground running and I’ve been very impressed from the interactions and company calls I have had with him so far.
Mike Taylor, Founder and CEO
Information is current as at 31 October 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 guarantee of future returns. Returns can be negative as well as positive and returns over different periods may vary.
InvestNow News – 14th November – Pie Funds – A Message from Mike: The record rise of Tesla
Article written by Mike Taylor, Pie Funds – 5th November 2021
This month CEO and Founder Mike Taylor discusses the record rise of Tesla.
Tesla: How it did it happen, and why did we miss it?
Well investors seemed to have survived another October, historically a month that (in some years) coincides with sizeable market moving events. Whether the month of the year and negative events are completely correlated remains a mystery, although many swear by the investing phenomenon or so-called Halloween Effect, (sell in May and go away, to return after Halloween). In fact, I interviewed a Dutch professor, Ben Jacobsen in 2012 who produced a detailed research thesis on this investment strategy with strong empirical evidence to support his theory. From 1950 to 2013, the Dow Jones Industrial Average had an average return of only 0.3% during the May to October period, compared with an average gain of 7.5%, thereby confirming the thesis.
However, since 2013 this strategy has underperformed buy & hold with the belief perhaps that because it’s now a widespread theory, that it has been arbitraged away.
Regardless of whether it holds true to this day, enough people believe it and I, for one, certainly believe that the market has some seasonality. However, it was not to be this year, with the SP500 up around 7% in October and up 10% for the Halloween Effect period. Note, the SP500 is up an impressive 24.4% YTD though, a stark contrast to the NZX50 which is still in negative territory for 2021!
Market returns for the month of October were driven by some of the world’s biggest companies. But, mainly Tesla which was up 43.65% for the month. Wow! Tesla has now joined the US trillion-dollar club, alongside Google, Amazon, Apple and Microsoft. Given Tesla’s meteoric rise and the fact that Pie has not owned it at any point, I thought it was worth doing a deep dive to understand firstly, how Tesla has become one of the world’s biggest companies and secondly, why we missed it.
Tesla, $1t. How did it happen?
Tesla manufactures electric vehicles (EVs), solar panels, and batteries for cars and home power storage. It was founded in 2003 by American entrepreneurs Martin Eberhard and Marc Tarpenning and was named after Serbian American inventor Nikola Tesla. Tesla Motors was formed to develop an electric sports car. Funding for the company was obtained from a variety of sources, most notably PayPal co-founder Elon Musk, who contributed more than $30 million to the new venture and served as chairman of the company, beginning in 2004 and later becoming CEO. In 2008, Tesla Motors released its first car, the completely electric Roadster. In company tests, it achieved 245 miles (394 km) on a single charge, a range unprecedented for a production electric car. In 2010, Tesla went public and raised $226m with a valuation of, wait for it, $1.7b. A decade later, pre-Covid Tesla was valued at a “mere” $180b but is up 6x to $1.1t since the pandemic began. Interestingly, both Daimler and Toyota owned stock in Tesla but sold in 2014. Bet they regret that now!
In 2020, global car manufacturing was 78m and while Tesla has a growing share, it still represents less than 2%. Wall Street estimates Tesla will produce 1.3m cars in 2022 up from a forecast 1m in 2021, but well up on 500,000 in 2020 and 250,000 in 2018. With Tesla’s current market cap of US$1.1 trillion and <2% market share, it’s worth noting you could buy all of the car manufacturers in the world for $1.7t. A truly staggering comparison. I’m prompted to ask you the popular question that today’s kids use. Would you rather? Would you rather own all those other car brands, or Tesla?
Tesla does sell batteries and solar panelled roofing, but vehicle sales accounted for over 83% of revenue in 2021.While we are on revenue, Tesla’s revenue ranks the company at 89th on the S&P500 vs 5th in terms of market cap.
How did I miss that?
Researching for this article I read a story on how a Singaporean individual has made $7b from investing in Tesla. Stories like these fuel the fire on the mania.
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 $1t company well before the business fundamentals justify it.
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 a 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.
Investment team update
We have recently hired Senior Investment Analyst Michael Goltsman based in Sydney. Michael will be responsible for conducting research on Australasian equities and providing investment recommendations for the Australasian Growth Fund with the view of becoming its Portfolio Manager within the next 6-12 months.
Prior to joining Pie, Michael worked at Ophir Asset Management as a Portfolio Manager. Before that, he was previously based in London working as head of Citi’s UK Small & Mid Cap equity research team. He’s an outstanding addition to Pie and we’re excited about having someone of his credentials adding further depth to the Investment team.
Michael has already hit the ground running and I’ve been very impressed from the interactions and company calls I have had with him so far.
Mike Taylor, Founder and CEO
Information is current as at 31 October 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 guarantee of future returns. Returns can be negative as well as positive and returns over different periods may vary.
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