The meltdown

Don’t buy stocks.

That’s been the message on this pathetic site for years. Sure, buy the stock market. But not individual companies. Unless you have a few million and can build you own diversified portfolio (which would need about 70 holdings).

Examples abound why it’s so much less stressful to invest broadly instead of thinking you’re the smartest dude in the room and can sprinkle Alpha around. You’re not. It’s a gamble. Especially when you invest in a stock because (a) it’s cool, (b) you read about it, (c) your BIL put his life savings ($12,400) into it, (d) it’s the future, baby or (e) Elon’s there.

So, Blog Dog Paul helps raise the alarm. “Here’s a scary stat on all of Tesla’s ‘retail’ investors,” he says… sending this snippet from Vanda Research…

“Retail investors have plowed a net $15.4b into Tesla $TSLA purchases during 2022, 3x the aggregate sum across 2020 and 2021, leaving Tesla with an eye popping 11% share of the average individual portfolio. So tons of retail pain & margin calls”

This is like Nortel two decades ago, when it was the 800-lb gorilla on Bay Street making up a third of the overall index. Everybody owned Nortel because it was cool, a media darling, the future etc. Ultimately the company lost 90% of its value in the Dot-com bust and evenetually went to zero. Just ask one of the pensioners.

So what’s wrong with Tesla (apart from the fact you do not want to own one of its cars in Saskatoon)?

The company was a no-lose thing a year ago, but lately the numbers are dreadful. The loss in capital value in a month is 40%, while in six months it is down 65% and for 2022 as a whole, lower by 72%. It’s an unmitigated and historic disaster. It makes Bitcoin look stable. And in this year alone retail investors (including Musk) have shed $241 billion in equity.

So what happened?

First, high interest rates and CB tightening have whacked all the recent equity darlings, even though Tesla has negative net debt (until recently, anyway). Second, what the Fed’s been doing has depressed all financial assets (the S&P is still down about 17% on the year) and raised the spectre of a 2023 recession, which will hurt car sales. (Tesla’s Shanghai plant is on reduced capacity and the company has been forced to offer $7,500 discounts on some models. And what happened to the Cybertruck?)

Third, Tesla has tons more viable competitors now than it did a year or two ago. Everybody’s got an EV on the market, in development, or about to launch, Cheaper. Easier to service through a big dealer network. More available for delivery.

Fourth, Musk is brilliant (of course) but weird. Inconsistent, distractable. His attention was pulled away by SpaceX, Starlink, the Boring thing, inserting bots in brains and whatever else he’s migrated to. Like Twitter. Oh, especially Twitter. What a sorry move that was, spending $44 billion for a social media platform whose day has passed, inserting himself in a destructive debate over free speech, getting grossly political, and demonstrating in spades that even geniuses can be idiots. Mostly and above all, this shows investors can’t trust the guy to continuously add value to their TSLA shares.

Musk sold off a mess of stock ($22 billion) to help finance the Twitter deal and pledged billions extra on margin. Will more follow? Repeatedly Elon has pledged not to dump stock, then done exactly that. He’s enraged regulators with disrespectful comments and lately seems to be crawling onto the wrong side of the Ukraine war.

Most of all, investors hate losses. Especially when three-quarters of their capital is erased in a year. And particularly when so many have a gross portfolio weighting on one security. They could have had decent exposure to Tesla through an index fund and yet avoided this Muskopolypse.

Tesla was added to the S&P index two years ago when it was trading in the stars, amid big controversy (critics said it was too young an enterprise, too flighty, too bubbly, speculative and unproven). It formed up to 3% of the index, and now is the biggest loser in the entire shebang. So while the S&P is up a tad the last two-year period, Tesla has crashed and burned. This is a good little lesson on diversification. Never invest without it.

Moreover, Musk’s quixotic nature has hurt him, wounded TSLA and shived investors. The company was booted out of the S&P environmental, social and governance (ESG) index a few months ago because of a shoddy climate change strategy and lousy business ethics. Then the Twitter fiasco – allowing hate speech, reinstating Trump and banning tech journalists – suggested Elon was going over to the dark side. None of this is what investors seek in the CEO of a company in which they have invested massively.

To repeat: Elon Musk is a genius. We need him. The world needs him. His accomplishments are legion. We all pale in comparison. But he’s also nuts. And he has no place in your TFSA.

Don’t buy stocks.

About the picture: “Enjoy the blog immensely and is part of my daily reading list (MSU)…” writes Bob. “Please feel free to use this picture if appropriate. Unfortunately our dog passed at the beginning of the Covid crisis. We were going to wait a few years before getting another dog but… after less than a month we got a new one. Jake has grown up quite a bit over the last couple of years but I think he now has a bit of a problem…”