Recently one of our tribe reached out and said she was thinking of buying tesla stock. Earning gains in any investment is never as simple as clicking the buy button. So I encouraged her to make sure that she had an exit strategy and examined how this investment would fit into her overall financial plan. These are two very common problems in investing. When you have a gut feeling about something and pull the trigger before you aim and before you know what you’re shooting at (what your goal and exit strategies are), then you are going to have a hard time being successful – particularly this late in the business cycle.
All of this becomes more perilous if you’re running and trying to shoot over your shoulder while being chased by a pack of wild boar, which is kind of like what investing in the 11th year of a bull market is like. Today, the markets are not in a “wind at your back” position. The economic forecast is not clear and sunny with smooth sailing. Rather, we are embroiled in a dark stormy night with lots of phantoms looming in the shadows that you’re probably not even aware of. (See the Asset Bubble Chart at the end of this blog for reference.)
What are the two most common mistakes you might make investing today?
1. Not understanding how this one investment fits into your overall financial plan.
2. Not having an exit strategy.
Individual Stocks Are Not Appropriate for Your Retirement Plan
Individual stocks require babysitting. So they are really not appropriate for your retirement plan, where the goal is to make money while you sleep so that you can earn a good living and live a rich life instead of babysitting your stocks. If you have pages of individual stocks in your retirement plan, you’re probably not as diversified as you think and paying more in fees than you realize. It is also likely that you lost money in 2018.
Invest Fun or Education Money (Vegas Money) in Individual Stocks
So if you’re not willing to babysit, and invest fun money or education money, i.e. not your nest egg, then investing in Tesla today at a 2 ½ year low is not the right choice for you. If you do want to invest and babysit then the amount you invest should be limited to the amount that you are willing to lose. Treat the investment like a trip to Vegas. Most investors are not as adept as Warren Buffett at buying low and selling high, and are going to be vulnerable to the person on the other side of the trade, who may be a hedge-fund manager with high-frequency trading systems and software on his side.
What’s Your Exit Strategy?
A solid exit strategy requires at least three considerations.
- What can the company do?
- What can the industry do?
- What will the macro economy do?
What Can Tesla Do?
Tesla’s next quarterly earnings report, which will be released at the end of July/early August, is expected to be quite strong. In the 1st quarter 2019, Tesla delivered only 63,000 cars; in the next report there should be 90 to 100,000 cars delivered. That’s a lot more revenue for Tesla – with revenue conceivably above $6 billion, compared to $4.5 billion in the 1st quarter 2019 and $4 billion in the 2nd quarter of 2018. That kind of revenue should also put Tesla closer to cash positive again. (Tesla posted net income of $139 million in the 4th quarter of 2018, on $7.2 billion in revenue.) That could excite investors in the short term. However, sophisticated investors will also be looking at the macro economy and the industry itself. The Tesla Model 3 makes up 60% of the electric car market and is the top-selling luxury sedan in the U.S. (source: CleanTechnica.com). Tesla’s Model 3 sales have been so spectacular that GM and Ford have thrown in the towel on sedan manufacturing.
The Auto Industry
The auto industry is under attack on many fronts. Tariffs make the cost of steel and other widgets that go into our new smart cars more expensive. This is an industry that is seeing the slimmest profit margins on the planet already, and these new costs could definitely take them all into the red. Check out the Auto Stock Report Card below.
Additionally, only 25% of 16-year-olds are getting drivers’ licenses today. Gen Z and Millennials prefer living in urban areas close to where they work, and taking a bike or an electric scooter for dinner and other local events. For longer distances, they grab a ride-share, rent a car or fly. So this means softer demand for cars going forward. Tesla actually benefits from that in that the Model 3 has become the fastest selling car in America by far, on consumer choice.
Additionally, the company is already a leader in autopilot and artificial intelligence. On his investor call of May 2, 2019, Elon Musk declared that autopilot will transform Tesla into a $500 billion company. Elon is known for hyperbole. However, he’s also known as one of the greatest inventors and CEOs the wold has ever known.
It’s important to remember that Tesla has only enjoyed one cash positive quarter in recent memory. Higher costs are going to make it harder for the company to generate cash, unless they are able to dramatically cut costs (which the company has placed as a top priority). That means another capital raise could be in Tesla’s future in the years to come, which is almost always tough on share price. There could be a great number of peaks and valleys before Tesla becomes the next Apple-like behemoth.
The Macro Environment
As we enter the 11th year of this current bull market, the politicians are screaming from the rooftops that the economy is strong and growth is outstanding. However, that message doesn’t seem to equate with how we feel about our lives. What is the disconnect? Housing is unaffordable for most people. Stocks are trading at an all-time high. Bonds have a massive amount of credit risk that’s under-reported. Consumer debt is higher than it was before the Great Recession. Public debt has ballooned to the moon, with $22 trillion in public debt and counting (which doesn’t include state, city or corporate debt and loans). We’ve all become keenly aware of what happens when you borrow from Peter to pay Paul. Sadly, anyone caught on the wrong side of the Great Recession has difficulty trusting what they’re hearing, when what they are seeing and smelling is nowhere near as rosy as the White House Tweets claim. We’ve heard the “Great Economy” rhetoric before – before the Great Recession and the Dot Com Recession and suffered the consequences of drinking the political Kool-Aid.
The Bottom Line
Do I think you can make money on investing in Tesla at $200 a share? It really depends upon you. It’s not going to be an easy road ahead. If you make money, it will be because you endure a lot of nasty headlines and stomach churning events and possibly even watching the share price go lower than you bought it for. Tesla is a company that has only two kinds of headlines – doomsday scenarios and heavenly vistas.
When you see the headlines turn sparkly and shiny, you may have only a small window before the macro economic reality will cast everything into darkness again.
So, what I’m really saying here, is: if you don’t know how to surf in hurricanes, you should not be investing in any individual company in the 11th year of the bull market, not even one you love. Your better strategy is to make sure that you are properly diversified and safe and protected from the next downturn. If you don’t have any hot slices in your nest egg, you might consider a hot slice of clean energy. Many of the clean energy ETFs have Tesla holdings (a small amount). Funds protect you from the volatility of any one company, but they also limit your upside, if Tesla does have a stellar second quarter at the end of July.
Full disclosure: I own shares of Tesla.If you’d like to learn time-proven strategies that earned gains in the last two recessions and have outperformed the bull markets in between, join me at my Wild West Investor Educational Retreat this Oct. 19-21, 2019. Click on the flyer link below for additional information, including the 15+ things you’ll learn and VIP testimonials. Call 310-430-2397 to learn more. Register by June 30, 2019 to receive the lowest price and a complimentary 50-minute private prosperity coaching session (value $300).
I’m also offering an unbiased 2nd opinion on your current retirement plan. Call 310.430.2397 for pricing and information.