Improving as an Investor: Self Reflection
I am a pretty good investor.
My total returns in 2020 exceeded 60%, with gains primarily driven by select big tech stocks, consumer and China. I missed out on run ups in SaaS, Tesla, Peloton, NIO, Zoom and Bitcoin/Crypto. I also applied a lot of leverage by taking advantage of cheap credit, so I am really rich.
I feel comfortable in my portfolio where companies have strong market share and competitive positioning in expanding industries. My stocks going into 2021 are cheap relative to market trading multiples and have wide operating and cash flow margins that provide a reasonable safety cushion.
However, like everything else from investing to poker to career to human relationships, it is important to consistently apply a scientific approach and reflect on what worked and what didn’t. Ultimately, improvement comes down to practice and application over a long enough time period. This is especially applicable to stock investing (and credit investing and so on).
When I started investing, I was a very bad investor. I chased above market returns and panicked in line with common behavioral finance pitfalls.
Spending the time but not adjusting your approach is foolish. Sometimes it is uncomfortable to admit that you have been wrong for a long time – especially when it comes to investing – because there is a sunk cost psychological element. This is why people hold on to losing stocks for years in hopes they will come back.
“I’ve missed more than 9,000 shots in my career. I’ve lost almost 300 games. Twenty-six times, I’ve been trusted to take the game winning shot and missed. I’ve failed over and over and over again in my life. And that is why I succeed.” – Michael Jordan
“Create a culture in which it is okay to make mistakes and unacceptable not to learn from them.” – Ray Dalio
Here are some things I feel I missed in stock investing in 2020 and before.
Addressing Downside Risks to Tesla Stock
I’m not saying Tesla’s valuation right now isn’t rich or necessarily even correct. Tesla is valued richly as its value is close to all the other automakers put together, but I wouldn’t stick my neck out there and say it is priced to perfection.
My initial thoughts about Tesla were that they made a great car and had a charismatic CEO in Elon Musk. However, I felt that downside risks to Tesla stock were extensive.
A cursory glance at the trading metrics for Tesla suggested a very frothy valuation where I did not think that they could carve out a permanent niche in a historically low margin industry with so many entrenched incumbents (especially at the luxury level such as BMW, Mercedes and Audi). So I figured that even if they had a first mover advantage, their competition would adjust and that cars would become commoditized and difficult to differentiate.
In order to avoid dilution, Tesla also forwent the equity markets and raised debt opportunistically at very low rates to fund capital expansion. I thought the debt would accelerate the demise of the company and was not prudent given their lack of proven cash flow generation capabilities at the time. Accordingly, I had issues from both a valuation and liquidity standpoint with Tesla.
There was also a period of time in 2019 where Elon was in the news regularly being portrayed in a negative light whereby the media wanted to push the mad scientist narrative and reduce his credibility. The lesson here was to strip away the news and look purely at the business fundamentals. Ironically, Elon, by virtue of his craziness, is essentially Tesla’s marketing platform coupled with word of mouth (which is the best marketing). You will never see an expensive Tesla plug during the Super Bowl.
Tesla investment also had a distinct non-institutional following, which made it difficult for me to reconcile my feelings on valuation vis-à-vis what I felt was mostly sentiment driven. This non-institutional following became more apparent to me after I laughed at the one tech mutual fund that included Tesla and have since missed out on all of its gains other than through NASDAQ tracker funds.
However, the longer Tesla’s valuation climbed ahead of traditional carmakers such as General Motors and Ford the more apparent the equity story became in terms of how Tesla was a differentiated product with a moat. It is also more than a car company.
Tesla User to Tesla Investor
The first time I heard about Tesla, one of my friends bought a bunch of its stock on the Investopedia stock simulator in 2009. I had an interview with Royal Dutch Shell that week and thought the idea was ridiculous. Fast forward a few years and I rode in the same friend’s Model S, thinking that the car was ridiculous (but in a good way).
I find that Tesla buyers are often Tesla shareholders because they have different opinions to Tesla being a commoditized vehicle. Most people who drive a Tesla end up becoming an evangelist for the product. The earliest I recall was a major mining executive in Vancouver back in 2013 who purchased one and talked about it during chitchat before every investor presentation.
In addition to having a visionary in charge who lacks checks on corporate governance and executive compensation (which ironically have made Tesla the success that it is because Elon has zero impediments in making decisions with full mandate from the shareholder base), Tesla makes a much better product and overall user experience versus other automakers because it is free of the politics and legacy constraints of other carmakers.
This vision and lack of other stakeholders slowing down decision making have made Elon and his Tesla franchise more appealing to the Chinese authorities, who have allowed Tesla to operate freely and scale immensely while building Chinese new energy vehicle (NEV) supply chains and accelerating their path towards zero carbon.
Tesla’s innovation ended up being instrumental in jumpstarting Chinese supply of lithium ion batteries, EV car parts, clustering and flowthrough effects to Chinese NEV startups (NIO, XPENG MOTORS) and other key infrastructure. Tesla’s presence and Elon Musk’s cheerleading of Chinese business have also led to soft power gains by the People’s Republic of China.
Tesla Competitive Advantage as Automaker
Unions, collective bargaining, protectionism and elevated wages are issues for all legacy carmakers. They are not nearly as big of a problem for Tesla, who also have no issues moving away from historical business hubs when regulation is more favorable in another jurisdiction. These all lower the cost of the car despite the other carmakers having long established supply chains and dealership networks. The other thing is the stripping out of the dealer intermediary.
No one enjoys buying a car and many people have bad experiences. Cars are one of the only industries where you have had to bargain for price, and the buyers remorse is magnified because of the relatively large ticket price of each purchase. Tesla has showrooms and direct buying – enhancing the experience and value for the end user and reducing one party for Tesla to share profits with. Teslas are well designed vehicles and lose much less value after being driven off the lot. My Audi A5 recently was written off as a total loss and I was offered £20,000 as a settlement.
Tesla also has a variety of forward thinking initiatives, some too ambitious but thinking outside the box is always a plus. Initially Tesla wanted to control the IP for uniform charging stations (as it makes sense for charging stations to scale by having a limited number of options – like how everyone should be using a USB or type C cord for phones and other electronics).
Tesla’s Autopilot (which is not autonomous driving) sends incredible amounts of data that can be harnessed by Tesla every day. They are more than a car company with implications towards battery manufacturing at scale, maps, autonomous driving and connectivity with the internet of things.
A major secular trend that I missed which led to me thinking less about Tesla was ESG investing – especially pertaining to the disruption of fossil fuels and the energy sector. It is clear now that everyone is taking a zero carbon future more seriously, with this trend taking perhaps a surprising turn with the U.S. abandoning climate leadership and the most meaningful steps being driven by higher growth emerging markets.
I don’t – however, regret not piling into enterprise stocks / SaaS that are trading at astronomical price-to-sales ratios. I am comfortable missing out on Bitcoin – at least in theory if the dollar is worth nothing the value of goods and services that constitute the revenues of the stocks we own will adjust.
Next up, Apple Inc…