Now I Look Like an Idiot But You Just Wait…

Dear Rich Lifer,

For quite a while I’ve been arguing that Tesla (TSLA) is not a sound investment, including an article here about a month ago.

I’ve also argued FOR investing in Tesla’s old-line competitors like Ford (F).

That means I’m looking like quite a fool at the moment.

We’ll let the charts paint a clearer picture …

First, Ford over the last year:

F

And now Tesla:

TSLA

It doesn’t take long to realize that Ford has been stuck in neutral while Tesla has kicked into “insane mode.”

Just the action in the two stocks over the last couple of weeks tells the basic story.

After fourth-quarter results came in better than expected, Tesla started a new run higher that gained ridiculous momentum from other relatively minor news items.

Tesla Mania in Full Swing

Indeed, at one point, it was reported that simply typing “Should I …” into a Google search bar was getting auto-completed as “buy Tesla stock.”

And then, after a very brief cool down period, investors started plowing into the shares anew … this time on news that Tesla would be selling an additional $2 billion in shares.

Now, this last fact tells you exactly how disconnected from reality things have become.

Typically, the issuance of more shares would be viewed as bad news – after all, it is diluting the value of all the existing stock already owned.

In this particular case, it’s even more disturbing.

Why? It’s yet another example of Elon Musk either bending the truth or changing plans at the drop of a hat. (Bad either way.)

Consider what Musk told investors just two weeks ago, during the fourth-quarter conference call:

“It doesn’t make sense to raise money because we expect to generate cash despite this growth level.”

Okay, so now they’re doing it anyway?

Analysts are applauding the move as smart and well-timed, given Tesla’s sharp rise. But even that idea suggests Musk and company are simply cashing in at what feels like a major top.

In contrast, Ford’s stock fell anew after the company reported its fourth-quarter numbers.

Sure, sales were down, but Ford still made money. It posted adjusted earnings per share of $0.12. Its cash on hand went up to $17.5 billion (against automotive long-term debt of $13.2 billion). The company also said it expected dividends to remain supported for at least the current year.

This might be a good time to remind you that Tesla doesn’t make regular profits yet. It certainly doesn’t pay a dividend, either, let alone one worth 7% this year.

In my view, Tesla is currently being driven by pure hype.

I’m talking pie-in-the-sky, cult-like hype.

History Repeats Itself

I’ve seen this type of euphoria before – on everything from Pets.com and Sun Microsystems in the late 1990s to Florida real estate in the mid 2000’s.

Logic, fundamentals, none of it makes a lick of difference.

Simply look at some of the comments under any story on Tesla and you can see it plain as day.

People talk about what a visionary Musk is. They don’t talk about the numbers.

One argument I saw compared Tesla to Netflix. These two companies are not alike at all.

Of course, my favorite comments always come from the people celebrating their (presumably open) profits on the stock. In their minds, the price action is all the justification needed.

That’s true until it’s not.

Indeed, I’ve yet to see a case where price action defies fundamentals indefinitely.

Never forget that stocks represent ownership interests in real businesses.

Every person has to decide which businesses they’d like to own, and at what valuations.

As Warren Buffett explained it in his 2014 letter to Berkshire Hathaway shareholders:

“If a moody fellow with a farm bordering my property yelled out a price every day to me at which he would either buy my farm or sell me his — and those prices varied widely over short periods of time depending on his mental state — how in the world could I be other than benefited. If his daily shout-out was ridiculously low, and I had some spare cash, I would buy his farm. If the number he yelled was absurdly high, I could either sell to him or just go on farming.”

“Owners of stocks, however, too often let the capricious and irrational behavior of their fellow owners cause them to behave irrationally. Because there is so much chatter about markets, the economy, interest rates, price behavior of stocks, etc., some investors believe it is important to listen to pundits — and, worse yet, important to consider acting upon their comments.”

Well, hey, I’m just another pundit.

But based on the shouting on Tesla right now, I definitely wouldn’t be buying… especially not when there are way cheaper farms for sale.

To a richer life,

Nilus Mattive

Nilus Mattive

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Nilus Mattive

Nilus is the editor for the daily e-letter The Rich Life Roadmap and a Paradigm Press analyst.

Nilus began his professional career at Jono Steinberg’s Individual Investor Group, where he published his original research through a regular investment column. Later, he worked for a private equity business and spent five years editing Standard and Poor’s...

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