What Tesla and United Can Teach Us About Investing

May 05, 2017

In another of my “grumpy old man” rants here, I’m absolutely mystified by investors and the car company Tesla. Sure, they make cool cars. Sure, they are selling directly to consumers and bypassing the traditional dealership model. Sure, every time I see one I give it a long look and think “that’s pretty awesome.” But in the midst of all of all of that, I just don’t understand how their stock price can be so high.

Tesla passed General Motors as the #1 US car company recently. Last year, Tesla sold about 76,000 cars. GM sold about 10,000,000. GM made over $9 BILLION in profits last year, while Tesla has had 2 profitable quarters…EVER! It is perhaps due to the “cool factor” that Tesla is now the #1 car company in the U.S. based on market capitalization. (Market capitalization is simply the number of shares outstanding times stock price.)

Clearly, the stock market is rewarding more than just financial results. As someone who has all but stopped using Facebook, never liked Twitter and is not a fan of social media in general, it seems that the stock market is moving away from rewarding the old school “logic and reason” of profitable companies seeing their stock price rise and companies who have yet to hit their stride from a profitability standpoint not getting much traction in the market. There are a lot of future expectations built into stock prices. This makes it hard to be an investor.

Heck, one video was able to move the stock price of United Airlines. This is a company with $9.1 billion in revenue in just the 4th quarter of 2016 and the stock price moved because of one cell phone video. This age of social media definitely has ripple effects in the investment markets. No one could have predicted in advance that United would have been hit by a wave of negativity after a cellphone video went viral or that an unprofitable car company would be worth more than General Motors.    

Picking individual stocks and outperforming the market is HARD! Most professional managers struggle to beat their respective index. If you bought Apple very early on, you’re probably a pretty happy investor. If you bought Enron or MCI WorldCom, probably not so much. All of those companies had spectacular performance at some point in their history, but only one is still in business.

That’s why it’s becoming increasingly more important to diversify your portfolio. Having a mix of stocks – small, mid-sized, large, international, emerging markets – and bonds and cash can help you avoid devastating losses like many investors experienced in 2008. Check out my blog from last week and get to know who you are as an investor and build a low cost, non-emotionally driven portfolio.

Since I started with a grumpy old man rant, I’ll end with an old phrase that we’ve all heard countless times in our lives. Don’t put all your eggs in one basket! In the investment world, it simply makes sense.