Tesla Is Uninvestable And Thoughts On Investability - The 'Making Money While I Sleep' Portfolio August Update

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Includes: AAPL, AMZN, BABA, BF.A, BIDU, BMWYY, BZUN, DEO, DHR, DIS, F, FB, GM, GOOG, HMC, JD, LMT, NVDA, ROST, SBUX, SCHW, SHW, SJM, TM, TSLA, V
by: Theory of Living Investments
Summary

Tesla is a great stock for investors to learn from, having captured many a heart and mind despite its terrible risk:reward profile.

Tesla is not investable.

There is an opportunity cost to diversification that must be weighed when taking a flyer.

This month's picks take advantage of price cuts in Facebook and Alibaba.

I’m out to earn some money while I sleep, because I’m not planning to work until I die.

This is the second installment of the ‘Making Money While I Sleep Portfolio,’ the compounding force through which I will achieve financial independence.

My first article includes an in depth explanation of the portfolio’s makeup and goals. In short, the portfolio is built to outperform the S&P500 and bring me to financial independence in ten years.

I am starting out with $1,000 monthly contributions this year but expect the monthly investment size to increase dramatically next year when I have dealt with my student debt. I will be investing in “Stalwarts,” stable companies whose growth I expect to moderately outpace the broader market, as well as “High Growth Picks,” a growthier but riskier group of stocks.

Given recent headlines, I thought it would be instructive to explore the concept of “investability” by taking a look at a company that is not investable.

The majority of my time is spent seeking out long ideas, but examining poor investments is an important mental exercise.

Think about learning to play a sport: it is just as important to know what not to do as it is to know what to do.

This brings me to Tesla (TSLA).

I hope you’ve been enjoying the fireworks, because I know I have. Honestly, it gets just a little better every day.

Long Term Investing, Investability, and… Tesla?

I am a long term investor. As I discussed when I introduced my portfolio, I buy stocks to hold forever.

There are other styles: day trading, momentum, old school Benjamin Graham value investing. Practitioners of other styles buy and sell stocks for different reasons than I do, and thus our respective analyses of the same company may not be relevant for each other.

In other words, somewhere in the world, there is a person who has a defensible reason to purchase stock in Tesla.

This is not me.

As a buy and hold investor, before I even begin to dig into balance sheets and conference calls, I have to decide if a company is at its core “investable.”

Can I trust management? Does it operate in a reasonable industry? Does it have a moat or a brand? What is the upside? Is the valuation sane?

Lately, Tesla has been catching my eye… for all the wrong reasons.

Tesla is absolutely and completely, utterly and irrefutably uninvestable.

Before I get too far into this, I have a disclaimer: I am a huge fan of Elon Musk’s vision.

I hope he proves every word I have written wrong.

His vision is of a beautiful world, one where I can:

  • Take an hour long trip from New York to San Francisco
  • Plan a vacation to the colony on Mars
  • Enjoy fully green, ubiquitous solar energy
  • Ride passively in emission free vehicles that drive more safely than humans can

I desperately want to live in that world.

But none of that changes the fact Tesla is 100% uninvestable.

What’s more, Elon Musk has begun to demonstrate that he as a leader is uninvestable.

As investors, we must be diligent about separating the leader’s vision from the leader, the company’s goal from the company’s operations, the hoped for future from the present reality.

Investing cannot involve emotions.

Questions of Leadership - It Starts at the Top

As I discussed in my article on Facebook, extraordinary leaders can be central to an investment case.

Musk is not such a leader.

Whether it is calling calling conference calls "boring", the inability to turn a profit, or being the only public figure to use Twitter in a more insane way than Donald Trump, I cannot put money behind this man.

Do I need to even get into the going-private-stock-manipulation-impending-lawsuit debacle?

Only recently has Musk’s massive popularity come under heavy fire. The reason it took so long is twofold:

  1. Musk’s vision is pretty darn awesome
  2. We as a public have been sold the myth of the “eccentric visionary”

The first part is easy to understand. Musk’s vision for the world is beautiful, and he has expertly used his PR machine to build the hype. An obvious example is the presentation about the trip to Mars. It bought him a mountain of publicity and got everyone with a pulse excited, despite accomplishing nothing and containing little that is actionable.

When he talks about the future his companies seek to build, it is hard not to get excited. I know I do.

Second, Musk has become the new poster child for the myth of the “eccentric visionary.”

While many of history’s greatest leaders have been unorthodox in one way or another, there is a difference between “thinking different” or going “outside the box” and being downright problematic.

A willingness to explore unusual solutions has allowed many of the world’s greatest leaders to achieve their successes. It allows them to navigate past pitfalls that cause leaders with a more traditional approach to stumble.

Steve Jobs is among the most salient of recent examples. America is in love with stories of his oddities, and there is no doubt his leadership at Apple was a complete gamechanger. What’s worth remembering, however, is that in Jobs’ best years, he was less eccentric, a much better leader, and razor focused on building great products rather than pitching himself into publicity stunt after publicity stunt.

Musk, with his Paypal fortune and unshakeable confidence, his brilliant vision for the future, and the odd adventures he involves himself in (launching a Roadster into space? Cool but… yeah, unnecessary) checks all those boxes for the public.

I would argue, however, instead of demonstrating the unorthodox leadership qualities that create success, Musk is increasingly demonstrating antagonistic qualities and a belief that the rules don’t apply to him. He wields his Twitter handle like a weapon, antagonizes journalists, never misses an opportunity for a publicity stunt, and flirts with the very edge of stock manipulation.

I do not see the leaders I admire most in the world making headlines the way he does.

Valuation and Questions of Upside

Tesla’s valuation also makes it uninvestable.

We do not even have to examine the balance sheet or valuation ratios to see this. Instead, let’s consider the industry and the upside by looking at its peers.

BMW (OTCPK:BMWYY) is a reasonable comparison, a luxury vehicle company that produces great cars that people love and sell well. BMW is a $55 billion company. Ford (F) is worth $38 billion. GM (GM) is worth $51 billion. Honda (HMC) $53 billion. One outlier is Toyota (TM), worth over $150 billion.

If Tesla one day produces and sells high volumes of cars in the US and internationally, cars that people love and sell well. Well, then... maybe it should be valued at around $50-60 billion, right?

Tesla has already achieved this market capitalization, and it has a long, long way to go to deserve it.

It needs to:

  • Survive a harrowing financial crisis (okay, now you can look at the balance sheet)
  • Survive increasing EV competition from established automakers
  • Survive Musk’s recent PR explosion and impending lawsuit
  • Survive the SolarCity money pit
  • Address safety and reliability concerns
  • Start to actually produce and sell high volumes of cars

Tesla is fully valued today as the company it wants to be in 20 years if everything goes right.

The upside is gone, yet substantial risks remain.

What if I’m Wrong - Taking Flyers and Diversification

Let’s say I felt more equivocal on the company, felt there was a chance I could be missing out on a 100-bagger.

Should I take a flyer?

There is an opportunity cost to diversification.

As Charlie Munger said:

“The Berkshire-style investors tend to be less diversified than other people. The academics have done a terrible disservice to intelligent investors by glorifying the idea of diversification. Because I just think the whole concept is literally almost insane. It emphasizes feeling good about not having your investment results depart very much from average investment results. But why would you get on the bandwagon like that if somebody didn’t make you with a whip and a gun?”

I see some investors building highly diversified portfolios with 50+ stocks, and I question the logic. I doubt the performance of these portfolios will meaningfully diverge from an index fund with a similar strategy.

As investors, we should seek high conviction ideas through careful analysis then place measured bets in order to outperform.

The opportunity cost of taking a flyer is that I cannot put that money into a company I feel more strongly about, a company like Facebook or Starbucks. With JD.com (JD), my analysis indicates the potential rewards outweigh the risks, and the returns could be spectacular. With Tesla, that ratio is horribly skewed in the opposite direction.

I’m not opposed to taking the occasional flyer, but when I do, the risk:reward profile and opportunity cost of investment must be carefully weighed. All that said, I will admit this is an area I continue to struggle with as I attempt to pare down my investments each month.

In the end, Tesla is uninvestable. The price may be higher in a month than it is today. It may be higher in several months or a year. I cannot predict this.

But nothing I have seen indicates that an investor should have anything to do with Tesla.

This Month’s Picks

Enough about Tesla.

Let’s talk about this month’s buys and a few companies I’m keen to load up on. I also want to mention one I bought last month that will not be on this month’s list.

This month’s purchases include 20 companies. As you can see, this month favored the Stalwart group, although I’m taking a handful of aggressive 10% shots in the High Growth Picks area. The portfolio comes with a yield of 1.0% and a PE ratio of approximately 26.

1.) Facebook (FB)

Ouch. Within one week of buying into Facebook, the stock face planted 20% overnight on guidance for slowing revenue growth.

Time to panic, right?

No.

It stings to see 20% of an investment vanish, but as a long term investor I am not worried.

For a detailed description of my thinking, please check out my Facebook dedicated article.

Here is the short version.

Even with decreasing revenue growth, Facebook’s growth remains strong. To expect a company of this size to continue with 40-50% year over year growth in perpetuity is not realistic. The valuation remains reasonable, the balance sheet is pristine, and the company is actively developing areas for future growth.

I am happy to take advantage of the price cut.

Facebook is going to be a much more valuable company in ten years.

2.) Alibaba (BABA)

I am very bullish on Alibaba.

Alibaba is a phenomenal company. It draws a lot of comparisons to Amazon.com (AMZN) for its e-commerce business, but the parallels go well beyond that. Like Amazon, Alibaba has transcended its e-commerce roots and has become a dominant, generalized technology company.

Alibaba has its hands in… well… almost everything in China, and it is expanding beyond those borders.

Alibaba is a dominant e-commerce player, has a high growth advertising revenue segment, is involved in peer to peer payments, develops one of the leading Chinese cloud platforms, and sells to the largest and fastest growing middle class in the world.

Additionally, the company perpetually seeks to expand into new areas, pouring money into AI development and building a food delivery service. It is partnering with Starbucks, another company I am bullish on, and recently invested nearly a billion dollars in a Turkish e-commerce player.

Alibaba has a strong growth history and is in the right market for this to continue.

Chart
BABA Revenue (Quarterly) data by YCharts

In addition, the valuation is reasonable for the growth with a forward PE ratio of 22.

Some trade war concerns have given us a gift in Alibaba’s share price, as it has pulled back from a high of 211 to present value in the 170s. These concerns will not affect Alibaba’s long term performance and the price swoon should be seen as an opportunity.

I will take advantage and load up here.

3.) Baozun (BZUN)

Anyone notice it wasn’t on this month’s buys?

I won’t be buying BZUN for now.

Here’s the short version: I don’t like it at this price.

The long version:

When making investment decisions, I write to think. Writing forces clarity of thought as I succinctly group the most important pieces of information together and nail down the investment case.

Over the last couple of weeks, I wrote an article to be published on BZUN outlining my investment thesis for the company. I dug through the data, read conference calls, cast out my research nets, and put all of it together.

By the end of writing, I no longer felt as strongly about the investment case. I’d done my original research back in mid/late-2017 when the company was far cheaper.

Today, it is priced to perfection in a very, very competitive space.

It also remains to be seen how things will go as the company switches from a lower margin inventory model to a higher margin services model.

I am no longer confident in the risk:reward profile and have moved to the sidelines.

As stated, I do not feel a compelling need to take a flyer on every half decent idea that crosses my desk, though BZUN will remain on my watch list.

Thank You to the Seeking Alpha Community!

At first I wasn’t nervous about posting my portfolio online. I thought it would be fun and might spark good debate and the mutual benefit of shared thinking.

The article went live, and the comments poured in.

Woah!

My hands were sweating, my chest tight. There may or may not have been some palpitations. I had to take some deep breaths to read even the first one.

It turns out it is hard to put yourself out there.

That said, my nerves were entirely unfounded. Big thank you to the community for the positive and constructive feedback! As a firm Growth Mindset-er (must read book!) I cannot emphasize strongly enough how much constructive feedback is appreciated.

Thank you as well for the many stock recommendations which have been fruitful ground for research. Some of those tips may be making their way into future articles as I work through my due diligence process.

Good luck investing!

Disclosure: I am/we are long all stocks mentioned excluding TSLA and auto stocks. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Editor's Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.