- Tesla stock jumped by about 600 % this year.
- loads of money are flooding the market.
- Even Millennials who love spending on high end coffee and eating out are learning that stock market can be just as tasty.
Disconnected stock market
I love Tesla. The car is a beauty. I would love to own one someday. But, when the stock price of the Tesla manufacturer is sold like as if it is a Picasso painting, there is something wrong. I would stay away from it as an investment.
Tesla stock jumped by about 600 % this year. Did the company grow by 6 times? I looked at the details of Tesla’s financials. Tesla sales are up by about 10~15% annually for the last 2 years. The company just started turning around to make a profit. Even if I make a very aggressive assumption that Tesla will have a rich profit margin in the future due to its loyal customers, the price to earnings ratio is still about 400. As a contrast, Toyota Motors has 9 as the price to earnings ratio. The price to earnings ratio is the stock price per every dollar of net profit a firm generates.
Keep in mind, even if Tesla cars become as common as Toyota, the stock price is still excessively high. Enough said. But Tesla is a good example of how the stock market is doing these days. There is a disconnect between the fundamentals and the stock market itself.
As I’ve written about before, the stock market is currently highly overpriced. So, what keeps fueling the it upward? Here’s a key reason: loads of money are flooding the market. Americans are not known for saving. But recently it has been proven that they CAN save when they are staying up in their own homes. We can only buy so much at Amazon.com or Walmart.com, right? Piles of money unable to be spent on eating out, traveling, or gathering is ending up in our savings/checking accounts. According to the U.S. Bureau of Economic Analysis, we currently have a godly level of a savings rate. Take a look at the picture below where it shows a spike in the Household Saving Rate in the United States.
It looks like we are going through the last winter of the pandemic and people are starting to move piles of cash into the stock market. Even Millennials who love spending on high end coffee and eating out are learning that stock market can be just as tasty.
There are also institutional investors involved in this spectacular bubble. After extended low interest rates, they were both pressed to move money from low yielding government bonds to stocks. Also, the expectation of inflation is pushing them to avoid underperformance of bonds if it were to occur, which leaves them reluctantly investing in stocks.
For those who are trying to build a nest egg, I want to remind you that investing is a long-term process, like growing a tree. It is built to grow over time. I see this unusual bubble more like an Indian summer in Minnesota in the late fall. Deceptive but will eventually succumb to the big trend.
Warren Buffett once said, “You don’t have to have tons of IQ”, “You don’t have to be able to play 3-dimensional chess”. “You need a stable personality and temperament.” To be successful in investing, I want to remind you that investing is not surfing where it requires enormous skill to have fun and move forward on the water. Investing is more like sailing, patiently waiting for the right wind and determining to be in it for the long ride.
Ujae & Sarah Kang,
UAK Diversified Wealth Management
Analyst's Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
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