Tesla – Exploiting Cognitive Deficiencies

Good Car, Overvalued Stock

I occasionally like to short [1] stocks for fun and profit. One of my recent shorts is Tesla [2],  the maker of electric vehicles (“EV”) and energy storage systems. This one gives me particular pleasure because it is a great opportunity to take some money off the politically correct (“PC”) crowd precisely because of their cognitive deficiencies. Let me explain.

Tesla’s model S. A nice car, if a little expensive (we mainly regard it as a plaything for people with too much money, which is not meant to detract from its undoubted “cool” factor). Lately doubts about its reliability have been raised, and in spite of the car being heavily subsidized (see also caption under the Model X picture further below), Tesla still loses $4,000 on every Model S it sells. Last quarter, the company burned $360 million in cash.

I have nothing against the Tesla car.  Although I have never owned or even driven one, by nearly all accounts it is a pretty good machine (although clearly with some build-quality issues and probably some long-term reliability ones, too).  Tesla has almost single-handedly revived electric automobiles [3] and brought some useful practices to the automotive field from the technology sector, such as over-the-air software updates.

The Tesla car is also the darling of the chattering classes, particularly the West Coast variety.  Sleek, fast, expensive and electric, nothing announces “I have arrived…but I am still the same laid-back, eco-friendly [4] and PC guy I used to be” like a Tesla.  This has made it a celebrity favourite, as demonstrated by, for example, this six-minute long free commercial on The Late Show with Stephen Colbert which raves about Tesla’s recently downloaded auto-driving features.

These features are common or garden variety for cars in this price category but we can’t apply normal standards to a Tesla. We are talking about a revolution here. Well, you know we all wanna change the world.

Shares in Tesla benefit from the same cult following. I can’t prove this mathematically, but you only have to spend a little time in the Tesla section at e.g. Seeking Alpha, a popular investment website, to realize that the proponents of Tesla are on a PC mission. And like with their politics, these evangelists will not allow logic to distract them.

Cult stock Tesla, weekly, over the past five years. After a huge rally in 2013-2014, it has begun to stall out – click to enlarge.

I have been a businessman for over 25 years. At every point in my career, including when I was working at the all-conquering Goldman Sachs, I have felt the hot breath of competitors on my neck. This is a reality of the “free-ish” markets in which most businesses operate that the PC crowd, most of whom have no direct experience of business, doesn’t understand or acknowledge. And this is the major reason why they are going to take a bath on their Tesla investments.