Should You Buy Tesla Stock?

Paul Winkler: And a welcome. This is “The Investor Coaching Show,” Paul Winkler talking about the world of money and investing. So much stuff to talk about.

There has been just a load of news all over the place—plus questions. And of course, when you have questions, paulwinkler.com/question is how you ask them. A couple of times this week, I had this one question that came up, and I thought, I probably ought to answer it.

A good friend of mine asked the question. And then of course he’s not the only person that asked me the same exact question, so it might be worth going into.

The Media and Investing

A comment I often hear is, “Hey, I want to get into this investing thing. I’m wanting to learn a little bit more about investing, and my kids want to learn about investing. And I think what I’m going to do is buy a particular stock and just kind of watch that stock.”

Now, I’ve had friends of mine just pick up certain stocks just for the fun of it, just as a novelty more than anything and frame a stock purchase of a company that was supposed to end up being a big deal.

And another one is Marvel Comics, I think it is. People will actually buy that stock simply to get the annual reports because they’re cool. They make it like the comics. It’s the whole thing, their annual report. So it’s a lot of fun.

Outside of that, I’m not a real big fan of doing that.

And people ask, “Well, why? What is it?”

And well, there really gets down to the fact that I’m taking a risk that I’m not getting paid to take, or not likely to get paid to take.

And when we choose companies and their stocks stocks. Typically, it’s not us really choosing those companies. As I’ve said before,

People don’t usually choose companies, companies choose them.

And that is because we hear about them. And I say the companies choosing us, figure of speech, because it’s a stock that we hear in the media.

The media talks about certain companies. They will talk about companies that have been doing well or companies that are hitting the news, or typically those companies that have had some good performance in recent history, and their stock price goes up.

And of course, because their stock price goes up, the media covers it because that’s what they do. They appeal to greed.

Appeal to your sense of, hey, I’m going to get rich and everybody wants to watch a story or hear a story about somebody who’s getting rich.

In fact, I got some interesting stuff on that. Probably, I don’t know. I may cover it a little bit later in the show this week. We’ll see how much time I have on the show today because I have so many different things that are coming up. I’ve got a workshop coming up that I’m going to be talking about as well.

Why I Don’t Buy Single Stocks

But anyway, so this particular stock has been making the news, and I might as well tell you, and Tesla is the company that people have been asking me, or a few people have been asking me about, and saying, “Do you think I should do something like this?”

And my answer is no.

In our ADV, which is our disclosure to the public, I always tell people, I can’t give you advice to buy a single stock or wouldn’t do it for you. I wouldn’t do that to you, as I like to put it.

And the reason being is I don’t believe it’s in the best interest of the investor to invest in single companies. Anytime I buy a single stock, I am buying it off of somebody else that is willing to sell it.

If I believe that this company is going to do well, if I believe it’s going to outperform expectations or have higher returns than any other company, then I would keep that information to myself.

Number one, I would probably go and just sell everything I’ve got and just buy that one stock, or I’d borrow a ton of money and leverage the daylights out of it. And then pay 3% interest and get my 90% return, and then pay back the loan and be fabulously wealthy. That would be a great way of going about things.

But people choosing individual companies—individual stocks—typically doesn’t end that well.

Investors in Single Stocks Have a Poor History

People don’t get very good returns doing that type of activity.

If we look at studies of pension plans, major, major study of pension plans, they found that they studied 90-plus pension plans, and not one of them, and these are pretty smart people, pretty well-informed, pretty, well-educated, not one of them in the Brinson, Hood, and Beebower study actually had a return that was increased or improved as a result of that activity.

Now, if they’re not getting improved results from stock selection, and they are some of the most educated people out there, what’s the likelihood of any of us actually doing it? 

And market timing too. Trying to figure out which areas of the market I should be in, which areas I should be out of, when I should move into certain market segments or move out of them, or based on information on what I think is going on in a different country. Get involved a little bit more with their stock or increase their stock.

And if you look at, for example, I’m talking about Tesla, right? Just giving that as an example of a stock that people are asking me about. If you actually go out … and this is not an endorsement for this type of activity by any stretch of the imagination.

The Morningstar is a software program that I have a subscription to, and it’s a fairly significantly expensive subscription, but I get the information or I get the subscription more just for information and breakdowns about mutual funds and sub-accounts and separately managed accounts and things like that.

Because what Morningstar basically does is they get annual reports off of all of these investment alternatives. Tens of thousands, hundreds of thousands of sub-accounts, tens of thousands mutual funds.

And what they do is they take that information, they break it down, they say, how much of this mutual fund is investing in large companies? How much of this mutual fund is investing in small companies?

How much is investing in value versus growth? How much of it is in international?

How much is in bonds? What kind of bonds? What’s the duration on the bonds? What are the maturity of the bonds? And what is the average maturity?

What are the risk levels? What are the ratings of the bonds inside of the portfolio?

What type of stocks? How many stocks in the portfolio?

It’s just really, really detailed. But I certainly don’t get the information for the ratings of the mutual funds.

What’s the rating? What’s the star rating on that mutual fund? And it was literally in—Wall Street Journal basically says that it’s a five-star curse.

If a fund has had a really good performance in the past, its likelihood of continuing that performance isn’t that great.

Because of the fact that when we look at performance, we’re looking at in essence, many times it’s just luck, or maybe that fund just happened to be a little bit more growth-oriented during a period of time when growth stocks did better than value stocks.

Or maybe it’s a little bit more value-oriented in time when value stocks did better than growth stocks.

So I’m looking at the returns and I’m surmising that the better returns or the better results are due to what? Skill. I’m assuming it was due to skill.

When in reality, it may just be due to the luck of the draw that the fund manager just happened to be a little bit more over—“Well, it was skill that made them overweight in that area, Paul.”

No, because if that were the case, we would see past performance repeating. The best fund managers going on into the future and performing well into the future.

And we just simply don’t see that. But it sells mutual funds.

If you want an investor to take action and buy your mutual fund, show them good past performance.

The industry knows this. That’s why they love the star rating system.

And they have no problem with it at all because it sells mutual funds, and all they have to do to beat the system—and many fund companies do this—is have 18 funds that are investing in the same exact area of the market. They’re investing just slightly differently.

And one of those funds is going to do better than the others. And that’s the one we’re going to market. Now, that’s what we’re going to do.

That’s the game that they play in the biggest fund companies, every last one of them, even the ones you think of as being virtuous because the media talks about them all the time are engaged in that process.

We see it. So you’ll have all these different funds investing in the same area of the market, and then one of them will get a high rating, and then you get attracted to that particular fund.

An Investor Sells a Stock for a Reason

Well, Morningstar, back to them, they actually had this guy, Seth Goldstein, had done a rating on this particular stock.

And people have been saying, “Hey, been seeing all good kinds of good stuff on this particular company. Paul, should I buy it?”

And I’m like, “I don’t buy individual stocks. But if you look at what Morningstar’s rating is of it, they’re basically saying it’s slightly overvalued.”

Now, I would basically disagree with that as well because you’re assuming that the market is all wrong and they’re paying too much for it.

Maybe they are. Maybe they aren’t. We only know in hindsight though. We don’t know ahead of time whether that’s the case.

Now, if you think about it this way, if the shares were really undervalued—and let’s go back to the case that “Oh, it’s selling for less than what it’s really worth”—If they were really undervalued, and they’re getting ready to just shoot up in value and take off, why would anybody that currently owns—because that’s what you’re doing, you’re buying it off of somebody that already owns it—sell it to you for a low price, and give up the great return that is sure to come?

Because they think, “I know that this is going to take off. It’s going to be great.”

Well, guess what? There’s somebody on the other side of that trade that owns that stock that is seeing the same news that you are. 

And realize that when you buy a stock, you buy it off a market maker. They buy and trade the stock all day. In order to sell it to you, they buy the stock off somebody else who owns it—and they want to make as sure as they possibly can that they don’t overpay for it—and then they turn around and sell it to you.

The market maker is basically the go-between between the seller and the buyer. And they don’t want to pay any more for it, and they don’t want to get paid any less for it when they turn around and sell it to you either.

So that’s why you see these things when you watch, “The market crashed today!” you see that kind of stuff. And they’ll show a picture of a person on Wall Street, his head in his hands, just looking all distraught.

Oh my goodness. That’s amazing.

It’s very possible that person bought a stock and turned around and wanted to sell it. They wanted to mark it up and sell it to the next person.

They couldn’t get rid of it on time because that’s a risk. You’re the market maker. You may buy something and actually, it goes down before you can sell it to somebody else. But usually trades take place so that it doesn’t even happen.

The media is really good at finding pictures of people that are all distraught because it goes well with the narrative that is on the TV screen or in the magazine or in the newspaper or whatever. 

If you look at this particular stock that I’m talking about, the price that it’s selling for, for every dollar a book value is over $25, according to Morningstar.

You look at that and go, “Well, how does that compare to other areas of the market?”

Well, the S&P 500, and this is high right now, is selling for over $4.

And what is it? Six times the price.

You think about that and go, That’s not a bargain, is it?

Now, that doesn’t mean it can’t go up. I mean, good grief. Look at how many times things that act absolutely … you don’t know what’s making them go up or go down, like cryptocurrencies and things like that.

And you really just kind of that thing that goes up and down based on supply and demand. It doesn’t create anything. It doesn’t produce anything. So it’s the beauty of the stock market.

You own companies, you own stocks, you own companies that produce stuff. They’ve got to pay to use your money. They pay in earnings.

And the reality of it is, dealing with cryptocurrency, you’re not dealing with anything like that. They’re not paying to use their money.

It’s just going up and down in value based on somebody that paid more for it than you paid for it, if you happen to own it and it goes up or you’re just watching trades take place.

The Investor’s Psychology

So the stock can go up. We don’t know when it’s going to go up. We don’t know when it’s going to drop.

But here’s the reality, when they do drop in value, when stocks drop in value, it is so rapid. And it’s because, let’s say if something drops rapidly, and you’re out there and you’re thinking, I think I may buy this, and you notice the news like everybody else does that it dropped a lot.

You’re going to go, “Well, wait a minute. I don’t want to catch a falling knife. This doesn’t seem like a really good idea.”

So you’ll wait. You won’t go and buy it or you’ll pay a price that’s way, way lower.

And you won’t jump in it because why would you jump in it? Why would you go and buy something that has just fallen?

Why would you pay the old price for it? You wouldn’t. It wouldn’t be rational.

The psychology is so, so difficult.

And what happens is the rise of stocks and the fall of stocks—there are so many reasons for it. There’s news events. There’s, let’s say, just investor sentiment.

We have people that maybe feel good one day and they don’t feel good. And they’re always measuring that.

Are you optimistic? What do you think is going to happen? How do you think things are going to play out in the economy? What’s going to happen next?

And people’s sentiment is really driven by how they feel on a particular day, what’s going on, what the news is, what’s in the economy, what the news about another company.

One company’s news can actually affect another company’s stock price simply because they might be related. They have a correlation with each other.

So we’ll drop the price we’re willing to pay for one company because another company that might be somewhat like it is falling as well, or maybe had some bad news.

So what happens is that people thinking the same thing that you do, that maybe the stock is going to go up in value well, what are they going to do? They’re going to bid the price up.

And what’ll happen is people that currently own it go, “Well, if you think this is going to go up, great. I’ll sell it to you. But I’m going to sell it to you for a higher price right now and I’m going to make the money on your optimism. If you’re right, I won’t have missed out on the upturn.”

So that is what happens in investor psychology in buying single company.

And the reality of it is fund managers engaging in this activity, we don’t see increases in returns as a result of their efforts. 

So that’s why I wouldn’t want to do that.

Now, if I bet that this company is going to do better than any other company out there, that’s kind of a farfetched type of thing, especially when it’s a company that’s really, really popular and the price is super, super high already compared to the assets of the company.

That’s not to say that it couldn’t. It can. It happens.

In fact, I got an interesting story about the guy that I was talking about. I was reading about this guy with this Roth IRA. And he has this huge Roth IRA. Why?

Because he had this stock that took off to the stratosphere that he bought early on. And that’s why everybody is talking about his Roth IRA. Because he happened to hold it in a Roth IRA, and it’s tax-free.

That’s the type of stuff that makes the news. The media will chase after this stuff because they know that people will read these types of stories as odd as they are, as crazy as they are.

It’s literally why people will read about somebody that’s a lottery winner or find out who the lottery winner is.

That’s why this stuff makes the news because it is so fantastic. It is so different.

It’s such an outlier as we’d call in statistics, but you don’t want to bet your financial future on this kind of stuff. You don’t want to bet your financial future on luck.

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