Tesla Model S sedan with sun setting behind it

Tesla and the Problems of Finance Capital

James Anderson - November 2017

The value of any investment and any income from it, can fall as well as rise, meaning that investors may not get back the amount invested.

Why on Earth is Tesla so hated? It’s frequently been the most shorted stock in the US stock market. Currently the short interest is around 27% of the free float, which in dollars amounts to a negative bet of around $10bn.

But the antagonism goes well beyond the raw figures. Scarcely a day passes without the financial media trumpeting the thesis of another short seller. Sometimes these funds are kind enough to cut out the middle man and send us their exquisitely crafted 100-page denunciations. We read them with interest.

Meanwhile the media itself – from mainstream to professional to Twitter – is devotedly engaged in a similar task on its own initiative. Open up, say, Seeking Alpha and each day there will be a new negative take on Tesla. At one stage last year I was receiving at least 10 emails a week denouncing us for owning Tesla in savage words. We were told for instance, that we would be featured in ‘the mutual fund hall of shame’ as a consequence. What the motivation is of these criticisms remains unclear to us. I doubt though that it comes from concern for our shareholders.

But whilst the language might be more polite the mainstream media is hardly different. Unlike the volume of email abuse this hasn’t died away at all. From the Wall Street Journal, to the Financial Times, to serious commentators for whom we prefer to have respect, the generalised desire to criticise Tesla is striking and growing. In just the last few weeks the Wall St Journal has redoubled its war of words. In just the month of October 2017 alone it has published articles headlining claims that Tesla is building ‘major portions’ of the 3 series ‘by hand’ and even more dramatically that ‘The Truth is Catching up with Tesla’.

What’s going on here? My guess is that the second headline is very revealing. Whether it be reputable journalists, muck rakers or self-promoting hedge funds, just about all the critics are consumed by a notion that they know ‘The Truth’. This seems to us to be a dangerous, damaging and arrogant mentality. Whether it be about Tesla or any other stock – let alone about market predictions – the uncertainty, complexity and mass of ingredients that makes up messy reality, simply aren’t usefully handled by this type of dogmatism. Whether it be spot forecasts, detailed spreadsheets or price targets, the illusion of certainty is the enemy of thoughtful investment.

To quote Elon Musk back in 2013 “there is a small but growing possibility that Tesla will be the most valuable company in the world.”

We are thrilled at Baillie Gifford to be the largest external owners of Tesla (according to Thomson Reuters) and we’re great supporters of the company. But this doesn’t remotely mean that we think we know ‘The Truth.’ It doesn’t even mean that we deny the possibility of serious failures on the part of the company or of the potential for severe declines in the share price. We think Elon Musk is a fabulous strategic visionary and extraordinarily knowledgeable about detail, but for sure there are aspects of management between these extremes at which he may not be perfect.

We are committed owners of Tesla because we think that there is a very favourable, probability adjusted, potential pay-off in consistently backing the company and its management. That is to say, there is an asymmetry to the potential returns, because the upside from here, if Tesla succeeds, is much larger than the capital we have invested – just as it has been since we started owning the stock when it was $30-40 (sadly not for long). To quote Elon Musk back in 2013 “there is a small but growing possibility that Tesla will be the most valuable company in the world.” Since then both the level of that possibility and the share price have risen. This seems quite intelligible. But considering Tesla – or much else – in a balanced and incremental light is hardly good for headlines. How much easier to just denounce us and other shareholders as dreamers.

But being seen as naive isn’t of great importance in the scheme of things. Most worthwhile investing involves such sentiments. Our egos are not the point. But let’s step back and consider Tesla from a systemic point of view. Isn’t Tesla unusual and valuable in demonstrating what stock markets are actually meant to do? Isn’t raising significant risk capital to pursue uncertain but important economic and social objectives precisely what justifies the existence of stock markets? To repeat in different terms: supporting Tesla implies no absolute faith in its every action or a naive belief that Mr Musk will deliver on the precise date that his demanding ambitions initially project. It doesn’t mean that at times we don’t question some aspects of corporate policy. Truth to tell, we’ve always been gratified by the considered and open response we’ve had from the company, even when we’ve been quite critical.

Neither the media nor large portions of the vociferous short-sellers community seem to address the underlying issues. In a historical context isn’t this a bit troubling? Did Thomas Edison or Henry Ford live in an era in which the most obvious instinct of finance was to bet against them in size at every turn? Let’s not pretend that either of them was less prone to impatience, ego or exaggeration than Elon Musk in search of their outsized ambitions. Edison didn’t really invent the electric light and Ford quarrelled with his initial backers, who were men of some substance but limited vision. Ford at that point had provided far less evidence of his gifts than Musk has by now. Later, investors had to be bought out because they wanted dividends not growth.

Isn’t raising significant risk capital to pursue uncertain but important economic and social objectives precisely what justifies the existence of stock markets?

But even if finance didn’t have a great record back then, our current hostility and impatience still seem extreme. A recent participant in the cynicism is one Mark Yusko, CIO of Morgan Creek Capital, who opined in early October (2017) that ‘Every month that passes without significant deliveries of the Model 3 will shine the lights on Tesla and force stockholders to check under the hood and they may be distressed to find a cash incineration engine’. Well, I’m sorry to disappoint Mr Yusko but I’m afraid this shareholder will not be doing anything of the sort. We aren’t really surprised that the car industry is capital intensive. In aggregate Tesla has spent less than we expected, though more than Mr Musk has at times suggested. We haven’t very much interest in the month that the 3 series ramps up. We’re thinking in decades. We’re thinking in terms of the possibilities, likelihoods, pay-offs and how these evolve as we can’t make definitive projections and predictions about the future. Are we wrong?

The views expressed in this article are those of the author. Its express purpose is to highlight areas of intellectual thought and debate which inform the investment philosophy that underpins Scottish Mortgage, in the hope that they may be of wider interest. The author(s) therefore make(s) no suggestion that this article constitutes independent investment research and it is not subject to the protections afforded to such.

Further, it is not intended to be considered as advice or a recommendation to buy, sell or hold any particular investment. As referenced above, private companies may be more difficult to buy or sell, meaning short-term changes in their prices may be greater. Those considering investing in any of the areas highlighted in the article should undertake their own research and seek advice if unsure. For those looking for information on Scottish Mortgage specifically, please visit www.scottishmortgageit.com