Do this one thing if you trade Tesla

In today’s Exponential Investor…

  • The tweet that aged well
  • Unobviously obvious
  • US$17.5 billion profit vs US$862 million loss

Yesterday I made note about the recent J.D. Power quality and reliability survey. The survey in which it finally got a chance to add Tesla into the mix. And it came dead last.

Not exactly the kind of quality you’d expect from what’s widely recognised as the world’s most high-tech car company.

Nonetheless ,the J.D. Power survey clearly had little impact on traders when you look at Monday’s price action. More on that in a moment…

We have already seen that Tesla’s stock price has gone on one of the most incredible runs this year.

What’s somewhat difficult to fathom is the rise since a tweet from the CEO, Elon Musk.

On 1 May this year Elon Tweeted the following,

Source: @elonmusk, on Twitter

It received 201,900 likes and 37,500 retweets. It was headline news across all the major business news stations. It also raised further debate about CEOs tweeting about stock prices as opposed to official market announcements.

But the interesting part about Musk’s tweet is the trajectory of Tesla’s stock price since.

You see, on Monday 13 July, just a couple of days ago, Tesla’s stock price hit an all-time high of US$1,794.99.

The price at the time of Musk’s May tweet was US$701.32. In just over two months, when apparently the CEO thought its stock price was “too high”, Tesla has gone on to rise a further 155.9%.

This might seem like pure bubble territory. And to a large degree, it is. Tesla is by far the most valuable car company by way of market capitalisation.

But the huge spike and rise to all-time highs on Monday could be traced back to one particularly subsection of the market.

The statistic that really stands out, however, is that on Monday as Tesla hit an all-time high, something remarkable happened on the “free” stock trading platform, Robinhood.

Reports have it that on Monday alone 50,000 Robinhood traders (let’s call them traders, because this does not appear to be investment) added Tesla to their portfolio.

Why? Good question. At a market cap up around US$280 billion, Tesla is one of the most expensive loss-making companies in the world.

But there are a few tailwinds that have blown the proverbial roof off here.

None more so than one of the most powerful trading tailwinds you’ll ever see… FOMO.

FOMO is never obvious, until it’s obvious

FOMO (fear of missing out) is a powerful trading signal, particularly amongst younger, less experienced investors and traders. FOMO was a massive part of the crypto market rise and fall in 2013 and in 2017.

And FOMO was a huge part in the rise and fall of the dotcom bubble. FOMO in a more traditional setting is often called irrational exuberance. But that’s too wordy for most, when FOMO will suffice.

The thing about FOMO is that you can quickly get swept up in it and not even realise until it’s too late.

Buying into a stock that’s on fire can be exhilarating. And then when you see gains from where you entered, it all comes just far too easy. But that’s the point of danger when you’re on to a trend trade like these.

If you’re not ready to make some hard decisions before you enter these kinds of plays, then you can and will get burnt.

I want to note that I’m not saying there’s anything wrong with making a trade on momentum and a FOMO run. These can be very lucrative if you’ve got the wherewithal to trade with the frequency and short-term nature required. But you’ve just got to be prepared to make a very, very hard decision.

And that decision is the exit strategy. You’ve got to go into a trend trade like this with a hard and fast exit point. That’s on the upside and on the downside.

You should decide on where that exit point is before you ever make a play on a stock like Tesla.

If you don’t, you’ll get caught up in the FOMO, and then you’ll be too stubborn on the flip side if it starts to go pear shaped.

Danger, danger, danger!

What makes an exit point so hard though is the little voice in the back of your mind saying, “But what if…”

That’s danger.

Danger, because if you have a hard exit point, maybe it’s 20%, 50%, whatever, and you sell out but then the stock races higher again, you think to yourself, “What if I’d only stayed in longer?” Then perhaps you chase the gains again going back in.

Likewise, if you’re in a position with an exit but the stock heads south, fast, you think to yourself, “But what if this is just temporary and it heads back higher again?”

Again, danger.

Danger because you can then enter a “catching falling knives scenario” trying to buy the stock lower and lower thinking that the bottom must soon be “in”. But also danger because if there’s a false bounce, you may dive back in, only to see newer lows after the fact.

This is why trading becomes fraught with danger for the rookie players. And that’s why inexperienced traders often fail long term, because they lack the discipline needed to do it well.

Sure, you can get lucky and win a few, but danger lurks around every corner without the right approach to it.

There’s always an argument that an investment in a company like Tesla today is an investment in the future of green energy, green tech and a cleaner world. Maybe, but you also need to appreciate in the last decade that it’s shifted about one million cars and never turned a full annual profit. Whereas a company like Toyota shifts 10 million every year… and is profitable whilst doing it.

Just to emphasise that point a little more: in its year to 30 September 2019, Toyota had net income of US$17.5 billion. And Tesla made a loss of US$862 million. Yet their current respective market capitalisations are approximately US$170 billion and US$277 billion.

Again, trading Tesla might be highly exciting. And trading these sort of momentum plays can work out ok, if you know what you’re doing and have the discipline to know when to get in and definitely when to get out.

But as an investment, my view is that Tesla stinks. Great company, an industry disruptor and hugely successful for investors to this point. But the bubble is in full effect and the FOMO is strong.


Sam Volkering
Editor, Exponential Investor

Category: Commodities

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