It’s cool to own Tesla: Teaching finance within the schoolroom

By Bob Huxford

When, in a newsletter post at the start of May, I questioned whether the meteoric rebound of some of the leading Nasdaq companies was a case of too much too soon it turned out to be me that was getting ahead of myself. Since then Microsoft is up a further 23%, Amazon up 44%, Salesforce up 63% and Apple up a remarkable 68%, all hitting all-time highs in the past couple of weeks after delivering strong results in the face of the pandemic. 

Fair enough you might say, Covid has proven the digital world’s potential for replacing the traditional office or bricks and mortar shop and these companies will likely be the biggest beneficiaries. Plus, they’re hugely well capitalised, so can weather the Covid storm while increasing market penetration and bagging bargain priced acquisitions as weaker competition succumb.

Despite these positives the share prices of these companies are still incredibly punchy, given the full effects of Covid on the economy have not yet washed through. There’s still plenty of fallout to come which will likely drive stock market volatility, and that’s regardless of the uncertainty of the upcoming US elections, trade wars with China and a potential second wave of the pandemic. 

No major company’s rise since the start of the pandemic has been as rapid as that of Tesla. Last week it hit a valuation of $464 billion, seven times that in March when Covid fears were at a peak. This made it the world’s seventh most valuable company and Elon Musk the world’s third richest person, overtaking Mark Zuckerberg. All this despite having only made $104 million of net income in the second quarter– at that rate around twelve hundred years of earnings to equal the market cap – though this was ahead of the $250 million loss predicted by analysts. 

While on a family journey last week I was bemoaning this dislocation between Tesla’s fundamental and market values (I’m a lot of fun on road trips) when my 12 year old son unexpectedly opined from the back of the car: “But Dad, Tesla are so cool, they make the best cars in the world. They’re like Apple but for cars instead of phones.” 

In some respects he’s right – Tesla is more than just a car company. It’s a huge innovator in the move to electric and self-driving vehicles, while its battery technology may have many more applications beyond automotive. Its aim is to rewrite what the car is, which is pretty cool, just as Apple redefined the phone. However, Apple has redefined its market whereas Tesla hasn’t, as yet, and Apple earns around 100 times that of Tesla yet has only four times the valuation. 

Why is it that Tesla’s share price growth has massively outpaced even the other Nasdaq giants? Is it, in part, simply because they are perceived as being cool? It’s often been suggested that part of what is driving these stratospheric price rises is increased retail investment activity through free online trading apps – the Robinhood effect as it’s called. These apps have recently driven a huge increase in retail investor activity with around six million online trading accounts opened in the first half of 2020 alone, at least half of which were with the Robinhood platform. 

Certainly, part of Tesla’s huge rise at the start of last week was attributed to it making a stock split, such that its shares suddenly became accessible to smaller investors, suggesting many of them might be piling in. How much fundamental analysis and due diligence are a lot of these smaller investors putting into their investment decisions? Given the hype around Tesla and Elon Musk’s image as the modern-day Thomas Edison with his other ventures into space travel and solar energy, might a lot of investors, particularly younger ones, simply want to be a part of the cool company that they see as ushering in their new future? Why should they care about PE ratios and PEG factors when they get to be a part of the revolution? How many are also getting in because they’ve seen their friends doubling their money and want a piece of the action? Of course, the FOMO attitude is great while the party’s going but you don’t want to be the last one dancing when the music stops. Not only that but FOMO drives bubbles and these are bad for the economy, with capital being diverted away from places it would be best employed. 

Tesla already saw a sharp retraction last week, dropping some 20% from its high (although it appears to be on the way back up again) and there’ll be some retail investors out there who may have lost a lot of money already. Perhaps Tesla will fulfil its promises and it won’t be the stock that causes many of these gamblers to lose their shirts, but an investor that doesn’t put sufficient effort into understanding the risks will inevitably get stung somewhere along the line.

This leads to the case for introducing some element of financial training into schools. It isn’t taught anywhere and yet understanding how best to employ and safeguard our money would have a huge influence on our ability to lead stable, successful and enjoyable lives. This goes from personal finance - budgeting, understanding mortgages and compound interest etc. right through to the basics of stock valuation.

In my view this should be mandatory for all ahead of leaving school. It could ultimately help save a lot of people from a lot of pain. Six million trading accounts in six months is a heck of a lot and there are likely thousands of novice investors out there right now making uninformed, hasty investment decisions that in the current volatile environment could be extremely costly, with no protections if they do happen to lose all of their hard earned savings.

If this increase in retail investment is part of a growing trend then we should be doing all we can to help prevent future generations from making mistakes that are costly to themselves and the wider economy, while also helping them to benefit from the success of our best companies.