Tesla Stock Crash – My Message To Tesla Investors 

I’ve been a Tesla stock bear over the last years and I would always receive a lot of hate when I would do a video on Tesla and also lose hundreds of subscribers. However, now that the risks are materializing and the stock is down, I think I can actually add value to Tesla investors because I know a thing or two about buying or holding a stock that is crashing.

I want to discuss 3 things that should help:

  • Forget about market noise
  • Growth stocks strategy
  • Buy or sell solution

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Source: CNN Money

The reason for the above decline is simply psychological, I don’t think the risk reward ratio when it comes to Tesla has changed much over the last 5 months. Tesla has always been a risky play but now the sentiment has turned negative and it is all doom and gloom.

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So, in just 5 months, the stock went from being a market darling with $3,000 price targets to being the most hated with $10 price targets.

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In such a crazy environment you have to focus on 3 things:

  1. The reason you bought the stock in the first place – forget about the noise

If you know why you bought in the first place and nothing spectacular has happened with the business, short term stock market fluctuations don’t matter at all. The key is that you understand the risk and rewards well, the likelihood of the positive and negative scenarios unravelling. Focus on that and forget about the news and the market’s noise.

If we take a look at what institutional investors think, we see that such jumps in yields are normal and related to the market’s sentiment.

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Source: Borse Berlin

  1. Tesla is a risky growth stock – have a strategy

I assume many of the Tesla investors have always had a strategy and I hope it was always part of a plan. Tesla is a growth stock, which means there will always be fluctuations in the stock price.

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Such fluctuations have to be accepted as given. The key is what are you going to do about them. Having a set portfolio allocation helps, having a set portfolio allocation to growth stocks helps even more.

Portfolio – 100%

Value Investing – 40% (5 stocks)

Growth/Tech Investing – 40% (10 stocks)

Cash balance – 20%

The above is just an indication and is something I wish every investor should have in relation to one’s preferences. The key message is that growth investing should be part of a strategy, a long term strategy where I would go to Peter Lynch as the best guide.

Lynch’s strategy was to hold many growth stocks for a very long time, this would allow him to find the 10 baggers. If you own 10 such stocks and only 2 don’t go bust and actually become 10 baggers, you will double your money.

Plus, you might buy such stocks when those are cheap, because it is part of your strategy. Interesting enough, Tesla is still a 10 bagger for the early growth investors. 

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If growth is part of your strategy, the likelihood of finding growth stocks early increases significantly. Don’t chase market darlings.

  1. Buy more or sell

This is the hardest question to answer but if you can leave emotions aside, it is possible to answer it. If you are looking at your Tesla stock and you feel bad, it means that you are under the influence of emotions. Being under the influence of emotions is not good when investing in stocks. 

Try to rationally estimate what can happen. You probably know more about Tesla than I do, therefore also understand the value of it better. So, try to create scenarios, from the worst case one, to the best case one, attach probabilities to those and see how would such scenarios affect your portfolio, personal finances etc. Understanding the risk and reward in relation to your personal situation and portfolio will give you the answer to whether buy more, hold or sell.

If you need help with a worst case scenario for Tesla, you can always watch one of my old videos.

So, to conclude, I am not happy to see what is going on with Tesla because it is people’s hard earned money there and it is never nice, plus it can be painful. I keep having the picture of my former students that have been playing with Tesla’s stock. My message is pretty simple: Have a strategy so that whatever happens you are ok. Be objective in assessing the situation. Try to really see how this fits your portfolio and forget about the noise.

Further, if this doesn’t work well, don’t be pushed away from investing, just keep in mind the risk and reward next time and allocate your money adequately.

Tomorrow I’ll discuss my general stock market crash strategy so you might want to consider subscribing as I think it will be very valuable. 

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You can retire by investing in the stock market – just don’t invest like everybody else in index funds

  • It is possible to retire earlier using the stock market if you focus on investing in businesses. Investing is all about business earnings and value.
  • This paper will show how historically, you can do amazing things if you think before you invest, or at least avoid the stupid mistakes others usually make. When it comes to retirement, small current mistakes are extremely costly in the long term. 
  • I’ll give you an example of a simple stock that has been paying a dividend for 89 years and will likely outperform most indexes. I’ll also add 5 stock ideas. If you find 20 of such stocks, you practically need nothing more for your retirement.

Financial independence and retiring is the goal of many investors. This booklet will cover current and future potential investing opportunities and strategies that will help you achieve your financial goals in the long term. To achieve financial independence sooner, with more certainty, one has to invest in investments that offer less risk and, at the same time, higher returns than other investments – this is called value investing.  

Financial independence topics covered are:

  • Stock market and retiring – great tool but use it smartly!
  • The economy, inflation and your financial independence
  • Real estate – the best leverage, diversification and inflation protection option.
  • A fixed vs. a dynamic investment mindset – over decades, things change.
  • Diversification, yes, but not like and when your banker advises.

In this article: 

Contents

  • Stocks can make you financially independent – but mind the valuations, value, business strength and risks
  • The value investing truth – buy businesses with value
  • PE ratio and price to book value
  • Value investing – Margin of safety
  • Current value and strong earnings example plus 5 stocks to watch
  • How can you find such stocks?

Index funds might not be the vehicle to your financial independence

The predominant investment advice you hear is to invest your money in index funds, usually the S&P 500 (SPY). Invest on a monthly basis and simply forget about it. 

That is a good advice, unfortunately it is better suited for the 1980s or 1990s than now. Nobody can argue that stocks have been an amazing investment over the past 35 years. Those that invested $1,000 in the S&P 500 in 1982, have now $26,000 and the dividend is $480 per year. Not bad on a $1,000 investment. Those that invested $100k in 1982, have now a dividend of $48k per year and a capital of $2.6 million. I would call that a wonderful retirement scenario.

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Source: Macrotrends

The problem is that back then, really few dared to invest in stocks. Even investing legends, like Ray Dalio, didn’t invest in stocks in 1982. Actually, stocks looked that bad that Dalio was betting against stocks and practically lost it all. 

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Source: Business Insider

Fast forward 35 years, and you can practically hear everybody discussing how index funds or ETFs are the best way to invest. I agree those have been the best way over the last 35 years, but I argue the same will not be true over the next 35 years. You cannot expect to invest $100k in the S&P 500 today and up with millions in 30 years simply because stocks were cheap back then and now stocks are expensive. Nevertheless, the best way is to still invest in stocks, but as in 1982, the best way is usually not to copy what the herd does.

The value investing truth – buy businesses with value

Let me tell you the little truth Buffett and other value investors like Seth Klarman use, the simple mindset that pushed Buffett to crazily buy stocks during the 1982 period while others, like Dalio, were selling.

Warren Buffett and other value investors focus on business earnings and the price paid for those earnings. To quote Seth Klarman from his book Margin of Safety:

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The thing that makes investing simple is understanding the investing law where long term investment returns are perfectly correlated to the performance of the underlying business. This means that when investing, one should focus on investing in good businesses, not stocks. Stocks are extremely volatile; good businesses simply continue doing business no matter what. In a good year most make good money, in bad years a little bit less and that has been the case since humanity.

The investing core around what your focus should be is that business earnings will determine your long-term returns and those are what you should care about when planning retirement or financial independence. 

Another thing mentioned by Klarman is value, there is a difference when investing in agricultural real estate the produces a healthy yearly yield and in stocks that offer mining cobalt in an African country. With the latter anything can happen while with value, you know you buy value. To quote Buffett:

“Value is what you get, price is what you pay”

Retirement is too important to bet it on promises from companies like Tesla, Lyft, Uber etc. Those might succeed, but if those fail, so does your retirement. I wouldn’t consider such stocks an investing option.

PE ratio and price to book value

The two best approximate indicators of business earnings and value are the price to earnings (PE) ratio and the price to book ratio. The price to earnings ratio simply divides the price, i.e. what you have to pay, with the underlying earnings a business delivers. The result is your business earnings yield, your long-term investment yield.

The S&P 500 mentioned above, has a PE ratio of 22 that leads to an earnings yield of 4.5%.

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Source: Multpl

Approximately 4.5% is what long term investors can expect when investing in an index like the S&P 500. Perhaps even a bit higher as earnings will grow in the future alongside economic growth. I would say 4% to 6% is what you can expect. It is not bad, but there are some risks one has to consider when making a retirement strategy.

The first risk is the S&P 500 earnings yield of just 4.5%. If we look again at the above chart going back to 1871 based on professor Shiller’s data from Yale, the average historical yield was 7.36%, in line with what has been the average historical return from stocks. The problem is that if in 10 years, the required return from stocks is back to 8%, like it was in 1990 and for the most part of history since we have stock market data, investors would actually look at miserable returns over the coming 10 years. Miserable returns are something that doesn’t help with retirement and those are not uncommon when it comes to investing. We have to always expect that one can look at negative real returns over one or two decades.

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Source: Macrotrends

Of course, one would say there are always the dividends, but in 1929, 1966, 2000 and 2019, the dividend yield was 3.3%, 3%, 1.5% and is 1.8% respectively. Thus, if stocks go nowhere for the next 20 years, you can count only on a dividend yield of 1.8%. For me personally, this is a big risk that can be avoided by buying investments that offer a higher yield for the same risk or even lower risk. 

Also, you cannot tell people in The Netherlands or Croatia that stocks always go up. The Dutch AEX index is still 18% below its 2000 peak. Fortunately, it is higher than the 2002 and 2009 lows that represented 70% declines. 

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In Croatia, stocks are still 75% below their 2007 peak.

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Source: Trading Economics

How to know when to buy in order to catch the upside and avoid the huge downside shown above? Look at valuations (business earnings in relation to price) and book value. The Dutch and Croatian markets had crazy valuations in 2000 and 2007 while the PE ratios were low in 2009. Given the above, I wouldn’t bet most of my retirement on any index just because it might have worked for some in the past. It doesn’t mean it will work for me now. It might work, but it also might not given the current valuation compared to historical parameters, too much of a risk when it comes to retirement.

Starcapital has excellently summarized what you can expect when looking at business earnings. To even out cyclical influences they have used the 10-year average PE ratio, the so-called CAPE ratio (cyclically adjusted price earnings). As the current CAPE ratio of the S&P 500 is 30, investors cannot expect great subsequent real returns. The average return can be expected to be around 5%. This is again not bad, but could always be better.