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.
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.
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.
In such a crazy environment you have to focus on 3 things:
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.
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.
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.
If growth is part of your strategy, the likelihood of finding growth stocks early increases significantly. Don’t chase market darlings.
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.