Tesla is a pocket of inefficiency in a mostly efficient market. Millions of times per day, the market “votes” on the value of Tesla, and each time, its value rings in higher than $0. Whether the Tesla bears are right or wrong, we know that eventually the company’s true value – or “weight” – will be recognized by the market. But it's not just Tesla. For the last couple of years, I've been following a couple of the largest "pockets of inefficiency" I've seen in my career – and Lyft's $20 billion IPO valuation is, unfortunately, just the tip of the iceberg. Today, there are a number of large companies that sport nonsensical valuations. To appreciate just how absurd these values are, let's indulge in a short thought exercise... The market is Imagine you suddenly have $2 million to invest... Say a generous benefactor gives you the capital, and you immediately put half the money to work. You spend $1 million to buy 10 houses for $100,000 apiece in a neighborhood of identical houses. After six months, nobody else is buying houses in the neighborhood, so your purchases are essentially the only “comps” – or comparable sales – around. You become disappointed that your 10 houses are still languishing with a value of around $1 million... So you buy two additional houses in the same neighborhood, but ... This time, you pay $250,000 for each house. generally efficient – except when it isn’t.
If that’s true, how do you explain legendary investor Warren Buffett, who for years posted annual returns of around 20% investing in high-quality stocks? If he can’t know something the market doesn’t, how is that possible? The real answer is that the market is generally efficient – except when it isn’t . Ben Graham, the father of value investing, touched on these dynamics in this oft-quoted bit of wisdom: “In the short run, the market is a voting machine but in the long run, it is a weighing machine.” On any given day, the market is just adding up relatively meaningless “votes” in a glorified popularity contest... But eventually, the market gets it right, and the true “weight,” or value, comes to light. Take, for example, Tesla, the enigmatic electric-car maker and money-burning machine. Many Tesla bears even consider its business to be worth somewhere in the neighborhood of zero dollars (yes, $0). Its CEO is crazy, its financial statements are quite possibly fraudulent, and its business – building electric cars – is something that every established automobile company in the universe is also working on. The market seems to forget this, but behind its shiny veneer, Tesla is an enterprise that the public has a 100-plus year history valuing... It builds cars. I’m not sure Tesla is worth $0, but there is absolutely no reason it should sport a stock market valuation typically reserved for tech darlings like Google or Amazon.
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May 2019
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