James Anderson, the feted boss of Scottish Mortgage Investment Trust, is a big fan of Elon Musk’s Tesla.
His fund, the UK’s biggest investment trust, is one of the electric car maker’s top shareholders. And there is a large and growing possibility, he has claimed, that Tesla will one day become ‘the most valuable company in the world’.
That will be music to the ears of anyone who has piled into the stock in recent months as its shares roar higher.
Tesla shares have risen 447% since June last year
Since June, when they skidded to lows of $177, they revved up to peaks of almost $969 – and then back down to below $800 again.
From trough to peak, it amounts to an astonishing 447 per cent increase in a little over seven months. So what is fuelling the rise? And is Anderson a genius or just badly mistaken?
There are various theories about what is causing Tesla’s surge, but no certain answers.
From the ‘short squeeze’ – shares getting a lift as investors who bet against Tesla unwind their positions – to the rush of retail investors wanting a slice of the action, there are several market forces that have helped push the stock higher.
But there is also the growing sense of optimism exuding from the company, which has posted two quarterly profits in a row, hit record production numbers, opened a factory in China and stands to benefit hugely from the coming electric car revolution.
And although much has been made about ‘Tesla killer’ electric cars being made by traditional car manufacturers, some analysts say none of these can match the range or capabilities of Musk’s machines.
Or, as Anderson has put it: ‘These companies cannot compete with what Tesla is doing.’
But before you jump on the bandwagon, it is worth remembering that a company’s fortunes – especially one so closely linked to its boss – can change quickly.
Still, anyone wowed by the success of tech giants Amazon, Google, Facebook and Netflix in the past two decades, as most investors surely are, could be forgiven for feeling the fear of missing out.
Tesla’s supporters claim it still has a lot of growth ahead of it.
So what should you do when a stock like this pops?
Russ Mould, investment director of AJ Bell, says Tesla’s shares are ‘either going to keep going up like a rocket or come down like the stick’.
He points to similar astonishing rises that were followed by meltdowns, from the dotcom bubble in the early 2000s to the rise and fall of Bitcoin from 2017 to 2019.
It’s worth noting at the moment that Tesla, which produced about 370,000 cars last year, is worth almost three times more than General Motors, which makes around 10m cars each year.
Much has been made about electric cars being made by traditional car manufacturers, but some analysts say none of these can match the range or capabilities of Elon Musk’s machines
Mould adds: ‘Investors have two choices: let the trend be their friend, in which case they will just let the shares ride, or take the view that even a good stock with a strong narrative and entrepreneurial management has its price – and that, on a short-term basis at least, Tesla’s valuation looks very, very rich.’
He recommends asking some back-to-basics questions from the checklist devised by Warren Buffett’s business partner Charlie Munger: Do you understand the business? Does the business have a durable competitive advantage? Does management have integrity? Does the stock come at a sensible price?
Weighing up the answers truthfully is key to your decision.
Investors wanting a less risky way into fast-growing tech equities can turn to trusts such as Anderson’s Scottish Mortgage, whose top holdings, as well as Tesla, include Amazon, Illumina, Tencent and Alibaba.
And notable others include rival funds Axa Framlington Global Technology, Polar Capital Technology Trust and iShares Automation & Robotics ETF.
But you should also take note of Anderson’s investment strategy. His fund aims to invest early in the most disruptive tech companies and is prepared to stick with them for the long haul.
‘Our view,’ he told Citywire in 2018, ‘is that the point of equity capital markets is to provide serious amounts of capital for the long term, for projects that are for the good and that are driving forward our societies and economies. That is what Tesla is doing.’
But he adds: ‘One of the great difficulties in financial markets is the outrageous level of certainty that people have in their views.
‘Our position on Tesla is we don’t know if the company will be successful. We do not know where the share price goes.
‘We certainly believe there is a good possibility that Tesla will prove entirely and highly successful – and the returns we make to that would outweigh the downside. But one should always try to phrase things in terms of probabilities and payoffs, rather than certainty.’
So don’t bet the farm on runaway stocks such as Tesla – but don’t write them off either.
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