Current Thoughts on Tesla

Finally, though at times he seems superhuman, Musk is constrained by the number of hours in the day. As of today, he is running Tesla, SpaceX, Twitter (x.com), xAI (the maker of Grok — a ChatGPT competitor), The Boring Company, Neuralink, and oh, yes, DOGE. The EV market is getting more — not less competitive. Tesla needs an undistracted Musk.

One last thought: Folks have been telling me that Tesla declined by 40% off its high. I want to offer this gentle reminder: It is the same price as in November 2024, when President Trump got elected. Trump was supposed to be a huge tailwind for Tesla, and may still be for the approval of robo-taxis, but so far, he has ended up being a huge headwind for Musk’s brand.

We live in a very politically charged environment and a divided country. Half of America and the bulk of Europe hates Musk, and thus Tesla (though I’m sure they love him in Russia). Any way you look at it, this is not helping Tesla’s brand.

How can we protect the gains we have made if the market enters a deep bear phase? How do we hedge our portfolios?

I have several answers to these questions.

First, we don’t own the market. I keep repeating this, but it’s important to remember, especially in a recession. The market — the average stock listed in the U.S. — is very expensive, but [if you are an IMA client] your portfolio looks nothing like “the market.” In fact, a good chunk of your portfolio is outside of the U.S., in markets that are not nearly as expensive as the U.S.

Second, as our stocks approach fair value, we’ll be trimming or selling them. We have done some of that already.

Third, it is impossible to completely hedge out your market exposure economically. We can take large swaths of capital and buy put options, but to reduce short-term volatility, we would have to give up a huge amount of return. We are not going to do that.

Fourth, we are going to be opportunistic about limited hedging. Our track record with hedging is mixed: Our out-of-the-money puts on indexes expired worthless, but our costless Uber collar twice was profitable.

Fifth — and this is the most important point — volatility is not risk. Risk to us is permanent loss of capital. As we analyze and value individual stocks, we look at them as businesses, and we require a margin of safety.

This is not what index fund investors are doing. Over the last 15 years, index investing has turned into a religion that promises never-ending returns from stocks, no matter how expensive the stock market might be. “Buy the dip” and “never sell” have become this religion’s commandments. This faith has received endless reinforcement from stock market appreciation … so far.

Of course, as stock market growth outpaces earnings growth, these dollars invested in stocks buy less and less. But inflows never end. In their defense, investors typically keep doing what worked for them. Most are given a menu of index funds they can buy in their 401(k). They check off the box, and then billions of dollars buy the index every month, with no research and no attention paid to how much these dollars buy per unit of earnings and cash flows. The longer this cycle lasts, the higher stocks will climb the cliff from which they will eventually fall.

This is where things get nuanced, and this is where risk becomes volatility, because in the case of downside volatility (nobody looks at price appreciation as risk), there may be a semipermanent loss of capital — losses or near-zero returns for a decade or two.

“The market” is a somewhat nebulous entity to wrap your head around. Instead, consider Microsoft, Qualcomm, or Walmart. It took them a decade or longer to return to their 1999 levels. A decade is forever in the stock market, especially when you’re losing money. Only a few investors who bought them in 1999 held on through 10–15 years of negative or no returns before things turned around. This is why I am so glad we don’t own the market.

Vitaliy Katsenelson is the CEO at IMA, a value investing firm in Denver. He has written two books on investing, which were published by John Wiley & Sons and have been translated into eight languages. Soul in the Game: The Art of a Meaningful Life (Harriman House, 2022) is his first non-investing book. You can get unpublished bonus chapters by forwarding your purchase receipt to [email protected].

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