When we look at our best investments, it’s striking how much we got wrong. With Tesla, the share price was $8 when we wrote the 10Q in January 2013, versus $800 eight years later. After a few months of deliberation, we started buying it well north of $8, kicking ourselves for not getting on with it earlier. As we were doing so the share price seemed to get away from us further. We paused. The share price continued up. And we resumed our purchases at an even more annoying $20 – more than twice the price a few months earlier! Imagine if we’d stopped altogether, on ‘valuation grounds’?
Deliberations over Tesla in 2013 serve as a hugely important lesson on valuation, though not one that clients tend to like to hear, namely that the valuation we buy in at early on, for a great growth stock, does not matter. It really doesn’t – not if you latch on to a company that then grows revenues at 25 per cent or 35 per cent or 50 per cent per annum for the next decade. If the company delivers on that sort of growth, our investment will go up many times in value. Imagination is the key, not discipline.
Much like our early attempts at imagining how big Amazon could be, our blue-sky case on Tesla fell a long way short of future reality. Remember, we pride ourselves on being the optimists, but the lesson here is the same: if you buy the right company, then even the wildest optimists (i.e. us) will be miles short of imagining the scale of future achievement. Our brains cannot compute the astounding results of high-growth compounding (we’ve cited the Sissa and the chessboard grain-of-rice story before). But at least we were trying, and with years of practice we may even be getting better.
So, for Tesla in 2013 our medium-term upside was $15–$18bn of market cap in five years’ time (from $4bn) and $45bn in 15 years’ time. As you know, the market cap today, eight years on, is over $600bn, so more than 10 times our 10 times upside. But the prescient author of the first note, humbly sensing inadequacy, did finish with a plea to colleagues: help me be more imaginative with the upside.
Nevertheless, what we got right was far more important than what we did not. We believed Tesla had a huge lead in electric vehicle technology and a huge competitive advantage over the conflicted (non) competition, that the auto industry was blind and asleep to what would happen over the next few years, that Elon Musk was the visionary to lead this transformation in transportation, that electric would go mainstream, that the Tesla was simply a superior product to internal combustion engine (ICE) cars regardless of your environmental views, and many other contentions.
The unfolding Tesla story therefore also brought another lesson home: about the blindness that comes from over-specialisation. We have long eschewed sector specialists at Baillie Gifford, and Tesla is a great example of why. The worst people for predicting the future of the automobile, the most blinkered observers – we did ask around – were without doubt the automotive analysts and industry insiders themselves. They all trotted out the same knee-jerk “GM/Toyota/Ford will just squish Tesla when they take it seriously” line.
The analysts were useful – as contrary indicators of the future. They fell into the pattern we also saw with Amazon and the retail analysts: “Amazon must be overvalued because its market cap is bigger than Borders and Barnes & Noble’s combined” (2006). The auto analysts? “Tesla is hugely overvalued because its market cap is bigger than GM”. At a time of impending industry transformation, sector specialists will be the last to see the wood for the trees.
That’s not to say we weren’t frequent visitors to BMW, Porsche and Toyota ourselves, but each time we came away with the same conclusion: their giant existing ICE businesses were continuing to hold them back. Tesla was gaining a bigger lead by the week.
We had another go at the Tesla upside in 2017, but in the intervening period we were reminded why being optimistic and supportive shareholders is often tough – “hell is other people”, as Jean-Paul Sartre put it.