2017 Investor Roundtable: TSLA Market Action

[TrendTrader007]

Ron Barons bullish explanation is quite superficial, not much
Better than Chanos bearish one. To think these people are
Billionaires is quite amazing.

Billionaires are not analysts
Analysts are not billionaires

 

[TrendTrader007]

Sorry to go off topic. Mods can move this if they like. I spent a while working out the current US tax situation; everyone should do their own spreadsheets because everyone's situation is different, but I had to correct inaccurate statements.



This is dead wrong. Actually even if your tax bracket stays the same, the Roth is better for high-growth stocks. I'll explain. A key and very important point: you can contribute $5500 before-tax to the traditional, but you can contribute $5500 after-tax to the Roth, so you're contributing more each year to the Roth; getting more tax deferral. You can't get the same tax deferral by reinvesting the tax savings from a traditional, because you pay capital gains taxes on those.

This is amplified if you expect your tax bracket to go up, as it might if Tesla makes you millions of dollars. Most of my income is from long-term gains on investments, which are only realized during years when I sell, and I don't sell every year. Only a small portion of my income is earned. As a result, in my position, I have consistently been contributing during 0% or 15% tax bracket years for earned income (and another ~6% for state taxes). I had a lot of short-term gains this year so it'll be much higher this year.

Since I've actually run spreadsheets about this, I know the Roth is better for fast-growth stocks. TSLA went up by a factor of 10 in 2013. I'll do the math for you.

So consider the two scenarios. i'm using rough rates for NY, so 15% federal + 6% NY now, 34% federal + 6% NY later.

Put $5500 in a traditional. Save 21% on taxes (1155) and invest it in an after-tax account. TSLA goes up by a factor of 10. You now have 55000 in the traditional; when you take it out, you pay 40%, and end up with 33000; when you sell your after-tax shares worth 11550 you pay 26% and end up with $8547. Total of 41547.

Put $5500 in a Roth an pay your taxes. You have 55000 after-tax money when you're done.

Let's try this for someone with a higher starting tax bracket. Put $5500 in a traditional. Save 40% on taxes (2200) and invest it in an after-tax account. TSLA goes up by a factor of 10. You now have 55000 in the traditional; when you take it out, you pay 40%, and end up with 33000; when you sell your after-tax shares worth 22000 you pay 26% and end up with $16820. Total of 49820. So even if your bracket doesn't change, the Roth is better.

(This does assume that you're in a bracket where you have to pay capital gains taxes at greater than 0%. But if your TSLA investment has made you rich, you should be!)


This is simply wrong. In general the Roth is a better option if you expect your tax bracket to stay the same or go up in retirement.

Traditional IRAs were developed with the assumption that people's incomes, and therefore tax brackets, would DROP in retirement. If you expect your tax bracket to go DOWN in retirement (because you are losing, say, a $300,000/year income from your job) then a traditional IRA is better than a Roth. Because in that scenario, you are getting a tax break worth 40% now, and paying 15% when you withdraw later.

This has interesting implications if you consider your entire portfolio plan as being predetermined, and then try to decide which parts of it belong in IRAs vs. Roth IRAs vs. after-tax accounts. It's correct to put your most conservative investments (low return, low risk) in a traditional IRA, because the traditional IRA is most valuable in a scenario where your income is dropping after age 65. But it's correct to put your big-return, chance-of-going-to-zero high-flyer investments in a Roth IRA, because the Roth IRA is most valuable in a scenario where your income is rising after age 65.

I'll explain it one more way, by comparing both types of IRAs to plain old after-tax investing.

Effectively the traditional IRA is doing three things:
1 -- giving you an interest-free loan equivalent to the amount of the tax deduction
2 -- giving you cash back equivalent to the change in rates if your income tax bracket goes down in retirement
3 -- converting capital gains (and dividend) income on your investments into ordinary income, which generally *raises* your tax rate unless your overall bracket is dropping

With a fast-growth stock, #3 dominates and outweighs the value of #1. #2 will still dominate if your bracket really is going down due to loss of earned income, though. With a REIT or bond producing fully taxable income or a stock showing losses however, effect #3 is nonexistent. Also, #1 is worth more in a high-interest-rate environment.

Effectively the Roth IRA is doing one thing:
1 -- converting capital gains (and interest and dividend) income into untaxed income
With a fast-growth stock, this is great, way better than the Traditional. It's not so great with anything else, and it's worthless with losses.

If you're doing *really really* well on your TSLA stock, so that you're over $6 million, the "prepayment" of income taxes in a Roth versus the postponement of income taxes in a Traditional typically ends up benefitting you on the estate tax, too. The traditional IRA is valued at its full pre-withdrawal value for estate tax purposes, and there is no deduction for the taxes which you will have to pay when you take out the money, so you're paying estate tax on phantom money. There's a rather complicated provision called Income in Respect of a Decedent where your heirs get the estate taxes back over time when they withdraw from the IRA, but you're effectively giving the government an interest-free loan of the estate taxes until they do, and the way it works, if your heirs have lower income tax brackets than you, they don't get all of it back. (Though if your heirs have *higher* income tax brackets than you, they get more back than you paid IIRC... and if your sole heir is a charity none of this matters.) Roth has no such issues. Of course if you're doing this well, please consult a professional about estate planning!

This is a super awesome post I love it!!!

 

[TradingInvest]

Billionaires are not analysts
Analysts are not billionaires

I agree. Billionaires are not analysts. They don't tell all the details that they know. Warren Buffett and Charlie Munger always say "don't ask us how we value businesses".

I'm sure Ron Baron has his way to calculate and conclude why Tesla's vehicle business will reach $750B, but he doesn't talk about the details.

 

[TradingInvest]

Roth is the single best thing to ever happen for high beta growth investors
A simple delay to invest a million dollars in Roth for 10 years can lead to a potential loss of over $176 million dollars of tax free money over a period of 20 years at 30% annualized rate

Roth IRA will not force you to make a required minimum distribution when you turn 70½. Someone made a very nice post about this recently.

 

[MXWing]

I was wondering what's been going on with Tesla power hour as of late.

Guess for today, power hour was 8:00am Beijing time.

 

[hobbes]

@hobbes spreadsheet estimates ~135,000 deliveries in USA through 6/30/17.

Credit for this goes to @Troy , not myself.

 

[Dagger]

Tomorrow OPEN $379.99.

Almost there

 

[WarpedOne]

ATH open in the making.
Frankfurt @379.75 USD

 

[Tslynk67]

Any news I missed that brought the rise?

 

[Dagger]

Any news I missed that brought the rise?

Tesla Said Close to Agreeing on Plan for China Production
Tesla driver in fatal 'Autopilot' crash got numerous warnings - U.S. government

 

[22522]

Thanks for sharing your views.

@dennis already responded with the essence, also:: " .. preparations at our production facilities are on track to support the ramp of Model 3 production to 5,000 vehicles per week at some point in 2017, and to 10,000 vehicles per week at some point in 2018."

Ramping from nil to 5,000/week in six months is an ambitious goal, particularly on never-before-deployed production equipment. I suspect Tesla will not have to divert many M3s to foreign markets in order to avoid delivering the 200,000th eligible vehicle to a USA customer in 4Q17.

Thank you also for recognizing difficult business situations.
Elon said he would mess up a quarter to not cross the line early. You pointed out that it is the last quarter, so it messes up a whole year!

Someone posted that there are 4 Model 3 lines?

I think I was proposing 3 for leap frog process improvements without stoping the flow from suppliers, or to customers - redundancy reasons.

There are surface area to volume production reasons why multiple lines are good, that I had forgotten in the recent mental picture - a little bit sloppy, - please let me correct that now.

The problem with super fast lines is that they don't have enough surface area to feed them. A super fast machine is painful that way.

If there are three or four lines moving at more reasonable rates, the surface area to feed them goes up and you avoid "I Love Lucy" situations feeding the material. Capital expense is higher, but maybe you can buy slower machines?

The two reasons I keep seeing the published goals as too low are:

1. Tesla's objective of accelerating adoption of sustainable transportation. You want to get as much done before that 27% price increase. I would try to deliver 1,000,000 cars in the first half of next year, if demand would support it. At $27.5K, demand might. The interiors cannot all be black though, but most could be rear wheel drive...
2. Riding a single speed bicycle changes your mentality. A geared bike accommodates the state of the rider and kind of shifts the focus to the rider with a bit of a scarcity/rationing operating mode, particularly on climbs. On a single speed, the trail demands a minimum speed on all climbs, and the rider's needs are subordinate. The answer is almost always "go faster." The rider needs to adapt. The focus is on the trail and what needs to happen.

If there are four lines, I would run two flat out, producing rear wheel drive base models, mainly for walk-in customers. You want to get the $27.5 price for people who have not yet met Tesla - a few hundred thousand normal people. Now is the time to do that. Not in 2019, but in early 2018 - because I can't just make $7.5K per car show up in 2019. (Where is that money going to come from? I know I don't have it.)

The other two would run to get the cooperative depositors an honored/respected contract as thanks for helping make the Model 3 a reality.

This seems like the obvious right answer (when one puts on the single speed mountain bike hat).
The slower plan of record seems like a good answer (when your legs hurt, and gearing down to spin up is a viable choice, XC hat).

This "plan of record is not good enough" mentality might also be because, from where I am standing, $7,500 is a lot of money. I would be pleasantly surprised if Elon sees it that same way.

 

[Reciprocity]

Thank you also for recognizing difficult business situations.
Elon said he would mess up a quarter to not cross the line early. You pointed out that it is the last quarter, so it messes up a whole year!

Someone posted that there are 4 Model 3 lines?

I think I was proposing 3 for leap frog process improvements without stoping the flow from suppliers, or to customers - redundancy reasons.

There are surface area to volume production reasons why multiple lines are good, that I had forgotten in the recent mental picture - a little bit sloppy, - please let me correct that now.

The problem with super fast lines is that they don't have enough surface area to feed them. A super fast machine is painful that way.

If there are three or four lines moving at more reasonable rates, the surface area to feed them goes up and you avoid "I Love Lucy" situations feeding the material. Capital expense is higher, but maybe you can buy slower machines?

The two reasons I keep seeing the published goals as too low are:

1. Tesla's objective of accelerating adoption of sustainable transportation. You want to get as much done before that 27% price increase. I would try to deliver 1,000,000 cars in the first half of next year, if demand would support it. At $27.5K, demand might. The interiors cannot all be black though, but most could be rear wheel drive...
2. Riding a single speed bicycle changes your mentality. A geared bike accommodates the state of the rider and kind of shifts the focus to the rider with a bit of a scarcity/rationing operating mode, particularly on climbs. On a single speed, the trail demands a minimum speed on all climbs, and the rider's needs are subordinate. The answer is almost always "go faster." The rider needs to adapt. The focus is on the trail and what needs to happen.

If there are four lines, I would run two flat out, producing rear wheel drive base models, mainly for walk-in customers. You want to get the $27.5 price for people who have not yet met Tesla - a few hundred thousand normal people. Now is the time to do that. Not in 2019, but in early 2018 - because I can't just make $7.5K per car show up in 2019. (Where is that money going to come from? I know I don't have it.)

The other two would run to get the cooperative depositors an honored/respected contract as thanks for helping make the Model 3 a reality.

This seems like the obvious right answer (when one puts on the single speed mountain bike hat).
The slower plan of record seems like a good answer (when your legs hurt, and gearing down to spin up is a viable choice, XC hat).

This "plan of record is not good enough" mentality might also be because, from where I am standing, $7,500 is a lot of money. I would be pleasantly surprised if Elon sees it that same way.

Mostly agree except that Tesla doesn't have a million reservations from the US to fulfill in the 1H2018, when the tax incentives will more then like decrease. If they have 600,000 reservations, probably only 60-70% are US. That's at most about 420,000 in the US. Can they build and deliver 420,000 cars in the US from July, 31st 2017 - June, 30 2018? I would love that, but I doubt it. The biggest barrier would be setting up a second line before the end of this year. It's a worth while goal to try to attain because demand is only going to sky rocket when people see them in the wild and take rides with friends and family and learn what we all know.

I would also argue that the model 3 is very competitive with the Camry or Accord even at $35k when you factor in TCO and residual value. When you add home solar and keep the car for 10 years it can be competitive with Civic and carolla level cars. This car is really going to fill a high diversity of auto segments because the base model is cheap enough but it can be optioned to a level to compete with a BMW M3 eventually. That's only going to bolster the residual value in the low end.

Edit: let's face it, 420,000 cars in the US helps but GF3 in China and GF4 in India and GF5 in EU will do more to help accelerate those goals then the short sides goal of a million in the US.

 

[SBenson]

IIRC there was some twitter conversation by Musk which seem to have indicated that Tesla is working on getting into China manufacturing WITHOUT a local partner. Financial media doesn't seem to note that.

When the actual news comes out there may be further gains in the stock.

 

[ValueAnalyst]

I agree. Billionaires are not analysts. They don't tell all the details that they know. Warren Buffett and Charlie Munger always say "don't ask us how we value businesses".

I'm sure Ron Baron has his way to calculate and conclude why Tesla's vehicle business will reach $750B, but he doesn't talk about the details.

I used to think exactly this way too, but after having conversations with and observed some of the best investors in the world, I'm convinced that simpler is better.

 

[22522]

Edit: let's face it, 420,000 cars in the US helps but GF3 in China and GF4 in India and GF5 in EU will do more to help accelerate those goals then the short sides goal of a million in the US.

But you can "step and repeat" that million in the US. You learn a lot by doing it.

 

[SBenson]

 

[Reciprocity]

But you can "step and repeat" that million in the US. You learn a lot by doing it.

The problem is that you can't step and repeat in time to sell a million cars in the next 18 months. My main point is that it doesn't matter because the green pastures are everywhere and they are wide open for Tesla and we shouldn't fixate so much on fed tax incentives as they did their job and allowed Tesla to crawl, then get on two feet and start walking. Now it's time to run. By 2020 with semi and Y and several gigafactories, they will be sprinting. The last major vehicle I want to hear about is the pickup, because that is game, set, match. I am hoping for a platform that can go from work truck up to box truck. Something that can be flexible enough to have many different configurations.

 

[1kEE]

This is on a tear!

06/20/2017 07:55 | Pre-Market $383.75

• Pre-Market High $384.49
• Share Volume 92,883
• Pre-Market Low $378
• Previous Close $369.8

 

[T3slaTulips]

384.70 new ATH if I'm not mistaken.

 

[vgrinshpun]

IIRC there was some twitter conversation by Musk which seem to have indicated that Tesla is working on getting into China manufacturing WITHOUT a local partner. Financial media doesn't seem to note that.

When the actual news comes out there may be further gains in the stock.

Tesla and China: An Unorthodox Affair.