Tesla, TSLA & the Investment World: the Perpetual Investors' Roundtable

[Ipe]

To the US members of this board: happy 4th. Let’s celebrate our freedom.

To those members outside the US: don’t lose faith in the US. We have our problems, and some are getting worse. But none of us here need look any further than the story of Elon Musk to appreciate that innovators are still able to thrive and grow here.

For every protectionist here there is another seeking to make the entire world open, free, sustainable and healthy.

Let the fireworks we light the sky with tonight remind us that we seek liberty and justice for all.

A First Salute from the Dutch Republic!

 

[dl003]

Not only double the TSLA value they hold, but force them to buy more TSLA shares as the relative weight of TSLA rises in the NDX relative to other equities it contains. TSLA would be ranked #18 or so in the S&P500 and weighted around ~0.83% today.

If S&P500-based index fund hold $5T today, they will need to purchase about $41.5B in TSLA when it is added to the NDX. That's asubstantial portion of the float which will have an exaggerated effect on the SP, triggering more forced buying, and greatly encouraging speculators who will further bid up the SP. See what I'm getting at?

S&P 500 Companies - S&P 500 Index Components by Market Cap

Even better, if TSLA's SP goes up faster than other components, those large Index funds must rebalance by SELLing underperformers and BUYing more TSLA.

Underperformers like NYSE:XOM (EXXON is now just 83.2% of TSLA's Mkt Cap). That's the virtuous cycle, one which accelerates after S&P500 inclusion



Cathie Wood has been specific in her answer as to why ARK Invest does not include T.E. in their 5-yr estimates for TSLA. The reason is that NO ONE ELSE DOES. ARK Invest wants to produce an estimate that is strictly comparable to other analysts, and to NOT give them the easy out (when they are proven wrong) that ARK included revenue streams that the other did not. ARK wants to compare Apples to Apples, and be shown to be correct, years ahead of the analyst community.

Cheers!

Say the SP 500 is worth $20T and Tesla is worth 200B, that's a 1% weight.
VOO is managing $200B, and so it needs to add $2B of TSLA to give TSLA a 1% within its portfolio.
Say VOO buys $2B worth of TSLA at $1000 each, that's 2M shares. Assume that we have 200M shares outstanding at $1000 each.
Say TSLA's valuation goes up 100% without new equity issuance, that means we now have 200M shares outstanding at $2000 each.
For simplicity's sake, let's say SP 500 remains at $20T because a couple other companies worth $200B just got booted and so the increase in the market cap of TSLA is just enough to keep the SP 500 at $20T.
So, now, VOO needs to own $4B worth of TSLA, right? So how many shares of TSLA do we need to arrive at $4B?
$4B/$2000 = 2M shares, still.
Now VOO still has $200B under management and TSLA has a 2% weight without any new share purchases.
This is the main disagreement I have with some others. I don't think the appreciation of TSLA stock in the interim will affect how many shares index funds have to buy. They still have to spend more for the same number of shares but they're not gonna have to buy more shares.
My thesis is the primary drivers of index fund's ownership are going to be (1) asset under its management and (2) subsequent TSLA offering.
(1) Say index funds own an aggregate 20% of the 500 companies. That means together they will buy 20% of float of any company that gets added to the index.
If, at a later date, that AUM increases to 25%, either through new inflow into SPY/VOO, or by the inception of new index funds, then they together will buy another 5% of all companies in the index, including TSLA.
(2) If TSLA is diluted by 100% through a HUGE stock offering, then all index funds must double the number of TSLA shares they already have, regardless of how much each share is worth after dilution.

If you think about it, if they have to buy more shares AND pay more for each share as TSLA goes up, that's double dipping and double dipping is almost always wrong.

 

[kelly]

Have you tried solar aid?
Home - SolarAid

Thank you for the link. Just donated.

 

[ggr]

Is it a lot less disastrous if your shares are in an IRA? I have a 100 shares in a Roth that I was considering using to generate income as covered calls, but not sure how risky this is if I’m trying to stay long. Maybe I shouldn’t be asking this question in this thread? Is there a covered call thread that I should start reading?

It probably should be in the Advanced TSLA Options Trading and maybe a moderator would move it if it goes too much further.

In a "tax advantaged account", that is an IRA, Roth IRA, 401k, etc., the difference between short- and long-term capital gains is irrelevant. So you only need to worry if it's a normal brokerage account.

@mongo pointed out to me that the problem with writing covered calls in a normal account, while it depends on the conditions when you write it, are actually triggered when the position is closed or exercised later. It's even more complicated than I thought. But the bottom line for me is: don't write in-the-money covered calls if you care about long-term capital gains on the underlying stock.
What Are The Tax Implications of Covered Calls? - Fidelity

 

[StealthP3D]

Why is everyone so focused on retirement? The best time of the life is before you get old!

That's why I retired at age 37! I was a proponent of FIRE (Financial Independence, Retire Early) before it was even an acronym! And I lived like a college student until I retired. Ironically, I had more fun fishing in Alaska in the summers and working at ski areas in the winter and picking up occasional seasonal work at oil refinery turn-arounds, small home-building jobs, supporting forest fire fighters in the field, landscaping, etc. than I would have had if I entered a serious career. None of my jobs came home with me. I showed up, kicked some ass (and had fun doing it) and was done. I could dream about how to invest my money so I wouldn't have to work for other people (or start 7 new businesses until I learned enough to find one that worked). I really didn't want my own business because I didn't want to bring my work home with me. Ironically, I "work" at home now (investing) but I don't have to deal with anyone on the phone or in person, I never have to please anyone or act a certain way (which is good because I'm a terrible actor) and I can check out anytime I like without worry.

Sorry for the diversion, but to answer your question, the best way to enjoy youth is to live cheaply, don't buy *sugar*, stay healthy and do awesome stuff that either costs very little or that you get paid to do (while simultaneously investing the extra for the long-term). Kids can really mess with that equation so I didn't have any. Negative population growth too!

 

[StealthP3D]

If a company appreciates 100% from the date of acquisition by an index fund, the index fund has to own double the initial value, that is correct.
However, since each share of the stock is now worth double its initial value, the index fund doesn't have to buy any more share. It just has to keep the same number of share, each worth double the initial value.

Right. But say the company needs to raise more capital and they do it by diluting the shares. At the same share price, the index would need to be rebalanced (more shares purchased).

 

[mongo]

Not only double the TSLA value they hold, but force them to buy more TSLA shares as the relative weight of TSLA rises in the NDX relative to other equities it contains. TSLA would be ranked #18 or so in the S&P500 and weighted around ~0.83% today.

If S&P500-based index fund hold $5T today, they will need to purchase about $41.5B in TSLA when it is added to the NDX. That's a substantial portion of the float which will have an exaggerated effect on the SP, triggering more forced buying, and greatly encouraging speculators who will further bid up the SP. See what I'm getting at?

S&P 500 Companies - S&P 500 Index Components by Market Cap

Even better, if TSLA's SP goes up faster than other components, those large Index funds must rebalance by SELLing underperformers and BUYing more TSLA.

Underperformers like NYSE:XOM (EXXON is now just 83.2% of TSLA's Mkt Cap). That's the virtuous cycle, one which accelerates after S&P500 inclusion



Cathie Wood has been specific in her answer as to why ARK Invest does not include T.E. in their 5-yr estimates for TSLA. The reason is that NO ONE ELSE DOES. ARK Invest wants to produce an estimate that is strictly comparable to other analysts, and to NOT give them the easy out (when they are proven wrong) that ARK included revenue streams that the other did not. ARK wants to compare Apples to Apples, and be shown to be correct, years ahead of the analyst community.

Cheers!

Say the SP 500 is worth $20T and Tesla is worth 200B, that's a 1% weight.
Say VOO buys $2B worth of TSLA at $1000 each, that's 2M shares. Assume that we have 200M shares outstanding at $1000 each.
Say TSLA's valuation goes up 100% without new equity issuance, that means we now have 200M shares outstanding at $2000 each.
For simplicity's sake, let's say SP 500 remains at $20T because a couple other companies worth $200B just got booted and so the increase in the market cap of TSLA is just enough to keep the SP 500 at $20T.
So, now, VOO needs to own $4B worth of TSLA, right? So how many shares of TSLA do we need to arrive at $4B?
$4B/$2000 = 2M shares, still.
This is the main disagreement I have with some others. I don't think the appreciation of TSLA stock in the interim will affect how many shares index funds have to buy. They still have to spend more for the same number of shares but they're not gonna have to buy more shares.
My thesis is the primary drivers of index fund's ownership are going to be (1) asset under its management and (2) subsequent TSLA offering.
(1) Say index funds own an aggregate 20% of the 500 companies. That means together they will buy 20% of float of any company that gets added to the index.
If, at a later date, that AUM increases to 25%, either through new inflow into SPY/VOO, or by the inception of new index funds, then they together will buy another 5% of all companies in the index, including TSLA.
(2) If TSLA is diluted by 100% through a HUGE stock offering, then all index funds must double the number of TSLA shares they already have, regardless of how much each share is worth after dilution.

If you think about it, if they have to buy more shares AND pay more for each share as TSLA goes up, that's double dipping and double dipping is almost always wrong.

The amount of TSLA in the S&P500 is fixed at inclusion.

Addition Companies are added at the float (capped float) market capitalization weight. For capped indices, refer to the index methodology for details on the capping factor applied to intra-rebalancing additions. The net change to the index market capitalization causes a divisor adjustment.

IWFs Investable Weight Factor) are recalculated annually. The index is rebalanced quarterly (Sept, Dec, March, June).
So TSLA rising due to inclusion won't change anything instantaneously.

 

[Curt Renz]

Electrek - yesterday: Tesla is making push toward fleet vehicles as cost of operation reaches tipping point - Electrek

 

[Artful Dodger]

If you think about it, if they have to buy more shares AND pay more for each share as TSLA goes up, that's double dipping and double dipping is almost always wrong.

Thanks for your analysis. I think the common misunderstanding is based on an assumption that a Company's total Mkt Cap is what S&P uses to assign weights in the NDX. This is not quite correct. Individual companies are weighted by the value of their free float x their SP, and then compared to the sum in Mkt Cap of all 505 constituent companies (which includes all shares, not just the free float);

How is the Value of the S&P 500 Calculated? | Investopedia

"Calculating the individual market weights shows how the underlying stocks affect the index. The individual market weights are calculated by dividing the free-float market capitalization of a company in the index by the total market capitalization of the index. As of January 2019, the S&P 500 total market cap was approximately $23 trillion. This market cap Apple roughly a 3% market weight. Overall, the larger the market weight of a company, the more impact each 1% change in a stock’s price will have on the index."​

So again, while it is a complex (or at least detailed) formula, the general take away is that as an individual Company climbs the ladder up the S&P500 it's weighting tends to increase, thus requiring more purchases by Index Funds, even as the value of their current holdings in that equity has gone up.

EDIT: Thanks to @mongo for further insight #175946

Cheers!

 

[Chunky Jr.]

In a couple years, I could see Tesla getting to be like Apple where they may not sell the most of any manufacturer, but they make more money than the rest of them combined.

 

[astrotoy]

For index funds, I believe the major effect is their growing share of the total investment pie. It has been growing substantially and as more investors including pension funds move from managed funds and individual stocks to index funds, the index funds will need to increase the absolute number of shares of all the stocks in whatever index they represent. This also includes the managed funds which also have been moving to mimic index funds in their holdings, except with higher fees. Particularly with very large cap stocks like TSLA, they can't use surrogate investments, like they do with index funds like Total Market Funds, where they simulate the behavior of the huge number of very small cap stocks, rather than holding 50,000 very small holdings.

Of course, this is a long term effect.

 

[dl003]

In a couple years, I could see Tesla getting to be like Apple where they may not sell the most of any manufacturer, but they make more money than the rest of them combined.

I'd like to see 2020 Apple in a universe where Steve Job is still alive!!

 

[Dutchie]

In my experience in the market, the party can get shut down at any time. You don't need virus fears, unemployment or lack of consumer confidence for the market to crater. The key is to have an investment horizon that looks past the next shut down and to own companies that are not fragile to market disruptions.

Cathie Wood is intimately familiar with how markets work over the decades and, as an investor who is long equities, she is comforted when the market participants are climbing the "wall of worry" and becomes more cautious when investor sentiment is telegraphing little worry. Her returns are superior.

As a person, in life I am naturally inclined to worry about all the details and what could go wrong. If I let this transfer through to my investment activity, I wouldn't have made but 1/10th the gains I have over the previous 30 years. And there have been plenty of market disruptions. Yes, I have spent years out of the market and, while it has saved me from some downside pain, I would actually be wealthier if I had stayed in the market 100% of the time (and simply switched to a different stock at any point one of them was screaming "sell"). The secret is not to time the market but to own great companies over the long haul. At the moment the market does look very toppy but I can see no better risk/reward than Tesla over the next 5 year period.

Will TSLA go back into the three digits? No one knows. Personally, I think it would be very short-sighted for investors to sell at this point in time (and certainly not in a taxable account). Stories of people selling at the top and buying in at a lower price for 30% more shares are much more popular than those who sold and missed out on the next doubling. Do you know why? Because people love to share stories that make them appear smart and savvy. People who lose tend to slink away into the corner never to be heard from again. These tendencies create an unrealistic perception and it's important to be aware of that.

Having said all that, I don't give a flying frick if you sell your shares. It's not going to impact me in the slightest, not in any measurable way. The only reason I bother to write things like this is because I would rather see a small investor on TMC who probably actually cares about the mission become wealthy from holding TSLA tightly over the years than having those gains go to a faceless financial industry player. I've always rooted for the underdog.

Yes, TSLA will drop at some point, but who knows where that point is, it will have to go a lot higher than this for me to sell. This road is littered with those who sold at $400, $500, $600 and $800 because they thought they knew.

I do think there will be a macro market correction - probably later this year. This correction will suck TSLA lower too. I am hoping in the $500 - $600 range and and I will be ready then. What I like about this market is that TSLA has proven that a $1200 price is possible, so that when market goes up again after that correction no one will be surprised.
If I am wrong and TSLA shoots up to $2000+ later this year I will be happy too. I am just not buying more at this level for the time being.

 

[PeterJA]

Thanks for your analysis. I think the common misunderstanding is based on an assumption that a Company's total Mkt Cap is what S&P uses to assign weights in the NDX. This is not quite correct. Individual companies are weighted by the value of their free float x their SP, and then compared to the sum in Mkt Cap of all 505 constituent companies (which includes all shares, not just the free float);!

Well now I'm really confused. If free floats are in the numerator, and all shares are in the denominator, then the sum of the company weights will be less than 100%, because each company's free-float share count is less than its all-share count.

How is the Value of the S&P 500 Calculated? | Investopedia

"Calculating the individual market weights shows how the underlying stocks affect the index. The individual market weights are calculated by dividing the free-float market capitalization of a company in the index by the total market capitalization of the index. As of January 2019, the S&P 500 total market cap was approximately $23 trillion. This market cap Apple roughly a 3% market weight. Overall, the larger the market weight of a company, the more impact each 1% change in a stock’s price will have on the index."​

So again, while it is a complex (or at least detailed) formula, the general take away is that as an individual Company climbs the ladder up the S&P500 it's weighting tends to increase, thus requiring more purchases by Index Funds, even as the value of their current holdings in that equity has gone up.

EDIT: Thanks to @mongo for further insight #175946

Cheers!

Sorry, I don't understand how the sentence you bolded supports your conclusion. Maybe I need a break.

 

[UnknownSoldier]

In a couple years, I could see Tesla getting to be like Apple where they may not sell the most of any manufacturer, but they make more money than the rest of them combined.

This is a better outcome than Tesla selling the most of any manfacturer but they are all cheap commodity products.

Just look at how AAPL stock has done versus every other company that makes commodity PC or laptop computers.

I'm happy I own AAPL and not Lenovo, Dell, HP, etc.

 

[Artful Dodger]

In a couple years, I could see Tesla getting to be like Apple where they may not sell the most of any manufacturer, but they make more money than the rest of them combined.

Unlike Apple (who uses FoxConn for manufacturing), Tesla actually owns, builds, improves, and interates its production facilities.

Telsa's initial relationship with Panasonic was an exception to this practise, but now we are seeing technogly transfer from Tesla to Panasonic in the battery space, and Tesla themselves becoming a large battery cell manufacturer.

The difference between Apple and Tesla could not be more stark, and was perhaps best telegraphed in this comment made by Elon Musk during the 2016 AGM:

"We realized that the true problem, the true difficulty, and where the greatest potential is – is building the machine that makes the machine. In other words, it’s building the factory. I’m really thinking of the factory like a product.”​

Tesla would not have bought Grohmann Engineering, Maxwell Technologies, Perbix, or Compass Automation unless they intend to become a major manufacturer.

Tesla quietly acquired automated manufacturing firm to design factories - Electrek

Cheers!

 

[UnknownSoldier]

I do think there will be a macro market correction - probably later this year. This correction will suck TSLA lower too. I am hoping in the $500 - $600 range and and I will be ready then. What I like about this market is that TSLA has proven that a $1200 price is possible, so that when market goes up again after that correction no one will be surprised.
If I am wrong and TSLA shoots up to $2000+ later this year I will be happy too. I am just not buying more at this level for the time being.

The issue is that literally everyone will also know this and will be looking to "buy the dip" on TSLA. This will make it very hard for TSLA to dip significantly even in a total market apocalypse. I mean Elon literally tweeted "haha stock price is too high" and it dipped 5% the next day and that gap was immediately filled. At this point even Elon can't tank his own stock. You know what I did the day Elon tweeted that and the stock fell? I bought a couple of calls. That worked out great.

 

[Artful Dodger]

Maybe I need a break.

Lol, me too! Imma gonna go enjoy a beautiful warm sunny afternoon bike ride...

I think for now I'm satisfied with the contribution from @mongo that index weight rebalancing is done quarterly by the Committee, so no instantaneous need for Index Funds to constantly rebalance when they already own shares.

That will however make those Quarterly Financials reports even more 'buy the news' events for TSLA

Cheers!

 

[Lycanthrope]

Why is everyone so focused on retirement? The best time of the life is before you get old!

Erm, yes, that's why we want to retire young!

Anyway, it's not true what you say. Youngsters (me included) are so full of *sugar*, anxieties, biases, preferences, and the like, that they let a lot of the good life slip past. I'm way happier in my 50's than at any time my life.

Not giving a f*ck about a lot of inconsequential stuff helps too...

 

[Lycanthrope]

View attachment 560404

English is not my native language so could you help me interpret why Elon chose to use the verb "would" rather than "will"? To express uncertainty, i.e. that the said features are aspirational [but not necessarily achievable]? Previously he has spoken about FSD with pretty certain terms.

it's a nice idea, but still some way off, I think. Even if Tesla nailed the technology, the legislation would need to catch up.

So in the meantime, lets get the manned Tesla ride-hailing up-and-running, with the favourable lease deals for drivers. What are we waiting for?