Young & Invested: Can you get rich quick?
Speculative trading has its perils.
Mentioned: Tesla Inc (TSLA)
Welcome to my column, Young & Invested where I discuss personal finance and investing for Gen Z and Millennials. This column aims to be a resource for young investors navigating an ever changing financial, political and social landscape as they try to build wealth. Tune in every Thursday for the latest edition.
Edition 10
We all know a crypto bro who stares at candlestick charts all day thinking he has made it after buying his second jet ski. Whilst such bets may result in handsome wins for a small portion of the population speculation often leads to losses.
It can be difficult to avoid the temptation of such investments as they come with the promise of quick riches – I know I’m not the only one tempted to pursue this path.
Research shows that young people, heavily influenced by social media, have an increasing interest in building wealth quickly and are consequently making investment decisions that are contrary to sound financial principles.
Whilst this generation is shaping up to be the most educated in the traditional sense, it doesn’t appear like they are any more financially literate than previous generations. With a lack of access to sound financial advice, these investors are turning to self-sourced investment research which is more akin to gambling than investing.
Like many investors, I’ve had my fair share of speculative trading – or ‘investing’, as I once liked to call it. Poor investment decisions are often encouraged by market noise, much like we’ve experienced recently across global markets.
The Tesla case
Whether you’re a tech enthusiastic or a mum-and-pop investor, one name that has seeped into everyone’s peripheral over the last few months is Tesla.
Last December saw Tesla’s market cap hit an all-time high of $1.5 trillion, bolstered by the momentum of President Trump’s election in November. The automaker’s share price has since suffered a steep crash back to reality, leaving speculative investors in the dust.
Figure 1: Tesla share price 8/11/24 to 31/03/25. Source: Morningstar.
Investors who jumped on the hype-train were likely hoping that the relationship between Elon Musk and President Trump could benefit Tesla. However, these perceived benefits are yet to materialise and Elon Musk’s prominence and association with Trump may be hurting the Tesla brand.
What can we do during uncertain times?
There has been a good deal of chatter that we may be experiencing a market correction. The question is, where does that leave young investors?
In his recent letter to shareholders, Portfolio Manager at Third Avenue Management Matthew Fine reminded readers that “numbers and facts still matter, even if equity investors seem more enraptured by stories, futuristic assertions and stock price momentum”. I think that perfectly encapsulates the hysteria we’ve seen the past months.
In the case of Tesla, it’s hard to deny that investors didn’t pile in expecting the Trump presidency to enact policies at the expense of offshore automakers. And certainly, this may come to fruition, however investors who entered at all-time highs have left a negligible margin of safety.
In periods of volatility, investors should focus on fundamentals, pay attention to valuations and keep the long-term mindset at the forefront of their decision making.
Avoid inflated valuations
2024 was a reasonable year for value investors, but arguably some missed out on capturing a slice of the growth pie. We largely saw the expensive get even more expensive, however it appears that markets are finally reflecting some semblance of reality.
Morningstar’s US Market Strategist David Serka recommends that investors overweight value stocks and underweight growth picks with the latter trading at the highest premium over fair value since the tech bubble in early 2021.
Tesla currently trades on a 129x price/earnings multiple and a market cap that exceeds the cumulative value of the 9 following automakers by market cap. But do these numbers add up? Tesla’s revenue at December 2024 was USD 97 billion. Meanwhile its next largest automotive competitor Toyota (by market cap), recorded revenues of almost USD 500 billion over the same period.
One could argue that Tesla is better positioned for the future. After all, with Toyota’s large legacy capital base primarily servicing fuel-based vehicles they may not be best placed to take advantage of the global demand for EVs.
Let’s compare Tesla with a more worthy adversary, the Chinese EV manufacturer, BYD who recently surpassed Tesla’s revenue to hit the USD 100 billion mark. BYD trades at a relatively modest price/earnings ratio of 27x despite vehicle sales growing at 93% in the first two months of the year. At a cheaper valuation, similar revenue and faster sales, Tesla doesn’t look good in comparison.
As the EV market expands it’s clear Tesla’s first mover advantage is up. Whilst acknowledging the diverse nature of Tesla’s tech capabilities, sticking to the fundamentals is essential to not getting caught in a hype cycle. It’s hard to argue that some portion of Tesla’s current market price isn’t inflated by speculation.
One-way geopolitical bets don’t get you far
Morningstar Market Strategist for Equities Research, Lochlan Halloway, suggests investors avoid loading up on bets that only pay off in one future state of the world. Prior to the election, companies such as Tesla behaved like proxies for the likelihood of a Trump victory, surging when Trump gained in the polls, and selling off when he stumbled. These looked like high-risk gambles, swinging wildly on sentiment rather than fundamentals.
Our research shows that a buy and hold strategy typically beats one that tries to time elections and the market cycle. History has not favoured those who make binary bets in response to large geopolitical changes.
The following chart shows $1000 invested in the S&P 500 beginning at Eisenhower’s inauguration in 1953. If an individual invested $1000 but only owned the S&P 500 whilst a Republican was President, they would have $27,400 today. If a similar exercise was run when Democrats were in power, it would result in a $61,800. Notably, if you stayed in invested the entire time you would have accumulated $1,690,000.
Figure 2: S&P 500 returns since Eisenhower.
Market noise can be loud
It’s likely that you’ve come across at least one headline about the state of markets. And if you’ve been following Tesla – it’s been a wild few months to say the least. Below is a succession of headlines investors were faced with over the last few months. Confused yet?
The reality is, by the time news hits the markets, there is no informational edge that investors gain from acting on something that has already been disseminated to the masses. Once information is widespread it is already priced in.
Should you take a punt?
In the share market (much like life), time is your biggest asset. Younger investors naturally have more of it. The prevailing belief is that young investors should focus on growth stocks given their long investing horizon. The level of risk and volatility associated with growth stocks is said to level out over time.
Young investors are often told they can afford to lose money trying to get the big payoff. Whilst this may have surface level merit, losing $10k at 25 has a more detrimental effect than losing it when you’re 65. In Mark’s 3 charts that unlock the secrets to building wealth, he finds that losing money on a speculative investment in the first few years of investing has a much larger impact on your total portfolio than losing it later in life.
It can be hard to differentiate true growth stocks with speculative investments. Growth shares trade at higher valuations. At some point the valuation may be too high.
In the Tesla case, it’s difficult to argue that the investors pouring money into the company after Trump’s win was anything more than a speculative bet.
Investing in growth stocks involves a systematic approach to growing wealth, with reasonable valuation levels compared to projected growth. On the other hand, speculative picks come with higher risk and uncertainty that come from valuations levels that don’t reflect realistic future growth. Some may have profited from Tesla’s whirlwind, however, to do this consistently is rare.
The core satellite approach
Amidst declining sales, fickle political dynamics and market uncertainty, purchasing Tesla above fair value (USD 250 per share) is certainly a speculative action right now.
But if you have conviction for Tesla right now, the core satellite approach may come in handy. It combines an active and passive strategy allowing for speculative bets with small portions of your portfolio.
Where does that leave Tesla for now?
Morningstar’s Tesla analyst, Seth Goldstein does not see the recent 25% tariffs on automobiles and auto parts making a significant enough impact to raise Tesla’s current fair value.
We forecast EVs will comprise 40% of global auto sales by 2030 and Tesla will capture some of that. The company is further expanding into autonomous driving software, insurance and charging. It’s robotaxi service is also set to capture market share, as we estimate 50% of ride-hailing rides in the US and Canada will be robotaxi by 2030.
With first-quarter deliveries set to be reported next week, investors await key consumer statistics amidst news of deliveries declining in the three key markets: China, the US and Europe.
Conclusions
Nobody can predict what short term price fluctuations are next for Tesla, but the message remains clear. A focus on the fundamentals prevails over longer horizons.
