Tesla Stock Proves It Pays to be a Contrarian

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A 258% return in eight months.

Sounds impressive, doesn’t it?

It’s the kind of short-term gain that every investor dreams of. But it’s not the kind of return that’s easy to achieve.

Typically you’d have to rely on a very tiny stock for an explosive result like this. Companies that have plenty of upside potential due to their diminutive market caps.

But that’s not the case for my example above.

Rather, that 258% return came from a multi-billion NASDAQ stock. A very divisive stock at that…

It was Tesla Inc [NASDAQ:TSLA].

If you’re not aware, Tesla is Elon Musk’s electric car company. A company that is now worth more than Ford and General Motors combined. According to their respective market caps right now, anyway.

It wasn’t always like this, though.

Back in early June, Tesla was trading at around US$180 per share. Wallowing in a mixed market with a tepid outlook.

Today, it’s the total opposite.

Shares in Musk’s company are now trading at around US$640 each. Reaching new heights on Thursday (Friday local time) after a better than expected full-year result.

Quite the turn of events considering Tesla’s volatile past.

However, what is far more fascinating isn’t the amount of money people have made thanks to Tesla. But, how much people have lost…

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Short-sighted or blindsided?

As it stands, over US$1.5 billion has been lost by people shorting Tesla. That is, people unsuccessfully betting that the share price would fall, not rise.

Granted, these are just paper loses at the moment. Meaning these losses aren’t realised just yet, and could increase or decrease.

Right now though, it’s looking like a very painful loss for a lot of people.

See, Tesla is the most shorted stock in the US right now. Though it’s not the first time the company has achieved this claim to fame.

It’s just one of those stocks that has polarised the market so much.

On one side you’ve got the starry-eyed optimists. Tesla stockholders who believe this company is about much more than just electric cars, batteries, or even Elon himself. An intangible, and almost fanatical belief in the future value this company could achieve.

And on the other side, there are the rigid fundamentalists. Investors and analysts who insist Tesla is an overvalued bubble. A company that has historically struggled to meet production quotas and burns through cash faster than a kid in a candy store.

The reality is, both sides are right.

Tesla has the potential to be an incredible company. Right now though, they are terrifyingly overvalued compared to the profit they make.

However, the stock market has to pick one side to be more right than the other. And right now, it has decided the former — the optimists — are correct.

That’s why the stock is soaring, even if the fundamentals seem preposterous.

It’s important to remember though, at any moment things could turn. Just a few months ago the market was siding with the doubters. Proof of just how flippant it can be.

Rollercoaster of emotions

For anyone who has been in the market for a long time, Tesla’s tale won’t surprise them.

This is just the latest iteration of a story many have seen before. The latest plaything of a very special subset of emotional investors.

Don’t get me wrong, every investment has its fair share of emotional baggage. Sentiment that will swing a stock up and down — whether rational or not.

It’s just that some are like rollercoasters (Tesla), whereas most are like the teacups.

What it all comes down to is the market cycle of emotions. A concept perfectly outlined by Russell Investments:

Money Morning

Source: Russell Investments

[Click to open in a new window]

What this infographic is showing is that as investors we often fall victim to common emotions. As share prices climb higher we become more optimistic.

Returns keep growing, markets boom and everyone is all smiles. And sooner or later people start believing the good times will never end. Take, for example this analysts comments in regard to Tesla:

It’s becoming clear, in our view, that Tesla is on a path toward becoming the world’s only relevant publicly listed auto maker’.

That’s quite the claim to make, one that coaxed a laugh out of me. A sign that perhaps Tesla is at peak euphoria and denial is right around the corner.

As we know though, there are plenty of people in this camp already. All those short sellers who have been burned are waiting for sentiment to turn. Hoping and betting on Tesla tumbling back down into despondency territory.

When this will happen, no one knows. It could be a matter of days, weeks or years.

But, at some point it will happen. The doubters will get their chance to say ‘I told you so’ someday.

I suspect however, it will be a hollow victory.

It pays to be heartless

See, when it comes to Tesla picking a side is a sure-fire way to lose.

In the long run, both the optimists and the doubters have been burned, multiple times. I can’t see that stopping anytime soon.

The only way to truly win when it comes to a stock like Tesla, is to block out any emotions. One way or the other.

You need to think and act in a manner that is totally free from emotion.

A task that is easier said than done.

Only then can you see beyond the optimists and the doubters. Using their emotional sway on the market, as a guide to make your own profit.

Again, something that is far easier said than done.

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The point is not to ignore emotions, as I’ve been saying they have huge sway over the market. Recognising them is important, just don’t get swept up by them.

If you can refine and perfect this abstract way of viewing the market, it can be an incredibly valuable tool. Helping you read and predict where certain stocks or sectors may be headed.

As for Tesla though, in my view, the real winning move is not to play at all. It is a fantastic example of just how emotional investing can be.

Enter at your own risk.


Ryan Clarkson-Ledward,
Editor, Money Weekend

About Ryan Clarkson-Ledward

Ryan Clarkson-Ledward is an Editor at Money Morning.

Ryan holds degrees in both communication and international business. He helps bring Money Morning readers the latest market updates, both locally and abroad. Ryan tackles all the issues investors need to know about that the mainstream media neglects.

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