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Elon Musk’s implosion and the investing lessons to be learned

There's a big investing lesson we need for 2023, and Elon Musk's implosion is illustrating it perfectly.

Composite image of Elon Musk and the Tesla logo on a phone on top of the Twitter logo.
Since buying Twitter, Elon Musk has watched Tesla's share rice plummet. (Source: Reuters)

Elon Musk is having a down December, to top off a very bad year.

On Thursday, Twitter - the website the Tesla boss spent $44 billion buying - was down (literally) for part of the day, with users unable to log in or send tweets. Tesla’s share price is down too - by a whopping 67 per cent this year. And Musk’s personal fortune is evaporating, sending him rapidly down the list of the world’s richest people.

Twitter error page with the text: 'Something went wrong, but don't fret - it's not your fault. Let's try again'.
The Twitter site was down on Thursday. (Source: Twitter)

Musk’s acquisition of Twitter is proving tremendously injurious to his well-being. Yet the descent of the former world’s richest man is a gift to us all. Not because of the schadenfreude (well, not only that), but because it illustrates the great investing theme that should guide investors in 2023.

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Musk was the king of risk. All kinds of risk. Musk asked investors to come with him on a dance through the minefield as he took on some of the world’s most successful companies - like Toyota and BMW; as he invented whole new product categories; promised new technologies nobody had yet invented; ran multiple businesses while tweeting memes - in defiance of a court order intended to limit his Twitter use; and introduced new products to market with the most cursory of nods in the direction of regulators.

Also by Jason Murphy:

Musk should have blown up a hundred times. But at the start of 2022, he had dodged every mine. He defied naysayers, bankrupted short-sellers, stood astride the world.

Musk smoked weed on a podcast and left the mother of his youngest child (as he had done to the mother of his previous six children). But people said he should be president - not just of America but the universe. His dance through the minefield was so audacious and so successful, it seemed he could do no wrong. His misses (including the Boring Company’s pointless tunnels, and relentless overpromising on full self-driving) were so completely overshadowed by his wins that the man seemed larger than life.

But then…

The economy changed. Subtly at first, and in a way many thought would be transitory – prices were rising. Inflation. Rising prices proved stubborn and that meant interest rates would rise for the first time in years.

Interest rates and risk appetite are connected. When you can borrow cheaply, you can afford to invest in a portfolio containing bets that may not pay off. You have appetite for duration risk – it’s cheap to borrow for a long time. You also have appetite for other types of risk – you’re willing to back more longshots because you don’t need so much return to fund your borrowing.

But when borrowing becomes more expensive, risk appetites change. Borrowers who must pay high interest rates want more ‘sure things’ in their portfolio. They need returns to fund the cost of borrowing and they need them now. This applies not just to stock-market or private-equity investors but also to companies. If it wants to be valuable to its owners, a company can’t as easily continue to focus on investing for growth, it might reduce debt and start returning money to those owners.

Risk – the main character in the past few seasons of this ongoing drama we call the markets – is about to be supplanted by a new character. Returns.

Show me the money

Why is Netflix bringing in ads? Why is Twitter trying to introduce user charging? The answer to these two questions also explains why the worst performing stocks in the market in 2022 were tech stocks. In 2022/23, investors want dividends, they want profit, they want yields. They don’t want airy promises of market dominance a long way down the track.

The biggest company on the ASX right now is BHP - a stock your grandpa owned - with a price-earnings ratio of just 7.7. It’s not flashy, but its stock is one of few to have risen over the past year and it pays a fat dividend. This is the kind of stock that is performing now and, if rates continue to rise, will perform in 2023 as well. When the market changes, unlearning the old lessons is vital.

For Musk, 2022 would be a turning point. He drew on his ownership of Tesla to fund his Twitter acquisition, pledging tens of millions more Tesla shares at major investment banks, on top of the 89 million shares already pledged against personal loans. But the links he built between Twitter and Tesla caused the pair to fall in sync. It was one risk too many.

Tesla was already falling before Musk bought Twitter. The market was no longer a fan of consumer stocks, preferring instead proven returners. But since the Twitter acquisition, the fall in Tesla has been amplified.

The next chart shows how Tesla fell alongside BMW until mid-year, then took a new leg down after his Twitter acquisition went through. Musk’s staff cuts at Twitter have led to repeat problems, not least Thursday’s outage. The links between Musk’s endeavours mean risks in one investment are contagious. Twitter hurts Tesla. Musk’s portfolio is the opposite of diversified – it’s correlated.

A graph showing the performance of Tesla stock compared to BMW stock throughout 2022.
(Source: supplied) (Jason Murphy)

Musk reminds me of the Cat in the Hat in the iconic children’s book.

“Look at me, Look at me, Look at me now,” cries the Cat in the Hat as he successfully balances more and more items on his hat. It is when the Cat is most gleefully triumphant that he slips. And then, as Dr Seuss writes, “… all the things fall.”

The trick for investors is to find companies that aren’t balancing one precarious thing on top of another and promising the world. It’s time to look for stability.

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