Elon Musk: a champion of long-term investing?

When an iconic entrepreneur is humbled so publicly, it’s a moment of truth. But it’s the bigger truth that is often the real casualty.

Thus it was so over Elon Musk’s dust-up with the Securities and Exchange Commission regarding his fateful tweet on 7 August, which falsely claimed that the necessary funding was in place for taking Tesla private.

Apparently it was a ploy to punish short sellers who had made a bundle from the endless production delays of the car of the future, the Model 3.

But the resulting publicity missed Mr Musk’s main point: namely, today’s markets are over-financialised, as speculative trading comes at the expense of prudent investing.

Equity markets’ primary role is to channel capital from investors to enterprises that want to grow their businesses. Investors are thus issued shares that are meant to claim against the future profits of borrowers.

Over time, however, trading in such claims itself has become more profitable than the rewards for holding them, giving rise to a vast array of financial activity driven by the 24-hour news cycle, which rarely isolates the wheat from the chaff.

Under this unreal quarterly capitalism, where the latest data are all that matters, entrepreneurs are increasingly forced to seek alternative sources of funding for the growth that is beneficial to them but damaging to the integrity of equity markets.

Many long-term investors, like pension plans managing retirement savings,decoupled from the rest of the economy. The result is shorter investment time horizons, an increased search for ‘hot’ products and stronger herd mentality.

Such investors are putting their money where their mouth is by steadily drifting towards private markets with longer time horizons. Worldwide, their allocation has risen from 4% in 1997 to 15% in 2007, and to 25% in 2017. Market distortion is not the only factor, but it is an important one.

Mr. Musk, for all his showmanship, has touched a nerve.

If you are a subscriber to the Financial Times, you’ll find an expanded version in the FTfm today (29th October 2018).

2 thoughts on “Elon Musk: a champion of long-term investing?

  1. Dear Amin,
    always a pleasure to read you. The whole line of your article is making sense with the exception of the role of short sellers( expanded in the FT FM paper version.

    The role of short sellers is to provide checks in the expectation game by challenging as in the Tesla case the exageration of future earnings. Finance littérature has largely discussed the healthy role of short sellers who are always betting the momentum trades. The reasons why bubble develop is essentially because not enough short sellers can challenge the consensual optimism and asleep they are on a weak position meaning potential losses and repo is financing holding durable positions.

    Like

    • Dear Didier,
      This is true if short sellers are not trying to manipulate the markets by spreading false information or rumors. The financial literature does not take into account attacks possible on companies by other means like FUD. Today short sellers have unlimited access to the press whereas communication of analysts is regulated thus jeopardized the role of public markets. An interesting article on this is under https://corpgov.law.harvard.edu/2017/11/27/short-activism-the-rise-in-anonymous-online-short-attacks/ .
      If public markets do not provide access to cheap capital but can trigger attacks on the company, its services, its products or on its key persons we should not be surprised by private markets becoming more attractive.
      Therefore I think Amin raised a key questions relating to public markets and the rules governing their participants. By the way, profit oriented public are mainly interested in high turnover and less in fair values.

      Like

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