Elon Musk: Take The Good With The Bad

Having covered the auto industry since 1991, I am often asked about Tesla as an investment. My response has always been the same, going back years now. Buy it if you want, but always own an options-based hedge in the form of a deeply out of the money put. Even in a stock as volatile as Tesla, these are cheap enough to not destroy returns. Roll them forward as long as you own the stock. Best case, you’ll never need them. Worst case, you’ll be happy to have them.

My rational: Tesla is Elon Musk, and Elon Musk is Tesla. You know this going in, and you have only yourself to blame if you ignore that observation. It has been true since before the tweets and the controversies, the contentious earnings conference calls and teary interviews. One-person risk is always something to consider regardless of when times are good or bad, happy or sad (to quote Al Green).

While most Musk-ian comparisons go only back to Steve Jobs or (maybe) Howard Hughes, consider a name lost to history: William “Billy” Durant. At the turn of the 20th century, he owned Buick and wowed the crowds at the 1905 NY Auto show. He secured over 1,000 orders on the strength of a few demo vehicles but had no manufacturing facilities to produce them. Regardless, four year later Buick was the best selling car brand in America.

He went on to found General Motors in 1908, only to be kicked out in 1910, but then bought his way back in with cash generated by his next enterprise, a little company called Chevrolet. And then got kicked out again. After that tried his hand on Wall Street, buying all the way down in 1929. His later career included managing a bowling alley in Flint Michigan and he died in 1947, essentially broke.

My point here is not about Musk per se – even his worst short selling enemies do not likely wish him a fate like Durant’s – but about the nature of individuals who power real change. They are seldom what society would deem healthy, well adjusted individuals. Steve Jobs was ferociously single-minded and hard to deal with. Alfred Sloan, who cleaned up Durant’s GM and made it a global powerhouse, bordered on the misanthropic. The list of difficult personalities who have made business history is long; a similar catalog of “nice, normal” ones feels much shorter.

Despite all the attention on Elon Musk’s challenges just now, I sincerely doubt the next raft of obsessed society-changing entrepreneurs will be much different. For investors, this is a critical observation since tech-based disruption will provide most of the alpha-generating opportunities in coming decades. Many of those future investment opportunities will come with visionary leaders. Not all will have strong teams around them.

Not owning those stocks because of that missing piece will not always be an option, either due to index inclusion or the chance for outsized returns.Hedging founder risk is the only answer, and an important one to keep in mind.