Is Tesla Fever the New Tulip Mania?

Tesla's share price is being driven primarily by investors using Robinhood, a platform designed to make trading easy for Millennials and Gen Zers, and populated primarily by pandemic era traders with too much money and time, many of whom couldn't indulge their usual passion for sports betting due to Covid restrictions.JL

Scott Galloway reports in Medium:

The story stock of Tesla, trading more on imagination than fundamentals, was a hit among Robinhood traders. Story stocks (are) where the narrative that is being spun to the public is more important than the actual numbers. Tesla stock started moving almost in tandem with the number of Robinhood users holding the stock. If you want to know what Tesla stock will do tomorrow, find out how many people signed up for Robinhood today.Tesla stock is up almost 6x this year, and its CEO, Elon Musk, is even saying it’s overvalued.

Every decade, there’s at least one financial crisis somewhere in the world. When asked what a recession was, Jamie Dimon responded, “Something that happens every five to seven years.” It’s been 11. One of the many strange things about a crisis is that the country of origin (this time, China) is usually not the one that gets hit the hardest. Similar to when your kid gets his first C. Yeah, it’s rough on him, but the household devolves into arguments around parenting, with an older brother who must endure new rules implemented as a function of his delinquent sibling. But I digress.

Financial crises have many causes, but they generally boil down to a few key elements:

• easy money
• poor regulation
• consensual hallucination that the market always goes up

The crisis is preceded by a cocaine-fueled party, where everything and everyone looks and feels great. The party creates an asset bubble — a wave of optimism that lifts prices well above levels warranted by fundamentals — ending in a crash. The first documented asset bubble was the Dutch tulip mania in 1636 when speculation drove the value of the rarest tulips to six times the average salary at the time.

Story stocks — where the narrative is more important than the numbers — are the new tulips, and Robinhood is the E*Trade equivalent of our age. During the early internet heyday, E*Trade grew its client base of retail traders 36-fold in four years (1996–2000). The three legs of the stool — cheap capital, poor regulation, and public delusion — are almost as abundant today as they were in 1999. U.S. venture capital funding reached a post-dot-com era high of $137 billion. Just like the flurry of E*trade investors helped drive the bubble of 1999, today’s fuel is Robinhood.

Robinhood’s use has exploded in 2020. The firm has expanded to 13 million users parked in their parents’ basements. To be fair, they’re not all day traders. The trading app added 3 million users in the four months after March, at the same time when Google searches for how to buy stock surged this year, only rivaled in popularity by searches for “tech stocks.”

The story stock of Tesla, trading more on imagination than fundamentals, was a hit among Robinhood traders. Tesla stock started moving almost in tandem with the number of Robinhood users holding the stock. In sum, if you want to know what Tesla stock will do tomorrow, find out how many people signed up for Robinhood accounts today.

The dot-com bubble of the late ’90s was another once-in-a-generation, tulip-type mania. I would know because I was at ground zero as one of its poster boys. Back in 1999, I went to an airfield to browse private jets with other makeshift Masters of the Universe. I was the “genius” starter of an internet startup that, on paper, could afford to spend the equivalent of 1,000 years of my mother’s salary on a Gulfstream. This alone should have signaled that the canary in the coal mine was choking. But it didn’t.

Pre-crash, I attended the World Economic Forum’s Annual Meeting in Davos — an invincible internet entrepreneur. Post-crash, I returned a humbled man having lost my Yoda status and instead becoming kryptonite, where I couldn’t get a meeting. Couldn’t get arrested, even. I promised myself next time I’d be smarter on the cusp of a recession.

As you get older you start to recognize that the economic time you are living in is a data point on a curved line and that the direction of the line can quickly change for better, or for worse. Although the general trajectory of the market trends upward, it’s about your resilience and your ability to survive over the long-term without combusting in between cycles that counts.

Valuation metrics — how much people are willing to pay for a company’s stock — are logical indicators of when the market is overheated. Just as regulation tightens when things are bad, it also loosens up after a few drinks or in the midst of a mania. After the bubble collapsed, laws like Sarbanes-Oxley were created to protect investors from corporate BS. But the pendulum has swung back to frivolity. Case in point: The FTC has allowed companies including Uber, who lost almost $9 billion in 2019, to disclose the much more pleasant-sounding metric of “rides-adjusted EBTDA,” which comes in at a much more palatable $2 billion, thus distracting the market from their bloated cost basis and terrible business. My favorite example of a BS metric? WeWork’s “community-adjusted EBTDA,” which omitted almost every expense related to running a real-estate business. As of 2018, 97% of the S&P 500 companies use these types of unconventional metrics.

The emergence of SPACs (Special Purpose Acquisition Companies) may also be an additional canary in the coal mine. 2020 has been SPAC’s biggest year ever, as investors and companies look to get into the frothy waters of a market that seems to have a huge demand for anything that seems to feel mildly disruptive.

What are the stocks that are rocketing? Simply put, story stocks, where, as mentioned above, the narrative that is being spun to the public is more important than the actual numbers. One SPAC-specific story stock? Virgin Galactic: The firm promises to send the ultra-wealthy into outer space. It’s racking up losses of $50 million a quarter trying to finish its spacecraft. That hasn’t stopped the stock market from rallying almost 80% this year. It was up 25% on some Wall Street firms giving it their tick of approval on no substantive news.

However, that fails to the story stock of the decade — Tesla. The stock is up almost 6x this year, and its CEO, Elon Musk, is even saying it’s overvalued. Tesla sold $5 billion of its own stock at the peak to strengthen their balance sheet, as they should, and for general corporate purposes.

As a species, we’re prone to bubbles. Aspirations, emotions, wishful thinking, greed, optimism, herding, and confidence are part of our animal spirit leading to shortcomings and irrational decision-making.

One thing to remember: While crises are inevitable, they always go away. So what to do: Should you sell? I don’t know. I can only tell you what I’m doing, as I promised myself I’d be smarter the next time I knew things were frothy. I’m trying to diversify, I make sure not to put myself in a position where I’m a forced seller, meaning that if the market were to go down by 30% to 60%, I wouldn’t have to sell because of crazy things like margin or a lifestyle based on what my paper holdings are. And from an emotional standpoint, I’ve accepted that I’m likely not as smart as I think I am. So when the market corrects, I won’t be the idiot that the market is telling me I am, and I’ll have the financial complexity, and diversity, to survive this crisis — just as I didn’t survive 1999.

Life is so rich,