KeyStone’s Stock Talk Show, Episode 196.
Great to be back with you this week. I will start with a few thoughts on Elon Musks tweet-gate initial SEC testimonial that started this week regarding his 2018 tweet that he had “funding secured” to take Tesla private at $420 per share, and that “investor support is confirmed.” We will also touch on the very significant layoff to start 2023 in big tech. Aaron will be discussing the yield curve and whether or not an inverted yield curve has been a good predictor of recessions. Brennan answers a question from a viewer on the age-old issue of whether to invest (for a return) or pay down debt first. In our Stocks 101 segment, Brett will take a look at the idea of risk and how it affects your investing.
I welcome my cohosts – Aaron, and the Killer B’s – Brennan and Brett.
Trial Details:
The trial surrounds Musk’s 2018 tweet that he had “funding secured” to take Tesla private at $420 per share, and that “investor support is confirmed.”
Shareholders are suing the Tesla CEO under federal securities law over his 2018 tweets, which they allege were false and misleading statements that caused them financial harm and losses. The court has already deemed the tweets to be “untrue.” The investors seek to hold Musk and Tesla’s board members liable for damages.
Musk sent the now-infamous tweet on Aug. 7, 2018 – the exact tweet of primary interest was —- “Am considering taking Tesla private at $420. Funding secured.” He followed it up with a subsequent post reading, “Investor support is confirmed. Only reason why this is not certain is that it’s contingent on a shareholder vote” — the other tweet referenced in court documents.
Just prior to the tweet, Tesla’s market cap was roughly $50 billion, after the tweet, it surged to roughly $65 billion. The surge in the share price cost Tesla short sellers hundreds of millions of dollars “when they were forced thereafter to cover their positions by purchasing Tesla securities at artificially inflated prices,” read the initial 2018 complaint.
Important Notes:
The court in the shareholder suit has instructed jurors to assume Musk’s declarations of “Funding secured” and “Investor support is confirmed” are untrue. Additionally, Musk has already settled with the Securities and Exchange Commission over the matter, paid a $20 million fine and relinquished his board chairmanship of Tesla, which paid a $20 million fine of its own.
Musk has defended himself over claims his tweets were false, saying last year that he did have funding lined up at the time — from the Saudi Public Investment Fund, which Musk said had “committed unequivocally” to taking Tesla private.
In testimony this past week he is now trying to assert that with his stake in SpaceX which is now around 43%, alone would be enough to cover the funding. SpaceX was at the time and remains private and it feels very disingenuous that he would have been about to secure $65 plus billion by either selling or against his stake in the private firm for a multitude of reasons – including the fact that his stake simply was not worth enough in real cash on a sale. I would suggest that had he informed investors that he was to liquidate his stake to take Tesla private, the value of SpaceX would have dropped.
Musk has also previously said that not all believe his tweets and that Twitter’s character limit does not allow for comprehensive statements, even if they are truthful – perhaps the answer then is that he should stop communicated ultra important information via this medium – duh.
My thoughts:
In the end, Musk looked very uncomfortable in his testimonial and appears like a man desperately trying to backtrack and explain away unserious behavior for what is serious business. Own it. The statements were irresponsible and just flat out untrue. They cost investors money – yes, they were short sellers, but it does not matter what you think about them. You cannot lie or basically commit fraud to hurt them. End of story. Pay the piper and move on.
CORRECTION TO LAST WEEK’S EPISODE – Tax-Free First Home Savings Account (FHSA)
Last week I went over the new Tax-Free First Home Savings Account (FHSA) – which aims to help first time home buyers purchase a home in Canada. And in my segment, I made note that one could not use this new FHSA account in unison with the RRSP’s Home Buyers Plan to purchase the same home.
However, this was a mistake. When the plan was first announced, this was the case, but in November 2022 the Government revised the plan so that both the RRSP Home Buyers Plan and the FHSA account can be used toward the purchase of the same home.
Mail Bag Question – PAYING OFF DEBT Vs. INVESTING
A question came in from a client wanting us to discuss the topic of Paying down Debt vs. Investing, so I thought that I would dig into the topic as it is becoming an ever more important question while we have seen interest rates on the rise.
Now I must say that deciding to use extra cash to invest vs. paying off debt really comes down to an individuals’ personal situation and there is not a one size fits all answer. But if we were listening to Dave Ramsey’s radio show – who is an American radio personality that teaches people how to budget, pay down debt and invest in mutual funds – he would argue that people should not invest a dime until all of their debt is paid off including their credit card debt, vehicle loans, lines of credit, and even their mortgages on their home. I have heard stanch debates that he has had on his show with live callers where he tells them they must not invest until their debt is all paid off, and generally this is the safer, more risk averse route for one to take. So really, it is not bad advice at all and is suitable for most.
Why would one decide to invest extra cash rather than pay down their debt?…. Well the only reason one would consider this is because they think that they can earn a better return on their investments than the interest rate they are paying on their debt. For example, if someone has credit card debt which charges an interest rate of 20%, we advise them to pay their credit card balance off ASAP rather than invest because they would need to earn a return of over 20% on their investments to make the investing route make sense.
So, this brings up the first step in the pay down debt vs investing decision making process – one should look at each of their sources of debt and the interest rate that they pay on each source. If they think that they can make a better return on their investments than the interest they are paying on their debt – they could possibly decide to invest. But remember, like Dave Ramsey preaches, paying off debt is ALWAYS the safer route, as there is no assurance that one’s investment returns will surpass the interest charges that they pay on their debt.
I recently helped a childhood friend do some financial planning in 2022 as he was interested in beginning to invest in the market and wanted to get his finances in order. He was looking at investing $30K cash he had saved up in his bank account, all while he had over $80K in debt which included a vehicle loan and a line of credit for a camper. At the time the truck loan was charging an interest rate of 4.5% while the camper line of credit was charging interest of 6.0%. And my advice to him was to take the guaranteed route of paying down his debt, starting with the highest interest rate camper line of credit, rather than beginning to invest. And what he ended up doing after I provided him guidance was to take $25K to pay down the camper loan and invest $5K in his TFSA.
Generally, I think that paying down debt is usually the more diligent way to go but again it all comes down to an individual’s personal situation. Investing rather than paying down debt is definitely the riskier endeavour and can play a toll on your emotions.
I will leave you with a simple quote from Charlie Munger – “Smart men go broke three ways – liquor, ladies and leverage.”
Risk & Reward
As most will know, risk and return are related, but many overlook or underestimate the importance of risk. Risk can be broken down into two broad categories, systematic risk and unsystematic risk.
Systematic risk is when the risk is derived from participating in a market. So, if you want to invest in, let’s say, a Japanese company, you are subject to the systematic risk of Japan. This may include things such as the Bank of Japan raising interest rates or a significant natural disaster such as an earthquake.
A real-world example of this is the great recession, the entire financial system froze up, negatively impacting the U.S. and the entire world’s economy. People will also call systematic risk “un-diversifiable” because if you want to participate in a particular country or industry, you are subject to that risk regardless of the individual company you invest in.
If you ever see a Beta number, this is the number trying to quantify the systematic risk, its not perfect by any measure but is commonly used.
On the other hand, we have unsystematic risk, and this is the risk that affects an individual firm. This can be things like a firm not being able to deliver its products, an example of this is Intel which I recently covered in a “your stock our take”. The company could not pass its 14-nanometer node on time allowing direct competitor AMD to take significant market share. The stock price has been cut in half and is trading at levels it saw in 2015.
Another example of this is the Boeing 737 Max crashes where Boeing had implemented poor software, causing crashes which caused the stock price to fall significantly following the tragedy. The company saw a mass cancellation of orders.
Risk outcomes are often asymmetric, the downside of an event may be extremely rare but have a dramatic effect on the company. Let’s say every year a hypothetical risk has a 0.1% chance of bankrupting the company, unlikely to happen but when it does happen everyone has 20/20 hindsight and says it should have been priced in, but risks are frankly overlooked much of the time.
We commonly see people overlook the risk of a company operating as projected. In 2021, we saw many companies project massive growth numbers needing everything to work out perfect, and the market relied heavily on these expectations overlooking the risk of the companies non-performance. In tandem, we saw a shift in systematic risk when it comes to interest rates and inflation making these projections harder to hit. So, as the projections got either missed or revised, we’ve seen many stocks drop dramatically; that was the effect of the market as a whole overlooking risk. We took the stairs up in price but the elevator down.
When we value a company, a company with higher risk should trade a lower multiple compared to an otherwise identical company. Let’s take Dynacor, for example, a gold processor that operates in Peru. Let’s compare it to a company that hypothetically had an identical operation & operates in Canada. Peru has a higher geo-political risk than Canada, Peru has had political protests which has inhibited other gold operations in the region. Does being higher risk made Dynacor a bad investment? No, not at all, as long as it is trading at an appropriate price with respect to our hypothetical Canadian company, and at time markets can overestimate certain risks making Dynacor an even more appealing investment.
Perhaps one of the biggest issues with analyzing risk between companies is there is hardly a one-to-one comparison to make. This is why you will commonly see an analyst take an industry average and adjust for the firm’s individual non-systematic risks.
In summary, the downside of risk can be sudden and investors need to recognize the risks and need to pay appropriate prices for the risk the company has.
