The Stock Market’s Secret Weapon

Elon Musk is one of those rare successful businessmen who has crossed over into pop culture because of his lifestyle and personality. Not only has the billionaire founder of Tesla and SpaceX been called the Thomas Edison of our day and age, but he has reached celebrity status as the inspiration for Robert Downey Jr.’s portrayal of Tony Stark in the Iron Man movie franchise.

However, it hasn’t always been an easy road to success in Musk’s conquest to change the auto and space industries. Musk became a billionaire at a young age following eBay’s purchase of Paypal, where he was an early shareholder and CEO. Instead of retiring on a island somewhere he decided to plow that money into new business ideas. Here’s the story from his biography:

Instead of hanging around Silicon Valley and falling into the same funk as his peers, however, Musk decamped to Los Angeles. The conventional wisdom of the time said to take a deep breath and wait for the next big thing to arrive in due course. Musk rejected that logic by throwing $100 million into SpaceX, $70 million into Tesla, and $10 million into SolarCity. Short of building an actual money-crushing machine, Musk could not have picked a faster way to destroy his fortune. He became a one-man, ultra-risk-taking venture capital shop and doubled down on making super-complex physical goods in two of the most expensive places in the world, Los Angeles and Silicon Valley.

He almost went broke in the process during the financial crisis:

When Musk ran through the calculations concerning SpaceX and Tesla, it occurred to him that only one company would likely even have a chance at survival. “I could either pick SpaceX or Tesla or split the money I had left between them,” Musk said. “That was a tough decision. If I split the money, maybe both of them would die. If I gave the money to just one company, the probability of it surviving was greater, but then it would mean certain death for the other company. I debated that over and over.” While Musk meditated on this, the economy worsened quickly and so too did Musk’s financial condition. As 2008 came to an end, Musk had run out of money.

He lucked out by securing a large government contract for SpaceX and a loan for Tesla that bought both companies enough time to survive the turbulence of the Great Recession. It remains to be seen whether or not these companies will be the game-changers Musk envisions, but fact that he has created a $30 billion car company and revived a dying space industry is quite an accomplishment.

(Say what you will about the prospects of his companies, but the guy is an amazing salesman. After reading his biography I came away wanting to buy a Tesla and mostly convinced that people could live on Mars some day.)

Musk seems driven by something more than wealth or power — the guy really just wants to create things and push the envelope in terms of innovation. Not many could do what he does, but it’s inspiring nonetheless. The fact that we have people like Musk and others who are willing to take these types of risks is probably one of our biggest under-appreciated assets from a market and economic standpoint. Our human desire to create and innovate is a huge driving force behind growth and improvement in living standards.

From a textbook perspective the stock market’s gains are driven mainly by the following factors:

  1. Corporate earning’s growth
  2. Shareholder yield (dividends, share buybacks & debt repayment)
  3. How much investors are willing to pay for the market’s earnings and yield

Owning shares in the stock market allows investors to own a piece of corporate profits. People’s desire to improve themselves and continue to innovate are two of the most overlooked aspects in this equation. I loved this quote courtesy of Eddy Elfenbein last week when discussing why stocks outperform bonds over time:

My point is that equity is completely different from other classes of investments. It’s the only one that captures human ingenuity, which is the ultimate asset.

Following the financial crisis many people swore off the stock market forever. People began to believe that the market was a rollercoaster casino where the odds were heavily stacked against them. They were missing the fact that markets and economies are always and forever cyclical. Some of the downturns in the cycle just happen to be more painful than others.

The problem with human progress is that it’s not always easily apparent in the moment and it happens in fits and starts. But human ingenuity remains one of the more under-stated reasons for the stock market’s growth over time.

Sources:
Elon Musk: Tesla, SpaceX and the Quest for a Fantastic Future
Why Do Stocks Beat Bonds? (Crossing Wall Street)

Further Reading:
What If The Future Is Better Than We Think?

Full Disclosure: Nothing on this site should ever be considered to be advice, research or an invitation to buy or sell any securities, please see my Terms & Conditions page for a full disclaimer.

  • Henry

    A side anecdote on this ingenuity topic

    I was once asked, “as you stand here, what is your biggest/most important asset?” – Most people try to determine the answer between their stock portfolio, property, bonds, personal business et al but the answer that was given to me (at least when asked to a 28yr old self) was YOU.

    You are your biggest and most important asset. The earnings power potential into the future, especially at a young age and understanding this concept, has the potential to far out weigh the yield on many asset classes. Thereafter, the return from those yields can be either reinvested in yourself ala Mr. Musk in his new ventures or in an asset class (stock) which captures other individuals ingenuity.

    When looked at it in that manner, how big was Mr. Musk’s bet at the end of the day?

    • Ben

      Good point. People definitely underestimate the power of human capital. Young people have the biggest asset of all — time.

  • Here to Learn

    The thing I love about Musk is that he is driven by aspirational goals and not the money. He wants to ensure a good future for humanity and he believes sustainable energy is one step towards that goal. So he goes out and builds the best looking electric luxury vehicle with plans to reinvest the money to develop a more affordable electric car (Model 3). While Musk is doing everything in his power to make Tesla #1 in the car industry, I think he views success as more and more people drive electric vehicles. The same goes with his other ventures, SpaceX, SolarCity, the Hyperloop. Musk is setting about to change the world and while money helps him accomplish those goals, it isn’t the driving force for him.

  • Mark Massey

    Life is cyclical. Always has been, always will be. If you do not know that or cannot understand that, you are likely in possession of a lower than average IQ. Similarly, if you do not understand the connection between owing shares of companies and investment in the progress of the human race, you are lacking an important piece of knowledge.

  • > Following the financial crisis many people swore off the stock market forever…

    Whenever there are mass post-crash exoduses of the market, such as the one you referenced, it always reminds me that a surprisingly large number of investors haven’t studied the history of markets. Any serious long-term investor will _expect_ to experience crashes, and will rebalance and repurchase straight through those crashes.

  • > Following the financial crisis many people swore off the stock market forever…

    Whenever there are mass post-crash exoduses of the market, such as the one you referenced, it always reminds me that a surprisingly large number of investors haven’t studied the history of markets. Any serious long-term investor will _expect_ to experience crashes, and will rebalance and repurchase straight through those crashes.

    • Ben

      Couldn’t agree more. People act like it’s completely out of the ordinary when there’s a bear market or crash. The reasons are always different but the reason shouldn’t matter to people, just that they understand they can and will happen.

      • BTW, really enjoyed your book. That’s actually how I came to know about your blog!

    • Ben

      Couldn’t agree more. People act like it’s completely out of the ordinary when there’s a bear market or crash. The reasons are always different but the reason shouldn’t matter to people, just that they understand they can and will happen.