To state the obvious, putting all of your money in one company, no matter what company it is, is a colossally bad idea. Admittedly, if I had to bet everything on one person, it would be Elon Musk. A lot of people feel that way. That’s why Tesla’s stock is so expensive.
Turns out someone decided to go all-in on Tesla.
A twenty-something startup guy from San Francisco (because of course it’s a twenty-something startup guy from San Francisco) invested his entire net worth in Tesla. It’s probably fair to assume this is way more risk than is he should be taking.
But there’s something interesting to think about here – if we consider his “true” wealth, his current investment portfolio is probably a pretty small piece of it.
Everyone has two sides to their wealth: their financial capital (their investment portfolio and any other assets as we normally think of them), and their human capital (potential future earnings). As we go through life we (hopefully) transition our wealth from the human capital side to the financial capital side.
Someone right out of school (like our twenty-something startup guy) is pretty much all human capital (and with student debt, they probably have negative financial capital). In contrast, a ninety-year-old retiree probably has everything on the financial capital side.
This says a lot about the level of risk you can stand at different times in your life, especially when you think about how risky your human capital actually is. If people were classified as either stocks or bonds based on their income, twenty-something startup guy would be a stock bought on margin.
But let’s set aside whether this is an appropriate level of risk for him. Even if this level of risk was right for him, investing everything in one company is a wildly inefficient way to allocate risk. The market doesn’t pay you for company-specific risk, and that’s pretty much his entire portfolio.
What happens if Elon Musk gets hit by a bus? I’m sure that the rest of Tesla’s leadership team is good, but they aren’t Elon Musk. And there are all sorts of other issues specific to Tesla, whose business strategy is built largely on people adopting technology that is not all that widely used at the moment.
If he were to broaden his portfolio and bet on other electric car manufacturers or green energy companies, twenty-something startup guy could eliminate some of this non-systematic risk and replace it with the systematic risk that the markets compensate you for holding.
And every time he stepped back and included more companies in his portfolio, the more he would replace the “bad” risk with the “good” risk, until he ended up with the market.
McLean Asset Management Corporation (MAMC) is a SEC registered investment adviser. The content of this publication reflects the views of McLean Asset Management Corporation (MAMC) and sources deemed by MAMC to be reliable. There are many different interpretations of investment statistics and many different ideas about how to best use them. Past performance is not indicative of future performance. The information provided is for educational purposes only and does not constitute an offer to sell or a solicitation of an offer to buy or sell securities. There are no warranties, expressed or implied, as to accuracy, completeness, or results obtained from any information on this presentation. Indexes are not available for direct investment. All investments involve risk.
The information throughout this presentation, whether stock quotes, charts, articles, or any other statements regarding market or other financial information, is obtained from sources which we, and our suppliers believe to be reliable, but we do not warrant or guarantee the timeliness or accuracy of this information. Neither our information providers nor we shall be liable for any errors or inaccuracies, regardless of cause, or the lack of timeliness of, or for any delay or interruption in the transmission there of to the user. MAMC only transacts business in states where it is properly registered, or excluded or exempted from registration requirements. It does not provide tax, legal, or accounting advice. The information contained in this presentation does not take into account your particular investment objectives, financial situation, or needs, and you should, in considering this material, discuss your individual circumstances with professionals in those areas before making any decisions.