3 Lessons from investing in Tesla

One of my best investments was also one of my worst.

On August 23rd, 2019, I invested more than one-third of my liquid net worth in Tesla, buying at a price of $212.88. This was more than doubling down on the number of Tesla shares that I already owned at that point. In total, more than half of my liquid net worth was now in Tesla. Any traditional investor will tell you that it is never smart to have such a high percentage of your money invested in a single asset, let alone a stock like Tesla which is one of the most volatile stocks in the market.

In this case, it worked for me. Perhaps it was smart. Perhaps it was lucky. Most likely, as with all investing, the success came from some combination of both. If I simply held onto all of my Tesla shares from then until now I would have more than doubled my liquid net worth in less than a year. The price today opened just under $800. My decision to buy a lot at $212.88 made it one of the best investments of my life. My decision to sell made it one of the worst. It could have been so much better.

Let me explain how and why I sold before getting to the lessons that I took away from all of this. With such a large percentage of money on Tesla, my plan before I bought the latest lot was to sell a bunch of shares once I broke even on my overall investment in the company. I was down on the position that I held before my latest buy and buying more would allow me to breakeven overall at a lower price by lowering my average cost per share. I executed that plan just as I designed it and lightened the load significantly exactly one month after doubling down. This enabled me take a lot of risk off of the table and hold onto the rest of my shares which were now in the green. Additionally, the week that I sold was the same week that I quit my job, and without a steady flow of significant income in the foreseeable future, I knew that I needed to de-risk my portfolio. Lastly, I did not want to be following stocks closely on my phone while I was traveling the world and when I am invested in a number of things I naturally tend to check on them often. For a number of reasons, I knew taking most of my chips off of the table was the right thing to do. I sold the majority of my shares at $241.81. Just five months later, I watched those share pass a price of $900. Trust me, it was a tough pill to swallow.

During my travels, I ended up selling the remainder of my shares in Tesla at a higher price but also much lower than where it is now. I sold at $335. In all, my Tesla profits were still significant. They paid for the entirety of my travels. I made good money and I cannot complain, but I could have made so much more. As with most learning experiences, it was a bit painful to go through, but I have taken away a few lessons in investing as a result. I choose to believe everything happens for a reason. If I had to guess, the lesson of selling too soon on Tesla will help me to make better investment decisions now and in the future which will have much greater positive impacts than this one did a negative.

Here are a few of the specific lessons that I am taking away:

  1. Know the why for what you do — Because I knew why I was selling the majority of my shares when I did, I cannot look back and fault the trade. Sure, it would have been great to have held, but it is simply not the move to take that kind of risk when one is out of a job. Looking at the stock’s movement in retrospect, it becomes obvious that I should have held, but that future was far from guaranteed, and I can look back with the comfort of knowing why I did what I did, and still believing it was the right thing to do. If you have great confidence in your reasoning, its correctness will persist regardless of what happens later. That will make it easier to live with the consequences if you miss out on a big gain like I did, which is a much better way to fail by the way than getting caught with a big loss.
  2. Always own a piece of what you believe in — When I sold the remainder of my shares at $335, I should have held on to some. Unlike selling the majority of my shares when I broke even and was about to quit, this is a trade I would do differently next time. I sold at $335 because the stock had popped to that level on a positive earnings report and the new price represented a 50% gain in a month. I still had a lot of money in at that point. I was excited to lock in my winnings and wait on the sidelines for a lower price at which I could buy back in. This showed an over-confidence in my ability to predict its short-term movements. That is not the game that I want to play anyway. The stock never fell. Instead, it turned out to be the beginning of a meteoric rise. From the experience of having to watch that over the next several months, I learned to hold onto small investments in the companies I believe in, even if I might think they are going to go down in the short-term. There may never be an opportunity to buy lower, and the potential small loss on a small investment is easier to swallow than having to sit and watch one of your favorite companies succeed while you are standing on the sidelines. Keep a small amount of money on the board and you can continue to root for the company with little at stake. If it goes up, your only regret will be that you did not buy more. If it goes down, buying more at a lower price will balance out your average cost per share, and so long as you still believe in the company, you should be comfortable holding for the long-term from there.
  3. Do not let past mistakes cloud future decisions –This last lesson took me a while to learn. In a way, it is about not falling prey to the sunk cost fallacy. About 5 weeks ago, Tesla fell to its lowest price since its massive rally. It dropped to around $360 which was just about 7% greater than the price at which I last sold shares at $335. I was excited to finally have the opportunity to get back into Tesla at the same price that I had previously gotten out. This was foolish. In waiting for the stock to fall below $335 only because I wanted to fully nullify my mistake from the past, I missed an obvious buying opportunity in its entirety. Before I could get my hands on some Tesla shares, they quickly flew back up to the 400s, and then the 500s, and then the 600s, and so on. As I write this, it is trading at $799.

The company’s Q1 earnings report after the market closes today should send it flying in one direction or the other. A combination of the first two lessons and my most recent realization of the third led me to buy one share of Tesla on Monday. I bit the bullet and bought it at $785.58 after having last sold at $335. Do not let past mistakes cloud future decisions. Always own a piece of what you believe in. Know the why for what you do.