As I wrote last month, in 2020 Tesla jumped from #8 to #2 position in my portfolio. This week as I set about writing a blog post dedicated to my Tesla holding, I came across Charlie Munger’s Q&A from the Daily Journal’s annual shareholder meeting. Mr. Munger does not own any Tesla shares as far as we know. He also thinks Tesla shares are very overpriced. But he does own one other company that has also gotten swept up in the EV (Electric Vehicle) frenzy of late.
Let’s first start with Charlie Munger’s background. He is the well-known vice chairman of Berkshire Hathaway—and the right-hand man of Warren Buffett. He’s also the long-time chairman of Daily Journal Corporation (DJCO), a publishing and holding company. In 2008, he invested DJCO’s excess cash in five public companies. Initial investment was just $20M but in nine short years, those holdings grew nearly 11 times. You can see more details of his investments in a 2018 post I wrote here.
Mr. Munger’s investment of DJCO cash was just in five stocks. Four of them trade on a US stock exchange, and therefore are subject to regular public disclosures (SEC form 13-F). Its only other holding is in a Chinese company named BYD. Since DJCO apparently bought those shares in an offshore stock exchange (likely Hong Kong), it is not subject to SEC disclosures. Nevertheless, Mr. Munger has talked frequently and openly about his BYD investment, and how happy he’s with the company.
BYD is an automobile manufacturer among other things. It makes both gasoline powered and battery electric cars, bicycles, buses, trucks, etc. It also makes rechargeable batteries and solar panels. Munger believes that BYD is well positioned for China’s gradual transition from gas powered to electric vehicles. As investors became excited about the prospect of EVs last year, BYD stock was also swept up in the ensuing speculation frenzy.
As Charlie Munger sat down for hours-long Q&A session with DJCO shareholders in February this year, this is what he had to say about BYD:
BYD stock did nothing for the first five years we held it. Last year it quintupled. What happened is that BYD is very well positioned for the transfer of Chinese automobile production from gasoline-driven cars to electricity-driven cars. You can imagine it’s in a wonderful position and that excited the people in China which has its share of crazy speculators. And so, the stock went way up.
I don’t own any BYD shares but unlike Mr. Munger, I am a Tesla shareholder.
See how both Tesla and BYD stocks have marched together in the last twelve months—and with nearly identical gains:
Tesla has been much more volatile (and also higher performing) between the two when we look at their five-year history:
Clearly there is a lot of crazy speculations with both stocks. But is Mr. Munger selling his BYD shares, given how far they’ve come? This is how he answered this question:
We admire the company and like its position. And we pay huge taxes to a combination of the federal government and the state of California when we sell something. On balance, we hold in certain of these position when, normally, we wouldn’t buy a new position. Practically everybody does that.
He’s not selling. If he does, he’ll pay significant capital gains taxes. I am in a similar position with my Tesla position. If I sell, I will also end up with large tax liability.
Munger went on to say this about BYD:
I think you can count on the fact that if we really like the company and we like the management—and that is the way we feel about BYD—we’re likely to be a little too loyal. I don’t think we’ll change on that.
He likes BYD management, so he is willing to stay loyal to them even when he clearly thinks that crazy speculators have bid up its share price too much. He obviously knows that BYD shares could go down significantly once the EV fervor dies down—and he won’t buy any new shares at today’s prices—and yet he plans to hold on to what he already got.
I am the same way with my Tesla shares. I like Tesla as a business. It not only has the first-mover advantage in the EV market, but it also has proven last year that its business can survive an economic recession. It has a visionary founder CEO who at times can be unpredictable but still managed to grow the company very well. It has loyal customers who at times remind me of Apple’s highly engaged customers. And above all, I consider Tesla’s Battery Electric Vehicle (BEV) business model to have crossed the chasm (to borrow an old term from Geoffrey Moore). The chasm in this sense is the vast difference in expectations when a revolutionary product goes from early adopters to mainstream users (see below chart). Today’s consumers no longer consider electric vehicles to be novelty products. You can read more of my thoughts on Tesla from this blog post that was written well before Tesla’s meteoric rise last year.
I first bought Tesla shares in 2013. Like Mr. Munger’s BYD position, I am sitting on huge capital gains today—about 12x my cost basis. I fully expect Tesla share price to drop from last year’s huge gains. It would cut down my position. But still, like Mr. Munger with BYD, I am also going to stay a little too loyal to Tesla. I haven’t bought any new shares of Tesla in last two years, but I am not willing to sell my existing shares either. I am optimistic of Tesla’s long-term future, even though there will be large drop offs in future.
Postscript: As I began to put together my thoughts on Tesla last month, its share price also began a steep downhill ride. And that continues even today. Since the beginning of February when Tesla was around $900, it has fallen precipitously. Today its trades at less than $600 per share. Unsurprisingly, my Tesla position has dropped too. I wrote in my lost blog post that Tesla had jumped from #8 spot to #2 spot in 2020. Well, today—barely a month later— it has given up some of those gains and now sit at #3 spot in my portfolio—behind Amazon and Apple.