Tesla’s stock price has risen nearly 2,000% over the past five years. To put that into context, a £1,000 holding at the start of 2016 could now be redeemed for nearly £21,000.
On paper, the company is worth more than ten times that of car giants General Motors and Ford. But is it still a good investment?
To answer this question, and also how to make sure your portfolio isn’t filled with overvalued companies, DIY investors need to understand the approach of who is making the most money from the stock market. They are not online stock pickers, but financial mathematicians. They have developed an equation, a formula, which gives them an advantage.
To understand how the mathematician equation works, a starting point is to study how to choose a new helmet. Consider three brands: Sony, the classic choice, Audio Technica, a more obscure brand, and Dr Dre Beats, the creation of the rap-music producer. These marks represent the three components or, what mathematicians call, the three terms of the equation: signal, noise and feedback.
The first, the signal, is Sony. Reliable, tested and approved. We know what we get if we buy this brand but there remains a nagging doubt: is there anything better that we don’t know? That’s where Audio Technica comes in. The enthusiastic local sound system shop owner swears it’s the best, but that’s just one point of view. His assessment provides a personal, error-prone opinion that is difficult to assess. This is the second term in our equation, noise.
Do-it-yourself investors have become familiar with the need to identify the signal by cutting out the noise. But feedback poses a new problem. In the case of Tesla, the rise in share value did not coincide with any particular technical innovation, it took the form of hype about CEO Elon Musk. He became something of a party animal, making outlandish claims about the future and inspiring a frenzy of excitement.