Wednesday , December 11 2019
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Three Things I Think I Think – Tesla and the Broken Window Theory

Summary:
Here are some things I think I am thinking about: 1) Tesla broke some windows. The unveiling of the Tesla Cyber Truck was a smash. Literally. They installed bulletproof windows on the truck and somehow didn’t properly test the vehicle’s ability to sustain damage before doing a live demo in which they busted the window with a small bowling ball. It perfectly summarized what appears to be a flop of a product unveiling. I am not gonna lie – this really disappointed me. I have no stake in Tesla, but I’m rooting for Tesla to succeed mainly because I just generally like the way Musk is pushing the limits on what we can do in so many different spaces (no pun intended). But this one seems waaay out of touch. I’ve driven trucks for most of my life.¹ I drive them because they’re simple and

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Here are some things I think I am thinking about:

1) Tesla broke some windows. The unveiling of the Tesla Cyber Truck was a smash. Literally. They installed bulletproof windows on the truck and somehow didn’t properly test the vehicle’s ability to sustain damage before doing a live demo in which they busted the window with a small bowling ball. It perfectly summarized what appears to be a flop of a product unveiling.

I am not gonna lie – this really disappointed me. I have no stake in Tesla, but I’m rooting for Tesla to succeed mainly because I just generally like the way Musk is pushing the limits on what we can do in so many different spaces (no pun intended). But this one seems waaay out of touch.

I’ve driven trucks for most of my life.¹ I drive them because they’re simple and practical vehicles. I don’t need something luxurious, fast and certainly not bulletproof.² I need something simple that can haul stuff, doesn’t need a lot of maintenance and gets me from point A to B at about 50 mph max. That’s about it. Honestly, I think if they’d unveiled something that looked roughly like a Ford F-150 with a Tesla interior and an electric motor the thing would fly off the lot. Instead, they made a car that has a lot of impractical elements (like bulletproof windows) and is, quite frankly, hideous. It’s almost as if they didn’t talk to a single truck owner when they were designing this thing.

Anyhow, I suspect they’ll have to go back to the drawing board for this one. I really hope they get it right because I’d love to own one.

2) Schwab bought TD Ameritrade. The big news in the financial world this week was Schwab buying TD Ameritrade. It’s kind of amazing how this unfolded. Interactive Brokers cuts its commissions to zero in the beginning of October. Then Schwab followed suit and made trading free. Then all the other discount brokers followed suit. As a result of IB’s actions their stocks all fell 10-30%. And then Schwab, partly due to its own actions, is able to bid on TD at a discount.

I like the merger overall. Schwab has always been one of my favorite firms in this space and I custody all of my firm’s assets with them because they just run a simple and clean business. TD is a nice fit.

3) Value as an inflation bet. I really liked this post by Lawrence Hamtil on value as an inflation bet. He touches on an old William Bernstein post discussing the relationship between inflation and the value factor. It makes sense if you think about it – growth stocks become increasingly predictable when inflation is low because the variance in cash flows is reduced. This makes value stocks relatively less attractive. So value is a more stable strategy when inflation is high because growth cash flows become more variable.

It’s amazing how many things in the financial world come back to macro predictions about inflation – government debt sustainability, aggregate bond returns, value stock returns, etc. So many people think they’re making microeconomic predictions about things when, in reality, they’re mostly making macroeconomic predictions. As I always say, if you get the big things right the small things tend to take care of themselves.

¹ – I actually learned to drive on an old standard transmission Ford F-150 flare side. My dad got out at a red light at a busy road and told me to switch seats. I stalled for about 5 minutes and with horns blaring behind me I figured out how a stick shift works in record time. 

² – Ironically, I might need bulletproof windows after criticizing Tesla. Of course, I don’t intend it to be critical, but hopefully constructive. But maybe Musk is the visionary and I am just the old man with an antiquated understanding of what truck drivers really want?  

Cullen Roche
Former mail delivery boy turned multi-asset investment manager, author, Ironman & chicken farmer. Probably should have stayed with mail delivery....

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