The Tesla Tightrope

Tesla's journey from a scrappy startup to a trillion-dollar company is nothing short of remarkable. But let's put on our investor hats and look beyond the dazzling headlines and charismatic CEO. In 2020, Tesla's stock price skyrocketed by over 700%, far outpacing its actual sales growth or profitability. By the end of that year, Tesla's market capitalization had surpassed that of the next nine largest automakers combined, despite producing only a fraction of their vehicles.

Now, don't get me wrong. Tesla is undoubtedly a great company. It's pioneered electric vehicle technology, built a strong brand, and pushed the entire automotive industry towards a more sustainable future. But here's where Fisher's wisdom comes into play: greatness alone doesn't justify any price.

Think of it like this: Imagine you're at an auction for a prized racehorse. This horse has won a few races and shows tremendous potential. But in the excitement of the bidding, the price skyrockets to $100 million. No matter how great that horse is, at that price, it's unlikely to ever earn back its cost. That's essentially what happened with Tesla's stock in 2020.

The glamour attached to Tesla – its innovative technology, its charismatic leader, its promise of a green future – created a fervor that pushed its valuation to unsustainable levels. At its peak, Tesla was trading at a price-to-earnings ratio of over 1,000. To put that in perspective, the average P/E ratio for the S&P 500 is typically around 15 to 20.

This isn't to say that Tesla wasn't (and isn't) a good company. It's more about understanding the difference between a good company and a good investment. As Fisher implies, they're not always the same thing.

The aftermath of this glamour-driven surge provides a sobering lesson. In 2022, Tesla's stock price dropped by about 65%, wiping out hundreds of billions in market value. While multiple factors contributed to this decline, a significant part was simply the market recalibrating Tesla's value to better align with its fundamentals.

For investors, the Tesla case underscores the importance of looking beyond the glitz and glamour when evaluating stocks. It's easy to get caught up in exciting narratives and revolutionary promises. But at the end of the day, a company's value should be grounded in its ability to generate profits and cash flow.

This doesn't mean you should avoid innovative or exciting companies. Far from it! But it does mean you need to be willing to pay a fair price for that excitement. As the old Wall Street saying goes, "Price is what you pay, value is what you get."

In the end, Tesla's wild ride reminds us that in investing, as in life, all that glitters is not gold – or at least, not at any price. A great company can indeed be a great investment, but only if you buy it at the right price. So next time you're eyeing a glamorous stock that's the talk of the town, take a step back and ask yourself: Am I paying for real value, or am I just buying expensive dreams?