The Stock Market's Secret Weapon

Instead of hanging around Silicon Valley and falling into the same funk as his peers, however, Musk decamped to Los Angeles. The conventional wisdom of the time said to take a deep breath and wait for the next big thing to arrive in due course. Musk rejected that logic by throwing $100 million into SpaceX, $70 million into Tesla, and $10 million into SolarCity. Short of building an actual money-crushing machine, Musk could not have picked a faster way to destroy his fortune. He became a one-man, ultra-risk-taking venture capital shop and doubled down on making super-complex physical goods in two of the most expensive places in the world, Los Angeles and Silicon Valley.

He almost went broke in the process during the financial crisis:

When Musk ran through the calculations concerning SpaceX and Tesla, it occurred to him that only one company would likely even have a chance at survival. “I could either pick SpaceX or Tesla or split the money I had left between them,” Musk said. “That was a tough decision. If I split the money, maybe both of them would die. If I gave the money to just one company, the probability of it surviving was greater, but then it would mean certain death for the other company. I debated that over and over.” While Musk meditated on this, the economy worsened quickly and so too did Musk’s financial condition. As 2008 came to an end, Musk had run out of money.

He lucked out by securing a large government contract for SpaceX and a loan for Tesla that bought both companies enough time to survive the turbulence of the Great Recession. It remains to be seen whether or not these companies will be the game-changers Musk envisions, but fact that he has created a $30 billion car company and revived a dying space industry is quite an accomplishment.

(Say what you will about the prospects of his companies, but the guy is an amazing salesman. After reading his biography I came away wanting to buy a Tesla and mostly convinced that people could live on Mars some day.)

Musk seems driven by something more than wealth or power — the guy really just wants to create things and push the envelope in terms of innovation. Not many could do what he does, but it’s inspiring nonetheless. The fact that we have people like Musk and others who are willing to take these types of risks is probably one of our biggest under-appreciated assets from a market and economic standpoint. Our human desire to create and innovate is a huge driving force behind growth and improvement in living standards.

From a textbook perspective the stock market’s gains are driven mainly by the following factors:

1. Corporate earning’s growth
2. Shareholder yield (dividends, share buybacks & debt repayment)
3. How much investors are willing to pay for the market’s earnings and yield

Owning shares in the stock market allows investors to own a piece of corporate profits. People’s desire to improve themselves and continue to innovate are two of the most overlooked aspects in this equation. I loved this quote courtesy of Eddy Elfenbein last week when discussing why stocks outperform bonds over time:

My point is that equity is completely different from other classes of investments. It’s the only one that captures human ingenuity, which is the ultimate asset.

Following the financial crisis many people swore off the stock market forever. People began to believe that the market was a rollercoaster casino where the odds were heavily stacked against them. They were missing the fact that markets and economies are always and forever cyclical. Some of the downturns in the cycle just happen to be more painful than others.

The problem with human progress is that it’s not always easily apparent in the moment and it happens in fits and starts. But human ingenuity remains one of the more under-stated reasons for the stock market’s growth over time.

Sources:
Elon Musk: Tesla, SpaceX and the Quest for a Fantastic Future
Why Do Stocks Beat Bonds? (Crossing Wall Street)

Further Reading:
What If The Future Is Better Than We Think?