It’s certainly been a crazy couple of weeks for Elon Musk.
In June, Musk announce plans for Tesla to acquire SolarCity (the solar panel company run by his cousins), which was met with much scrutiny by investors. This was soon overshadowed by the disclosure of a traffic fatality related to the Autopilot feature in Tesla’s Model S sedan. Regulators are investigating the crash and some people think that the company should scrap its Autopilot plans or at least market the dangers of using it.
Most recently, Elon pulled an all-nighter to finished his Master Plan, Part Deux for Tesla – a roadmap that laid out at a high level is plan for the company’s future.
Many well-known hedge fund managers are also philanthropists, and many of them have their own foundations. Seth Klarman of Baupost is one of those with his own foundation, and he invested in a handful of hedge funds through his foundation. This list of Klarman's favorite hedge funds is based on the Klarman Family Foundation's 990 Read More
Wait – why am I talking about Elon Musk right now? Isn’t this website supposed to be about value investing?
Let me explain.
When you think of value investors, I’m pretty sure that Elon Musk is not the first person that pops into your head. He’s probably the poster boy for Silicon Valley start-ups right now, having founded four different billion dollar companies (PayPal, SpaceX, Tesla, and SolarCity). On top of that, Elon Musk may be the most risk-loving businessperson to have ever lived, with his companies disrupting very large, very established industries.
I recently read a new biography on Elon called Elon Musk: Tesla, SpaceX, and the Quest for a Fantastic Future by Ashlee Vance and – although they are incredibly different in so many ways – I could help but realize that there were some pretty suprising similarities between him and the world’s most famous value investor, Warren Buffett.
For example, Warren Buffett and Elon Musk…
Both Are Committed to Non-Carbon, Clean Energy Solutions
Both Elon Musk and Warren Buffett are behind two companies that are making very big pushes into carbon-free electricity. Musk is chairman and the largest shareholder of SolarCity, a company founded by his cousins Peter and Lyndon Rive in 2006. SolarCity designs, finances, and installs solar power systems and is the country’s leading full-service solar provider.
Elon Musk now wants Tesla to buy SolarCity, allowing the combined company to offer a one-stop battery-and-solar panel solution to consumers.
Meanwhile, Warren Buffett’s company Berkshire Hathaway owns Berkshire Hathaway Energy, which is one of America’s largest energy companies. Many people don’t realize that Berkshire Hathaway Energy is a leader in the renewable energy space – the company is the largest provider of wind power in the U.S. and owns 7% of the country’s total wind generation capacity and 6% of the U.S. solar market. In fact, a third of Berkshire Hathaway Energy’s power comes from renewable and non-carbon sources.
However, just because the two billionaires see renewable energy as the way of the future, it doesn’t mean they are exactly on the same page. There’s actually been an ongoing disagreement between the two in Nevada, where Buffett is trying to prevent SolarCity’s solar panel customers from being able to sell their excess energy back to the grid (a process called “net metering”). Because Berkshire is forced to buy back the excess energy at a higher price than it would cost the company if it produced the energy itself, Buffett says that Berkshire’s million+ non-solar customers in the state are effectively subsidizing SolarCity’s 17,000 solar panel customers, which he doesn’t think is fair.
Both Take Advantage of Inventive, Cheap Sources of Funding
Many people know that Buffett generally despises leverage (the use of debt to juice equity returns). And throughout his career, Buffett has maintained a conservative balance sheet, preferring to hold large amounts of cash rather than take on massive amounts of debt. However, many people may not know that the Berkshire Hathaway empire was basically built on a very peculiar source of financing: insurance float.
Here is Buffett’s explanation of what float is from the 2009 Berkshire Hathaway annual letter:
Insurers receive premiums upfront and pay claims later. […] This collect-now, pay-later model leaves us holding large sums — money we call “float” — that will eventually go to others. Meanwhile, we get to invest this float for Berkshire’s benefit. […]
If premiums exceed the total of expenses and eventual losses, we register an underwriting profit that adds to the investment income produced from the float. This combination allows us to enjoy the use of free money — and, better yet, get paid for holding it. Alas, the hope of this happy result attracts intense competition, so vigorous in most years as to cause the P/C industry as a whole to operate at a significant underwriting loss. This loss, in effect, is what the industry pays to hold its float. Usually this cost is fairly low, but in some catastrophe-ridden years the cost from underwriting losses more than eats up the income derived from use of float. […]
Our float has grown from $16 million in 1967, when we entered the business, to $62 billion at the end of 2009. Moreover, we have now operated at an underwriting profit for seven consecutive years. I believe it likely that we will continue to underwrite profitably in most — though certainly not all — future years. If we do so, our float will be cost-free, much as if someone deposited $62 billion with us that we could invest for our own benefit without the payment of interest.
Let me emphasize again that cost-free float is not a result to be expected for the P/C industry as a whole: In most years, premiums have been inadequate to cover claims plus expenses. Consequently, the industry’s overall return on tangible equity has for many decades fallen far short of that achieved by the S&P 500. Outstanding economics exist at Berkshire only because we have some outstanding managers running some unusual businesses.
In other words, Berkshire’s insurance operations take in premiums from customers today and, because they don’t have to pay claims until years in the future, the company is able to invest those premiums immediately and start earning a return. This difference between the the amount of premiums collected and the amount of claims paid out is called “float”. Float is like a loan, since the insurance company is borrowing from its customers today (premiums) and must pay them back in the future (claims).
The ability to invest float is so valuable that most insurers will actually operate at an underwriting loss (i.e. the cost to obtain premiums and the amount of claims paid out today exceeds the amount of premiums taken in) just so they can get their hands on this float. Berkshire’s insurance companies are run so well, however, that the company usually operates with an underwriting profit – so the cost of float to Berkshire is $0! This is truly ingenious! In 2015, Berkshire had $88 billion in float… which is like having an $88 billion 0% interest loan.
Elon Musk, on the other hand, has nothing to do with the insurance industry so his companies don’t use float – but I’ve noticed that he also has a very clever financing trick of his own: customer deposits.
Customers that want to buy a Tesla car must put down a $1,000 deposit. When Tesla unveiled its next car, the Model 3, in April 2016, it got 373,000 pre-orders within a month. This equates to a $373 million dollar cash inflow to the company, which Tesla can then use to fund its production line, R&D, pay vendors, etc. (this is in addition to the $391 million in customer deposits Tesla already had on its balance sheet at the end of March 2016). Customer deposits actually helped Tesla avoid bankruptcy in 2008, when the company nearly ran out of cash.
Just like Berkshire’s float, Tesla is paying 0% interest on these customer deposits… so it’s like Musk just took out a $373 million 0% interest loan, which is due when the Model 3’s start shipping (customer deposits are applied to the final purchase price of the vehicles, and the Model 3 is expected to be released sometime in late 2017).
Of course, float and customer deposits are still balance sheet liabilities, so they are not all risk-free for Buffett and Musk. Berkshire’s insurance customers could all suffer a massive hurricane or other catastrophic event, leading to massive amounts of claims which would reduce the company’s float. And Tesla’s customer deposits are fully refundable if a customer cancels his or her order, so issues with Tesla such as negative press could result in mass customer cancellations, leading to mass requests for customer deposit refunds.
Both Act on Ideas with Conviction
Warren Buffett says:
Big opportunities in life have to be seized. We don’t do very many things, but when we get the chance to do something that’s right and big, we’ve got to do it. And even to do it in a small scale is just as big of a mistake almost as not doing it at all. I mean, you really got to grab them when they come. Because you’re not going to get 500 great opportunities.
Buffett is not a very active investor. He prefers to sit around and wait… and wait… and wait for the perfect investment to come his way, rather than make an investment that he doesn’t believe in. In that past, he has compared investing to baseball, except you get an unlimited amount of pitches. So he just waits for his perfect pitch and when he swings, he swings for the fences.
Elon Musk shows his conviction for his ideas by putting everything he has into his companies. When eBay bought PayPal in 2002, Musk’s payday was $165 million. He could have bought a private island in the Caribbean and retired at age 30, but instead he poured most of his proceeds into the founding of SpaceX, and later Tesla.
When both of his companies were on the verge of bankruptcy in 2008, Musk put everything he owned into saving the companies – all of his PayPal money, all of his savings, he even sold his house. In the end, Musk pretty much single-handedly kept his companies alive because he believed in them.
Also, despite being a multi-billionaire at this point, Musk still works 90-hour weeks. He also works his employees to the bone (the burnout rate at SpaceX and Tesla is very high) and he doesn’t suffer fools – nor anyone he thinks is inept, incapable, or not giving his or her 100% – gladly. Why? Because he is on a mission – to transfer the world to renewable energy sources and to help make humanity an interplanetary species.
Both Ignore the Short-Term and Are Focused on the Long-Term
Warren Buffett is famous for investing for the long-term. The second of Buffett’s 4 Stock Investing Principles is “finding a business with favorable long-term prospects.” In fact, his preferred holding period – forever – stands out in stark contrast to nearly everyone else in the finance community, whose longest holding period might be 5 years.
Buffett’s long-term view allows him to benefit from compounding (the interest that is earned on interest), which has helped him produce such incredible returns. He says that “Life is like a snowball. The important thing is finding wet snow and a really long hill.”
Elon Musk is also focused on the long-term – after all, transitioning global power to renewable sources and getting humans to Mars are visionary goals that won’t be achieved overnight. His Master Plan, Part Deux for Tesla also reflects the long-term nature of what he is trying to achieve.
Even when it comes to the stock market, Elon actually sounds a lot like Warren. Here is an excerpt from an email he sent every SpaceX employee in 2013 about taking the company public (emphasize mine):
Per my recent comments, I am increasingly concerned about SpaceX going public before the Mars transport system is in place. Creating the technology needed to establish life on Mars is and always has been the fundamental goal of SpaceX. If being a public company diminishes that likelihood, then we should not do so until Mars is secure. This is something that I am open to reconsidering, but, given my experiences with Tesla and SolarCity, I am hesitant to foist being public on SpaceX, especially given the long term nature of our mission.
Some at SpaceX who have not been through a public company experience may think that being public is desirable. This is not so. Public company stocks, particularly if big step changes in technology are involved, go through extreme volatility, both for reasons of internal execution and for reasons that have nothing to do with anything except the economy. This causes people to be distracted by the manic-depressive nature of the stock instead of creating great products. […]
[…] My goal at SpaceX is to give you the best aspects of a public and private company. When we do a financing round, the stock price is keyed off of approximately what we would be worth if publicly traded, excluding irrational exuberance or depression, but without the pressure and distraction of being under a hot public spotlight […]
[…] Below is my advice about regarding selling SpaceX stock or options. No complicated analysis is required, as the rules of thumb are pretty simple. If you believe that SpaceX will execute better than the average public company, then our stock price will continue to appreciate at a rate greater than that of the stock market, which would be the next highest return place to invest money over the long term. Therefore, you should sell only the amount that you need to improve your standard of living in the short to medium term.
That email shows how committed he is to the future. It also sounds like Musk knows exactly who Mr. Market is.
Both Have Big Egos Tied Up in their Companies
Warren Buffett’s long-time business partner and Berkshire Hathaway vice-chairman Charlie Munger has said that “Warren’s whole ego is poured into Berkshire.” Buffett himself has even said as much: in a Fortune magazine cover story in 1988, Buffett said “My ego is wrapped up in Berkshire… I can gear my whole life by the price of Berkshire.” That’s part of the reason why he never split Berkshire’s Class A shares.
At the 2015 Berkshire shareholder meeting, Buffett said that increasing the long-term value of Berkshire and making sure the company does well is what matters to him the most.
Elon Musk also has a big ego, which he wears more on his sleeve than Buffett does. But his ego is also tied up in his companies. As David Kiley from Forbes points out, Musk takes everything personally. When a Model S caught fire at a Norwegian charging station, and the Google results about Tesla were dominated by “fire,” Musk ordered his people to “change the story.” The media’s focus on one-off incidents like this drives Musk crazy.
This is also why he works his employees so hard (one time he told the entire office at SpaceX that “not enough of you are working on Saturdays”) and why he has no tolerance for less-than-perfect work. He believes it damages his companies, which are a part of his mission and a part of his ego.
One Tesla former Tesla executive says Elon “reminds me of the Detroit slogan I see on T shirts: Detroit vs. Everybody. In that comparison, Elon, ironically, is Detroit.”
Both Have Cultivated Personal Brand Images
Finally, both Warren Buffett and Elon Musk are just as much media personalities and cultural icons as they are successful businessmen. They’ve done this by cultivating very unique personal brand images.
Warren is “The Oracle of Omaha,” “Uncle Warren,” the aw-shucks friendly grandfather from the Midwest, whose personal frugality, respect for the Golden Rule, and anti-Wall Street and anti-greed attitude has made him one of the richest men in the world.
Elon on the other hand is the genius inventor, the crazy scientist, the real-life Tony Stark (he even had a cameo in Iron Man 2), the ultimate risk-taker and the visionary founder of not one, but four billion-dollar companies.
There are several other areas where Warren Buffett and Elon Musk overlap. For example:
- Elon is the largest shareholder of Tesla; Buffett has historically been and is currently a large investor in GM
- Tesla sells its cars directly to its customers; Buffett recently bought a group of auto dealerships called the Van Thuyl Group
- SpaceX operates in the aerospace industry; Buffett recently bought Precision Castparts, which makes components used in the aerospace industry
- Elon is the largest shareholder of Tesla; Buffett has historically been and is currently a large investor in GM
- In 2013, Elon unveiled a concept for high-speed rail transportation called Hyperloop; Buffett owns BNSF, the countries second largest railroad
What do you think of Elon Musk? How does he compare to Warren Buffett? Did I miss any comparisons between the two?
Personally, I’m fascinated by Elon Musk and his companies. And I think if he keeps working as hard as he does, he might end up being just as rich as Warren Buffett is now.
by Ashlee Vance
Veteran technology journalist Ashlee Vance provides the first inside look into the extraordinary life and times of Silicon Valley’s most audacious entrepreneur. Written with exclusive access to Musk, his family and friends, the book traces the entrepreneur’s journey from a rough upbringing in South Africa to the pinnacle of the global business world.
by Alice Schroeder
Here is THE book recounting the life and times of one of the most respected men in the world, Warren Buffett. The legendary Omaha investor has never written a memoir, but now he has allowed unprecedented access to his work, opinions, struggles, triumphs, follies, and wisdom. The result is the personally revealing and complete biography of the man known everywhere as “The Oracle of Omaha.”