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Speculative Stocks: A Lesson From Tesla

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I am not currently invested in Tesla and do not plan to invest in Tesla in the next 3 months.

I normally do not write about individual companies, but the recent news of the spike in price of the Tesla (NASDAQ: TSLA) stock illustrates speculative stocks. Before anyone uses the comment section to say that Tesla stock could still have value, speculative literally means having high risk of loss, that does not mean speculative stocks have no value. Furthermore, I feel like it is worth mentioning that every investment has at least a little speculation behind it. No investment is ever guaranteed. However, there is a difference between a highly speculative stock and one of moderate risk.

On February 4th, 2020 Tesla’s stock price rose to over $960. This was a short lived spike, it dropped over 20% in a day. Logic would state that Tesla’s stock is likely to plummet in price again since it just climbed very fast. However, Tesla’s stock could rise in price. There are some who say that Tesla could rise in price to $7,000 per share. So which side is right? That cannot be certain, that is the idea of highly speculative stocks, they can go in either direction dramatically. In this post I will illustrate what to do about some speculative stocks if any have caught your interest.

Large Price Changes

Tesla has almost tripled in price over the last 6 months. This type of growth is very rare. Tesla reported good fourth quarter results and higher sales. But that alone does not cause a stock to rise so quickly. This made Tesla more popular with some “fear of missing out” mentality. Retail investors and mutual funds bought Tesla, raising the price. In addition, some stock investors shorted the stock and repurchased the stock to regain their position. Essentially, Tesla has risen in price so quickly because of a good look in potential growth and a very large rise in popularity.

When a company is widely talked about, people feel like they must take action with these stocks. That can include massive sales and buys, which can drive the price in either direction very quickly, making it a speculative stock.

Lack Of Profits

One of the main reasons that many investors are buying Tesla right now is because Tesla reported its first profitable year. That does not mean that Tesla will be profitable in future years, in fact, since Tesla reported not only no profits, but frequent negative profits previously, the new profits could be a fluke.

However, Tesla has hit new sales records. There is the possibility that Tesla has required more time to establish itself as a brand. Tesla is not the first company to require several years to become profitable. Take a look at Amazon, it is one of the largest companies in the world and it was not profitable in its first years. However, Amazon was established on the idea that e-Commerce would be a significant part of the economy before the internet was even global. The equivalence for Tesla would be to become the most popular electric car, solar panel, and battery seller in the world. Possible, but the likeliness is debatable.

Possibility Of A Large Product

One of the other reasons investors are flocking to Tesla is the possibility of self-driving vehicles. I have previously established how self-driving vehicles may be the large product of the year (or at least the decade). Tesla is the icon of self-driving car developers, but it is far from the only one. Many companies are working on self-driving technology.

It is possible some other company may release the first true self-driving car for the public. Other companies may develop better ones, especially with the possibility of errors. Furthermore, I have heard from investors that it may not be the car makers that receive the windfall for self-driving vehicles, but the software companies.

Everyone who believes that Tesla may rise to thousands per share believes they will be the first/best to build self-driving vehicles. It is not guaranteed.

My Thoughts

Tesla is almost hands down the most talked about company right now. This is making it one of the most speculative stocks today. Without a doubt, Tesla will go through a roller coaster of prices. But if you ask any Tesla investor, that is nothing new, just something a little more extreme. Should you buy it at $900/share? Probably not, it seems a little overvalued right now. Luckily, Tesla is not priced that high right now.

If you want to invest short term, or are hesitant to part with money, I would not invest in Tesla. Tesla is receiving massive hype, especially with the whole “could be over $7,000/share.” There is still a very good chance Tesla could drop in price very quickly again and stay lower over several years. If you have even a moderate risk tolerance, Tesla is not for you right now.

Over the long term, Tesla may rise in price, but I just do not see it turning into a $7,000/share company. Tesla is a young company. It still has a long road to go before becoming that valuable of a powerhouse. Tesla is not the only company working on green energy and self-driving vehicles.

With the hype of Tesla, many people could be looking at other companies that are developing self-driving cars. You could try to invest in those instead. However, do not just invest because they are developing self-driving vehicles. Invest in companies that have a broad portfolio, otherwise these are speculative stocks, even more so than Tesla.

Another set of companies investors are talking about are automakers. Automaker stocks could be speculative stocks if they become overvalued. With the hype of Tesla, many other stocks could receive healthy attention.

Final Thoughts

It is too easy to buy into the hype of speculative stocks. But sometimes speculative stocks are hyped for good reasons. Tesla has expanded over recent years and has recently become profitable (even if brief). That alone may not justify the price of Tesla, the high last week, or its current price above $700/share. There is significant risk investing in Tesla, but there could also be rewards. Imagine the people who sold their Tesla stocks at around $300 in the middle of 2019. They are now feeling like they missed out on an opportunity. So are the people who did not sell their shares at over $900.

Take the hype of Tesla right now as a lesson for not only investing in Tesla, but any speculative stock. Any stock that is being talked about frequently is going to have significant changes in prices in the near future. Anyone with less than a moderately high risk tolerance should not invest any significant money into speculative stock. But with many people all hyped about these stocks and what they entail, this could be an opportunity for stocks in similar sectors or developing similar products. Speculative stocks, regardless of what method of investing you use, are opportunities to forge your wealth.

Author: Papa Foxtrot

Most of my life I was careful with money and learned where I should invest it. I was very lucky to have parents who taught me financial literacy when I was young. Unfortunately, I am very lucky because many people lack the financial literacy I know. The purpose of Forge Your Wealth is to teach people who are just starting out in life how to obtain their wealth or anyone who just realized they may need to learn more to handle their finances. I currently have a PhD in biochemistry, just started a job in industry (will not disclose where exactly for personal and professional reasons) and am currently married to the love of my life. I am one of the lucky few people in America who graduated with no student debts, my wife was not. Over the series of a little over 3 years we paid for our wedding with no debt and paid off her federal student loans.

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