We have been publishing profiles of legendary fund managers like Seth Klarman, George Soros, and Michael Burry.
Today we are looking at a different type of profile, a little more entrepreneurial and more controversial as well, one that is discussed intensely in investing circles, with cohorts of both fans and haters.
I am, of course, speaking of Elon Musk, “Chief Twit”, CEO of Tesla and SpaceX, and briefly the richest man in the world.
When talking of money and investing, we could do worse than look at the history of the richest man in the world. How did Elon Musk make his money, and what can investors learn from his spectacular rise? And why is he so controversial?
Who Is Elon Musk?
Musk was born in South Africa, to a relatively well-off family. He would start early on entrepreneurship, launching an arcade game franchise with his brother without telling his parents. He was also a self-admitted “geek”, who learned programming on his own and liked to spend most of his time with books. He was also brutally bullied, including to the point of being sent to a hospital for several weeks.
He left South Africa for Canada, and then the US. There he briefly considered starting a Ph.D. in battery technology but realized “there was this thing called the Internet happening, and I had to be part of it”.
From there on, he would successively start 2 Internet companies, and then Tesla, SpaceX, and a host of other “side businesses”.
How Did Musk Make His Money?
In 1995, Musk built ZIP2, a sort of Internet Yellow Pages with his brother Kimbal. They sold it for $300M in 1999, near the peak of the Internet bubble.
He used that money to build X.com, which would later turn into PayPal after a merger with Peter Thiel’s company, a competitor to X.com. eBay purchased PayPal for $1.5B.
Musk then founded SpaceX in 2002, and became an investor in Tesla in 2004, before taking over Tesla as the main shareholder and CEO.
He purchased Twitter for $44B in 2022, although it remains to be seen whether it will turn into a money-making or a money-burning venture.
Tesla has been the main driver of Musk’s $188B fortune. Musk owns 23% of the dominant electric car manufacturer.
The 3 Sources of Musk’s Success
There are three pillars to the Musk success story.
1. Entrepreneurs Beat Investors
The first characteristic of Musk’s rise to wealth is his entrepreneurial activity. He made almost all his money from being the founder of highly successful companies.
Risk-taking might also as well be his middle name. He systematically re-invested all his fortune in new. Both Tesla and SpaceX were “weeks from bankruptcy” at points of their existence while rushing to launch a functional product that (literally) did not explode (SpaceX) or self-ignite (Telsa).
2. Trend Following
It is fair to say that Musk has a flair for smelling trending topics years ahead of their time. Internet in 1995, electric cars in 2004 (even before if you consider the interest in battery tech), and space tech in 2002.
Rising trends are a powerful force for growing money, both for entrepreneurs and investors, and Musk is maybe the poster child of this for an entire generation, having caught not one but 3 speculative bubbles in their earliest stages.
3. Work Ethic
No matter what people say about Musk, something to grant him is a borderline insane work ethic and self-driven passion for excellence. Like a 120-hour work week and a near-maniacal focus on efficiency and productivity.
This transfers down the hierarchy, as he is asking his employees to work as hard as himself. He is also famous for very challenging meetings, often putting employees in a tough spot, and for setting “impossible” tasks and deadlines.
The pressure can get worse, as he routinely knows intricate technical details himself, often challenging his engineers during meetings by knowing as much or more than them.
Musk had been ingesting Cantrell’s textbooks on rocket-building and had transformed himself into an expert. “He knew everything,” Cantrell told Esquire. “He’d been planning to build a rocket all along.” And that’s how SpaceX was born.Inc.com
Musk is known to be a demanding and challenging boss, which can be an advantage if it gets the best out of employees and a disadvantage if they decide to go elsewhere.
What We Can Learn from Musk
Most of us are not going to replicate Musk’s career, but there are lessons we can extract from it.
Entrepreneurship & Investing
The first lesson is that no matter how good an investor’s returns can be, nothing will beat the returns of a successful entrepreneur. Musk, Bill Gates, and Jeff Bezos have each held the title of the richest man in the world. Each one of them is a successful business founder.
Most have also held onto their share for years, if not decades. Long-term holdings in successful companies can provide a much higher return than frequent trading will ever do. Initial investors in Tesla, Microsoft, or Amazon probably sold at some point, way too soon. Their founders did not.
The Trend Can Be Your Friend
Another lesson is that technological changes and rising sectors can make you a LOT of money, though it might be a good idea to cash out when it turns into an outright insane bubble.
Musk did that with Zip2 in 1999 and sold parts of his Tesla shares in 2020 and 2021. He might be riding a bubble, but he knows it’s a bubble, instead of deluding himself with the “it’s a new era” narrative.
“When looking at our actual profitability, it is very low at around 1% for the past year,” Musk says. “Investors are giving us a lot of credit for future profits, but if, at any point, they conclude that’s not going to happen, our stock will immediately get crushed like a soufflé under a sledgehammer!”www.autoevolution.com
Many growth investors could learn from Musk’s realism here.
A Good CEO Is a Workaholic?
For investors, Musk also illustrates the value of a founder and CEO who has his “skin in the game”. While it might not a healthy lifestyle, as shareholders, we might benefit from a CEO that lives and breathes his company in every moment.
Having the majority of management’s net worth in the company’s shares is also a good predictor of good governance.
The Musk Controversies
This could be a very long section, but we’ll try to be brief!
The first thing that drew a lot of controversy toward Musk is his personal style. Part geeky with low social skills, part bombastic or even crass, it is certain to irk a lot of people.
The latest example was a change of Twitter’s logo to a cryptocurrency meme image and removing the “w” from the company’s headquarters sign.
Previous and more problematic issues relate to financial declarations, like the infamous “funding secured” tweet, which led to an SEC ban on tweeting about financial topics without Tesla’s board approval…
Geniuses are often a little strange, and very rich people are often “eccentric”. We can safely say Musk is a little of both and really seems to enjoy pushing people’s buttons. He sometimes seems unaware that the free speech of a public company CEO is constrained by SEC regulations.
On the plus side, the endless media coverage has turned into the equivalent of tens of billions worth of free marketing for Tesla and Musk’s other ventures (Tesla is the only car company spending nothing on advertising).
And with the Twitter takeover, controversies are guaranteed.
As a counterweight to his many fans, Musk also has a cohort of haters. To them, he is a con artist, a scammer, and a fraud, and the same is said about his companies, especially Tesla.
There is a good argument that Tesla stock is in a bubble, with the company valued at one point higher than the rest of the automotive industry combined. Reliability issues and overpromising for features still not available years later *like full self-driving) is a genuine problem.
However, it seems Musk is such a polarizing figure it can make people rather irrational. And the dedicated “TeslaQ” short sellers have, more often than not, lost a lot of money betting against Musk.
For example, SpaceX has single-handily made viable reusable rockets, kicked off a new space race, and reduced the costs of reaching orbit by x10. Tesla proved that electric cars could be a highly profitable and functional product, and is now imitated by virtually every car manufacturer.
So it is more than a little extreme to claim that Elon Musk is just a scam artist who never created anything.
Elon Musk is a rather fascinating character and a sort of Rorschach test for investors: with the same public figure, different people can see completely different things.
Some will see a genius that will save the world from global warming, and disinformation and “make humans a multi-planetary species”.
Others will see a grifter lying to investors and regulators, a dishonest figure that needs to be put behind bars.
There are more rational takeaways to learn from studying Musk and his companies’ stocks:
- The strength of founder-led companies.
- The importance of long-term holding of quality companies.
- The power of catching rising trends early, along with the risk of irrational bubbles later.
- The value of a strong work ethic and leading by example.
- The potential of unconventional communication and “free” marketing, as well as its dangers.
- The need to stay rational instead of emotional in investing, about both what you might love or hate.
So love him or hate him, every investor can improve by studying Musk.
📚 (This article was largely written based on the book “Elon Musk: Tesla, SpaceX, and the Quest for a Fantastic Future” by Ashlee Vance. This can be a good start if you want to read further about Elon Musk.)