This is why this very successful growth investor no longer owns Tesla shares

Successful innovations make customers’ lives better, but it doesn’t necessarily make those companies invest better.

“In some cases, innovation helps us all live higher lives and that doesn’t mean there’s an investment or a company that flows directly from that tailwind,” said Dennis Lynch, head of Counterpoint Global, Morgan Stanley Investment Management, at the Morningstar Investment Conference on Thursday. His team runs several growth equity strategies for Morgan Stanley, including the Morgan Stanley Institutional Inception Portfolio MSSMX,
+ 1.40%,
Russell 2000 had an average annual income of 49.71% at the end of August compared to 12.27% annual growth of the growth index. RUO,
+ 1.82%

Electric vehicles are one such sector, and that’s why Lynch sold all its shares in Tesla TSLA.
+ 0.23%
Several years ago.

Lynch said he owned shares of the electric car maker in a “small, speculative position” when the first consumer report review of the car came out about half a dozen years ago. At that point, the company began “a real revenue stream in front of it.”

The team sold shares almost three years later, missing most of the carmaker’s stock price run-up.

Explaining his decision, Lynch said selling cars is a difficult business and selling electric cars means cars that are expensive and need funding for the average consumer.

It comes down to one of his metrics that he uses to evaluate disruptive organizations: focusing on unit economics.

Tesla has high capital intensity and needs to continue to receive funding from the capital market. It’s not necessarily bad, but it puts you in a potential position in times of uncertainty, relying on the kindness of strangers to keep the business model going, ”he said.

Lynch admits that founder Elon Musk did “really amazing things.” But he went back on whether the company could be profitable.

“When you rely on the capital market, and you dream big, there’s a fine line between inspiration and commitment that you may not be able to keep,” he said.

“It simply came to our notice then [stock price] We’ve sold tremendously well since we sold, “he said.” But I think it’s an area where choosing the final winner will be really difficult, especially at today’s prices, “he said.

Lynch, a value-fund manager, spoke with Bill Nigren, chief investment officer of U.S. equities at Oakmark Funds, on a panel of disruptive companies. Nygren had his own decisions on disruptive companies, noting that investors often overlook large companies that could innovate on their own.

Allison transmission ALSN, an example
Which produces transmissions with heavy duty, off-road trucks, fully integrated electric axles. OAKLX,
+ 1.56%
Owns shares in Indianapolis-based firm.

Oakmark Select grew 13.14% year-over-year at the end of August, trailing the S&P 500 Index SPX.
+ 1.21%,
But the index has been the best since its inception on November 1, with an annual return of 12.46%.

Nigren said moving to electric vehicles would dramatically change that business, but he noted that the overall valuation of new companies in space is the same, which values ​​Alison’s production of electric vehicles, more than the money spent based on value. About research and development. “You could argue that the market is evaluating Allison’s EV business in the same way as other pure EV companies are being evaluated,” he said.

As value managers, the Nigerian team analyzes stocks with a forecast that lasts for about seven years and they will not invest in anything they can justify at current prices, such as Bitcoin BTCUSD,
+ 0.17%.

“We are happy just because we are happy. And I think it would be wise for people not to listen to me on issues where we have decided that we do not know enough to invest.

Lynch, on the other hand, said he was not opposed to taking a chance at an unproven company. His team is willing to place small bets on the company in hopes of winning big, rather than a binary choice or ownership or stock owner.

“There are things where things can go right, but it’s not unreasonable to know that things can go wrong when you have a world where such disruptions are happening, and where these reverse scenes are getting so big,” he said.

Lynch has small positions in Bitcoin and Square SQ,
+ 2.16%
Due to exposure to cryptocurrencies. Bitcoin has a tendency as a trend, the metric he uses when looking at innovation. Talking about cryptocurrency As prices rise and fall, some protesters are saying that every time it is read it will not last, only come back. “I mean, like Kenny in Bitcoin South Park, you know, the guy dies every episode and he comes back again,” he says.

He called Bitcoin “anti-fragile”, something that benefits from the disorder, which he also likes as a potential diversifier. A big risk is that governments could ban these alternative currencies, Lynch said, but overall, it’s worth having a small speculative position.

“It’s sitting in a small way in a portfolio, which is probably something that can be right when something goes wrong in the rest of our portfolio …. Ten years from now, given Bitcoin’s firmness, it’s worth a small guess,” he said.

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