Anchoring bias and outdated mental models. Jeremy Grantham wrong on Tesla (twice)

In 2018, famed investor Jeremy Grantham called Tesla a no-go investment zone, citing a business without profits, overvalued relative to traditional automakers. In the same breath, he named climate change an investment theme focus, with the caveat being more or less, “we are focused on finding profitable companies” to invest in.

Now in 2021, Gratham is at it again in full swing, calling the market a bubble and effectively putting Tesla in the same basket as Nikola, Hertz and Kodak — framing designed to sell his story. He points out Tesla’s market cap relative to vehicle’s produced — Tesla valued at $1.25m per car, relative to GM at $9,000 per car.

This is a story about anchoring bias, and the investor ivory tower, and this is how it goes.

Investor Ivory Tower

First some personal history. In 2003, I made more money as a recruitment consultant than I did as a research scientist or energy consultant in any year from about 2009–2020. I did that willingly and without regret.

I did that because I know solving fundamental problems in Australia’s energy market, and accelerating uptake of renewables, required people taking on risk and ultimately exchanging time for outcomes below market rates.

The math on this is simple. Society hasn’t been willing to pay the premium required to solve climate change for many decades. So we either need to reduce the premium, or shift willingness to pay. Both require individuals, businesses and governments taking on career, financial and political risk respectively.

So give me a break in 2018 when Grantham says they like climate as an investment theme but are focused on finding businesses that are profitable. Grantham wants a climate solutions magic pudding that he can eat profitably for decades to come. This is investor class entitlement at its worst — they want all the upside, for none of the risk, all while being heroes for participating in climate solutions.

Anchoring bias and outdated mental models

Grantham and his team’s error of reasoning on Tesla comes from anchoring bias, and many investors have made the same problem on Tesla for years. The primary clue in finding their anchoring bias comes from their analytical framing, examples being:

• Tesla valued at $1.25m per car, relative to GM at $9,000 per car;
• Tesla market cap bigger than the next 5/10 automakers combined;
• “Tesla has risen some 800% since the fall of 2019 on the back of 17% growth in vehicles sold”

This analytical framework has strong intuitive appeal and completely misrepresents the value of Tesla as a business. Tesla is not a traditional car company, and in fact, is barely a car company at all. They are simultaneously:

• Re-inventing the manufacturing systems that are housed in the factories that make the cars;
• Making batteries and pushing new boundaries in battery cell performance;
• Making their own autonomous driving solution — hardware and software;
• Making their own solar solution integrated with household rooftops;
• Making their own energy market management software (auto-bidder);
• Making their own solar inverters.

And they are not just tinkering in these domains above — they have patented IP, unique to each market, that gives them sustainable competitive advantage. Or in other words, they are not just competing with the likes of VW and GM (car companies), they are competing with:

• The entire oil and gas supply chain;
• The entire electricity market supply chain (more on this below);
• The entire ride hailing and taxi industry;
• The entire autonomous driving ecosystem;
• To some extent, even the battery supply chain, though because of supply constraints the relationship is as complementary as it is competitive.

I am yet to see an investor fully grasp the breadth of Tesla’s market dominance — I believe even Tesla’s most famous bull investor ARK Invest, stops short of grasping the full breadth.

Across it’s product and service offerings, Tesla can now generate, store and manage energy supply to homes, businesses and transport options, as cheaply as any company in the world. Being vertically integrated across all key solution domains, gives it a unique platform to innovate and value engineer to shave costs and enhance customer experience. This includes being able to run an electricity retail business using software should it choose, and/or use vehicles to compete with distribution and transmission grids.

It would be too obvious to blame a generational gap on Grantham’s errors and perhaps unfair. His team makes the same mistakes. Perhaps they are too eager to please?

Looking at the reaction to the GME phenomenon, I blame the investor ivory tower and how it creates lazy logic — the investor class is one that expects to play by the rules it makes, while denying others the opportunity to play, let alone question the rules. It’s a class that defends its positions with logic, but ultimately defends it’s ego and brand first (Grantham has been wrong on Tesla as far back as 2014, and in 2018 even said they prefer to invest in chip makers for cars then Tesla (ignoring Tesla does its own chips to good effect).

It is this lazy logic stemming from occupying the investor ivory tower, that has seen the likes of ARK Invest reinvent how to think about, thinking about investing, to very good effect. That is to say, all the cliche’d investment thinking has been done, but applying it to good effect requires going deeper into investment team structure, makeup, and ultimately systems that test the thinking and its application to investing.

To wrap up, for the record, I actually enjoy and get value out of Grantham’s and GMO”s writing more broadly. They are open and transparent in putting their logic on show. And I agree Tesla is overvalued (I remain a Tesla long), but it is a long way from the bubble they think it is, once you look at the business as a whole, and not just as the sum of one part.