Navigating the universe of options

Tesla is positioned for a hard landing

Tesla stock lost almost half its value (45%) in the last 13 weeks, mainly due to its CEO Elon Musk aligning himself with a broad range of alt-right movements from his endorsement of the AfD party in Germany, the sieg heil at Trump’s inauguration, and has garnered the ire of many in the United States by mass firings of federal employees, including veterans and cancellation of programs that support healthcare and education in allied countries.

Even if we rewind the clock and just look at FY 2024 performance, things do not look good for Tesla. The current PE ratio is 118! That means assuming current revenues stayed the same indefinitely, it would take over a century of earnings to pay an investor back for today’s price. The reason why growth companies like Tesla have eye-popping PE ratios is because the market assumes the future revenues and earnings will grow at such a fast rate as to make the current price worth it. In 2004, Amazon’s PE ratio was over 600, but anyone who invested in Amazon in 2004, certainly did well if they had held to today.

Tesla’s problem is that it no longer appears to be a growth company. Total revenue YOY for 2004 was just 2% overall, while total automotive revenues were down 8%. And that was just last year, already in 2025 sales appear to be down in almost every market: down 70% in Germany (Europe’s largest EV market), 50% in China, and in California, the largest EV market in the US. To make matters worse, it appears that Tesla may have tried to pull off mass fraud in Canada, which will add to Tesla’s legal woes.

A price-to-earnings (PE) ratio of 118 could be warranted from a company with 30% YOY growth, a strong product or service in high demand, and tactful leadership. Tesla has none of those things going for it, and the results will be catastrophic.

Having focus in investing: selecting the right asset class

For value investors, we look for assets where the price is less than the intrinsic value of the underlying assets. When Ben Graham and David Dodd co-wrote Security Analysis in 1934, they focused on stocks and bonds. They did not write about commodities like gold, annuities, fine art, etc. They wrote about investments that had underlying cash flows, and that is fundamentally important if your investment philosophy is grounded in fundamentals!

So let’s explore all of our options and see if we should rule some things out and where to focus our time to do research:

Commodities: Hedging or Missing Out?

Too often, people will argue that gold or other commodities (like Frozen Concentrated Orange Juice Futures, a market famously cornered by Dan Aykroyd and Eddie Murphy in the 1983 classic Trading Places) are a good hedge against inflation, but that is almost always a poor long-term investment strategy.

Warren Buffet described how gold, unlike a company that is a living entity that can grow and change its business model over time, is merely a shiny rock with little practical application. Gold cannot create more of itself; it doesn’t have a board of directors who can adjust the CEO and add value by employing more people or changing its strategic direction. Similar logic would extend to all other so-called “alternative assets,” such as coins, jewelry, fine art, and even cryptocurrency. The value of all of these assets is dependent on increasing future demand. There are no cashflows associated with these types of assets, and the data required to accurately price such items is often opaque. For example, if you invested in a lot of gold bars or a Renoir painting, you would likely have to use some form of auction platform to sell the assets for price discovery and pay a hefty percentage of the assets’ value to do so.

Real Estate: Wall Street vs. Main Street

Real estate is another cash flow producing asset, and many prefer real estate over the stock market because it’s tangible: property values tend to increase over time, rental incomes continue to flow in, even during stock market downturns, and expenses associated with real estate can be leveraged to reduce taxes. Real estate bulls will tout superior “cash on cash” returns, yet what often does not get priced into those eye-popping yield percentages is the time associated with the owners to manage and repair those assets over time. Owning a rental property or a portfolio is extremely time-consuming, and if you only have 1-2 properties, a bad tenant or an adverse event like a flood or storm or a tenant who stops paying their rent can torpedo your profits. If the Evolved Investor receives any exposure to the real estate market, it should be done so via REITs (Real Estate Investment Trusts) that are publicly traded, whose activities and management can be evaluated, provide a steady stream of income, and are more liquid than owning an investment property outright with their associated maintenance and transaction costs.

Stocks vs. Bonds

That leaves stocks and bonds. In contrast to real estate, stocks and bonds earn cashflows and are liquid — they can be easily sold for very low transaction costs. Between the two asset classes, stocks have performed better over the long run vs. bonds, and For most of the period Graham wrote about in the Intelligent Investor, bond yields generally were above 3-4%, peaking in the 13-15% range in the early 1980s. Then around the year 2000 we saw a sharp drop in the 3-Month T-Bill and the 10 years T-Bill continued its downward trajectory. This new era of “cheap money” meant investors seeking yield could no longer receive attractive returns in the bond markets, at least not within US treasuries. Recent inflationary pressures have resulted in a bit of a reverse in this trend, but for the long-term investor who is not of retirement age, the golden age of bonds is long over.

Geographical diversification: US vs. International Stocks

US stocks, in particular, are favored by investors for having exposure to global income streams, a conducive environment for entrepreneurship and growth, and a well-established legal framework. Investing in international stocks requires more information about those specific markets and the regulatory environments of those countries, thus, you tend to see higher expense ratios for international mutual funds despite the lack of superior returns. Further, currency fluctuations — the diminishing value of one country’s currency vs. another — can erode returns, even if the investment thesis is successful.

Conclusion

In summary, the Evolved Investor should focus exclusively on finding value in US equity investments. There are over 5,000 tradable companies on the NYSE and NASDAQ; you just have to find 5-10 exceptional firms at a great price, with a significant margin of safety, and make a few (not a lot) of trades to beat the market.

Sponsored Post

BKNG

Booking Holdings is a conglomerate of travel reservations websites — priceline.com, booking.com, kayak.com, OpenTable, CheapFlights, and Getaroom — it has oligopolistic powers of owning several travel-related marketplaces, earning revenue from accommodations, transportation, and activities.

Booking Holdings boosts 2024 revenues of $23.7B, which is almost as much as its two second and third-largest competitors — Airbnb and Expedia — combined. Profit-wise, Booking Holdings has superior net profit margins as well, with 24.9% vs. 23.4% and 16.4% for Airbnb and Expedia, respectively. Revenue growth has been on an upward trajectory, except for the pandemic, obviously, but even in FY 2020, the company still generated a profit. BKNG has a strong balance sheet with $16B in cash, well above its current liabilities, and is generating a 7.64% shareholder yield, with 0.89% from dividends and 6.75% in the form of share buybacks. CEO Glenn Fogel extolled the positioning of BKNG to capture the secular growth of travel spending as people around the globe become wealthier and have the desire to travel the world and how artificial intelligence will benefit BKNG to capture a disproportional share of this growth.

Valuation-wise, the stock trades at a 25 PE ratio; its down approximately 18% from its December 2024 high as the market is pricing in declining spending on travel, which could result in a revenue hit for BKNG. Depending on how bullish or bearish your outlook for the next 12 months is, BKNG could either be one to track for an even better margin of safety if you expect further market contractions overall or a long-term purchase now, given its relative cheapness amongst the recession news.

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_{Legal Disclaimer: The Evolved Investor is for information purposes only and is, by law, not personal investment advice. Concepts and ideas are for your consideration only. We encourage our readers to do their due diligence. Investing has inherent risk, and investments can lose value.}