Should Warren Buffett Buy Tesla Stock?

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Uh no, I think electric cars are very much in America's future.

Well Warren, if you think that, would you consider potentially buying some Tesla stock?

No, there has been a lot of speculation recently that Warren Buffett is in fact investing in Tesla, and I'm not going to get into the specifics of why people are thinking that because there's a really good video by Tesla Daily that I'll leave linked coming up on the screen right now if you want to go research more into it.

But I thought in this video I'm going to talk about whether or not it would be Warren Buffett-like if he invested in Tesla and whether I think he should do it or not.

So it's really interesting because first of all, auto manufacturers are certainly well within Warren's circle of competence.

He's bought auto companies in the past; he currently holds General Motors in his portfolio.

He's even invested in an electric vehicle manufacturer called BYD, and as you're familiar with BYD, which is also on the West Coast, I think they're ramping up production of their electric vehicles. Warren Buffett owns a 10% stake in that.

Why do you laugh?

Trying to compete?

Why do you laugh?

Have you seen their car?

But anyway, Mr. Buffett, why not Tesla?

Well, I think there are actually a few reasons why Warren Buffett has not invested in Tesla and probably won't into the future.

One of which being, I don't think Warren Buffett thinks that Tesla has any form of competitive advantage, and we all know how crucial the competitive advantage is when it comes to Warren Buffett's investing strategy.

If a company doesn't have some sort of competitive advantage, it is extremely unlikely that Warren Buffett is going to buy shares in that business.

If you're a premiere with Google on search, or you're a premiere, you know, with movies on Netflix, whatever it be, there's a huge first mover, size, and network effect and all that working for you.

You can win one year and lose the next.

I mean, you've got a dozen big companies out there with resources; they're going to keep coming.

They copy what you do; people move from one year to another.

You don't worry about the fact that, you know, your whole life is on the iPhone as opposed to you don't want your whole life to be in one car or something.

It's not a... it does not give you a permanent advantage.

Now, I actually really disagree with Warren Buffett on this particular topic.

I think Tesla definitely does have multiple durable moats, from their battery cells that they're going to be making over the next couple of years to their full self-driving package to even just their brand.

And I actually think it's quite unfortunate that Warren Buffett doesn't see that.

I don't actually think Warren Buffett has truly done his due diligence on all of the facets of Tesla's business because in my eyes, Tesla definitely does have a competitive advantage—multiple.

However, in Warren Buffett's eyes, he doesn't think that's the case.

So I think that's the number one thing, or one of the main components, why Warren Buffett wouldn't buy Tesla, just because he doesn't believe in the moat.

Then the second core pillar of one of the other core pillars of his investing strategy is to make sure he trusts the management team.

Now, I actually think that Warren Buffett actually thinks that Elon Musk is a pretty great guy and a very good CEO and a great innovator.

The media likes to make out that there's some sort of beef between Warren Buffett and Elon Musk, but this is actually totally not the case.

In fact, Warren Buffett actually kind of looks up to Elon Musk and definitely respects him.

Have a look at this clip:

"I've never said anything negative about Elon. I mean, you're baiting me a little bit to do it. You know, he's trying something to improve a product and I salute him for that, and the American public will decide whether it's a success. And it's not easy. You know, what do you think of Elon Musk's behavior as a CEO?

Well, I think it has room for improvement.

Now, he—and he would say the same thing, you know. But he's a remarkable guy."

So the point here is that I don't think Warren Buffett would have any problems investing in Tesla, um, just based on, you know, management—the management team, the CEO Elon Musk and what he does.

So that's the second kind of key part of Warren Buffett's investing strategy.

Number one, I don't think—well, he doesn't believe that Tesla has a moat, but I think he would be fine with the management team.

But then that leads us to the third core element of the Warren Buffett strategy, and that is, of course, the valuation, the margin of safety.

And this is where I think that things start to fall apart a little bit, and this would definitely be my number one guess as to the reason that Warren Buffett would not be buying Tesla stock right now.

And that is, quite frankly, it's just very overvalued for where the company is right now.

I mean, we can have a look at the stock: the stock currently sits at 600 as a P/E ratio of 1187.

Now, I understand that Tesla—with the stock price of Tesla—a lot of future growth has been priced in, and you're right, Tesla definitely has a lot of growth ahead of them.

They've obviously got a billion Cybertrucks to sell; they've got the battery cell manufacturing that they need to scale up; they've got this Tesla semi truck to start building; they've got full self-driving revenue, which will be a big driver for their whole business going forward.

So I get why Tesla is priced as it is right now.

However, that's not really the way Warren Buffett thinks.

He is not someone that wants to overpay for a business in the present because he believes they're going even further than that in twenty years' time.

So I think that's the number one roadblock personally as to why Warren Buffett wouldn't buy Tesla stock right now—he just wouldn't be comfortable paying the price that it's currently at.

But then that leaves the question of overall, do I think that Warren Buffett would be wise in investing in Tesla?

And at the right price, the answer to that question for me anyway is actually yes.

I think that this is a stock that Warren Buffett should actually really sit down and consider.

Buffett himself believes that electric cars are the future, and there are currently no companies even close to rivaling what Tesla can do in that space.

But here's the thing: Tesla are working on all different lots of different technologies, right?

And each one of these technologies has the potential to actually disrupt some part of Berkshire Hathaway's business.

In fact, it's likely that Tesla is not going to be particularly nice to Berkshire Hathaway's business in the future.

So I actually think it would be wise for Warren Buffett to try and own a slice of Tesla if he can get it at a fair price to try and de-risk that future disruption that Tesla's bringing to the table, which will definitely impact Berkshire Hathaway in some aspect.

Because you think about this: Berkshire Hathaway has three key segments to their wholly owned businesses, right?

The first one is insurance.

It's the engine of their business; you know it is the core.

Now, Tesla themselves—this is a sneaky under the radar industry that Tesla is definitely disrupting.

Tesla, of course, are working on their own insurance products, which are likely going to have a major impact on automotive insurance in the future.

Because the thing is, every time you touch the accelerator, Tesla knows about it.

Every time you touch the brake, Tesla knows about it.

Every time you turn the steering wheel, Tesla knows about it.

The percentage of time that you let the car drive itself, Tesla knows.

So Tesla, not like a traditional insurance maker—yes, they collect information on, you know, age, sex, location, where you park your car, those sort of questions that you just answer on the forum—but what they don't gather is the data from your actual car on how you drive it, whereas Tesla obviously does collect that data.

So they're in this unique position where they can actually offer this insurance product that is specifically tailored to you and not in the traditional sense that I'm a 25-year-old dude, you know, that's living in Canberra or whatever, but they can offer you a tailored insurance solution based on exactly how you drive your car.

So if you drive your car very safely, your insurance costs are quite frankly going to be much, much lower, and that has the potential to seriously disrupt the auto insurance market.

And if Tesla can continue on in their lead—their lead in electric vehicles, their lead in powertrain efficiency and battery chemistry—if they can continue their lead in full self-driving, then it stands to reason that Tesla will continue to hold their electric vehicle market share lead that they currently have.

If Tesla can still maintain their market share, then there are going to be a lot of Teslas on the road; it's going to be a lot of insurance policies that Tesla Insurance could grab.

So that's the first component of Berkshire Hathaway's business that could actually be disrupted quite heavily by Tesla.

But unfortunately, it seems like Warren Buffett really doesn't see that coming or he just doesn't seem to care.

Have a look at this clip:

"Elon Musk says that Tesla will start to offer insurance for its cars and can price it better than a typical insurance company because of the data it collects from all the vehicles on the road.

You've talked about the threat of autonomous vehicles on the insurance business, but what about the threat to Geico of automobile companies themselves getting into the insurance business?

Actually, General Motors had a company for a long time called Motors Insurance Company, and various companies have tried it.

I would say that the success of the insurance company of the auto companies getting an insurance business are probably about as likely as the success of the insurance companies getting into the auto business.

I worry much more about Progressive than all of the auto company possibilities that I could see in terms of getting insurance business.

It's not an easy business at all, and I would bet against any company in the auto business being any kind of an unusual success.

The idea of using telematics in terms of studying people studying people's drivers happens— that's spreading quite widely, and it isn't important.

It is important to have data on how people drive, how hard they break, how much they swerve, all kinds of things.

So I don't doubt the value of the data, but I don't think that the auto companies will have any advantage to that.

I don't think they'll make money in the insurance business."

So while Warren Buffett doesn't think that there's anything really to worry about, and he thinks that an auto manufacturer getting into the insurance business is going to be quite unsuccessful, I happen to disagree with him, and I think he should pay a little bit more attention in this space.

But anyway, moving on to the second core component of Berkshire Hathaway's business, it is, of course, rail.

And this is definitely an area of Berkshire's—Berkshire Hathaway's business that could be disrupted by Tesla, and it would be disrupted by Tesla building a lot of their semi trucks.

And to explain this, I want to flick over to a clip from the 2017 Tesla semi truck unveil event and to a quote that actually largely gets forgotten about—not very many people discuss it or talk about it, but it actually has significant implications for Berkshire Hathaway's business.

Now, if you look at the economics of a truck convoy, it gets way better.

Now, a diesel truck is twice as expensive as a semi.

This, so what this means is, it's not just economic suicide to use one diesel truck; it's economic suicide for rail.

This beats rail.

So, and that's— I think is really quite profound.

Um, we're confident that this is a product that is better in every way from a future standpoint that wins on economics against diesel trucks.

And worst case scenario, and that defeats rail in a convoy scenario—electric truck convoys that beat rail.

Now, that's pretty insane because when it comes to freight and shipping things around, it's all economics, right?

Nobody cares how pretty it is; it's simply just a matter of economics.

People want to get stuff from here to there today, and they want to do it the cheapest way possible so that their business spends the least amount of money in transportation costs.

If Tesla creates trucks—electric autonomous trucks of the future that can convoy together—and it significantly beats the cost of rail, then rail instantly becomes the old technology, and all the companies will start wanting to get their goods around the country— no matter where you are—via this Tesla semi truck network because it's quite simple: it's going to be cheaper to do so.

Now, yes, this is out in the future; it's future tech, but I definitely think that it's something that Warren Buffett should start thinking about because it definitely could disrupt all rail business into the future.

So just something to think about.

And then, of course, the third area of Berkshire Hathaway's business that they talk about all the time is, of course, Berkshire Hathaway Energy.

And again, this is an area of Berkshire's business that could be disrupted by Tesla.

Why?

Because Tesla, in five years from now, they will have ramped up the 4680 cell; they're going to be producing a lot of their own batteries.

Okay, batteries, which could very simply go into their Mega Packs, which will be used for grid-scale energy storage solutions, which are only gaining in popularity and will be a big part of energy storage in the future.

And, of course, Tesla also makes solar panels, so you could get to a position where Tesla down the road just decides, you know, we already make battery storage; we already make solar panels.

Let's just become an energy provider ourselves.

This won't be Berkshire Hathaway Energy; it'll be Tesla Energy.

People will source their power from Tesla.

It could be a point where Berkshire Hathaway Energy becomes a customer of Tesla.

Just like that.

So I think that this also—like this is something that will happen, you know, 10, 15, 20, 30 years down the track—but it definitely does pose some element of risk to Berkshire Hathaway Energy.

So overall, you get these three core parts of Berkshire's business, and you can see that Tesla could potentially disrupt them in all three core areas.

And that's why I think that if Warren Buffett could buy into Tesla at a fair price, it probably makes decent sense to do so.

Plus, you're also backing Elon Musk, which is definitely the best innovator of our time, and I think it would be smart just to de-risk the idea of this technological disruption that Tesla's bringing to the table.

You know, instead of having to fight Tesla, um, bring them along for the ride, you know, um, and benefit from their successes as well.

But anyway, that's kind of my perspective on things.

Obviously, a lot of this stuff is decades into the future, but I definitely think that Warren Buffett shouldn't be so dismissive of Tesla and should actually start thinking about the potential disruption that Elon Musk could bring to his business in the future.

But anyway, I'd love to hear your opinion on this below, guys.

So definitely leave a like on the video if you enjoyed it or if you found it interesting or useful.

Definitely leave your opinion down in the comments section below.

Do you reckon at a fair price, Warren Buffett should buy into Tesla?

I'd love to hear from you guys whether you think yes, whether you think no, and what do you think?

Do you reckon Tesla does have a competitive advantage?

Because personally, I definitely think so; Warren Buffett doesn't seem to think so.

So let me know your opinions on that.

If you're interested in learning about how I go about my investing, then check out the links down in the description below; that will take you over to Profitful.

But that will do me for another episode of the New Money Advent Calendar.

Thanks very much for keeping up to speed with all the videos, guys, and I'll see you guys tomorrow.

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