Should investors be more like Musk or Buffett?

With the Tesla share price soaring, its CEO and famous entrepreneur, Elon Musk, is now worth more than Warren Buffett. Should investors start mimicking Musk’s behaviour rather than Buffett’s?

Article updated: 15 July 2020 11:00am Author: Michael Baxter

Here is one piece of advice if you want to be the richest man in the world. Stop giving your money away to charity. I might like to add at that point, if you are one of the wealthiest men in the world, and also want to be a decent human being, start giving some of your money to charity.

The comparison between Musk and Buffett is not meaningful. Buffett — once the richest man in the world — and Bill Gates — who was also once the richest man in the world — have been giving their money away. And good on them, too. I know there is a view doing the rounds that Bill Gates has been profiteering from forcing vaccines upon the impoverished world. I am not sure, but I think the same theory suggests he is in league with George Soros, and no doubt the devil. To make it clear, I loath such theories. I am not sure I think it's morally right that people like Buffett, Gates and Soros have so much wealth, but that’s down to the capitalist system none of these men designed. They can’t help being clever. But I do approve of the philanthropy — not sure I agree it should be necessary though.

So I'm being a tad unreasonable to argue an investor should be more like Musk than Buffett, because he is currently wealthier. But see my argument instead as a metaphor. Should you invest like Buffett or favour techs?

Tesla

The Tesla share price is up three-fold this year, six-fold the last five years and 75-fold since 2010. I don’t want to say ‘told you so,’ but I am going to anyway. I have been raving about Tesla and indeed, electric cars here as long as I can remember — “I told you so.” 

I admit, the current valuation seems excessive — $286 billion. It is worth around a third more than Toyota the second most valuable car company in the world. I can see why Tesla is so highly valued — its speciality in AI, lithium-ion batteries and positioning for when autonomous cars arrive, put it years ahead of rivals. I can see why its valuation is higher than any other car company — but that is mostly because I think the car industry faces a massive existential threat — but a quarter of a trillion dollars does seem a little steep.

Elon Musk owns 20.8% of Tesla. Buffett’s net wealth recently declined when he gave $3 billion away

Musk strengths and weaknesses

I would characterise Musk as having the mindset of someone who would either win big time or fail big time. Just as I am a fan of Tesla and have doubts about its current valuation, I am also a fan of Musk’s other big enterprise — SpaceX.

But both Tesla and SpaceX could so easily have failed.

Buffett’s approach

Buffett’s investment style, as I understand it, was fashioned by the nature of his investment opportunity in its early days — using leverage (from his insurance company) to invest while minimising risk.

He invests in strong companies he understands.

He doesn’t really get tech, so he has not often invested in tech. And when he has, for example investing in IBM, the investments have not always been so successful.

That Buffett has invested so profitably while mainly staying away from tech has been an extraordinary achievement.

Different now

But tech is disrupting — companies one might have called safe and reliable, no longer look so safe.

Technology is disrupting all aspects of business  and will claim many scalps.

If you look at the S&P 500, you see an index that has performed remarkably well during the Covid-crisis, but strip away a handful of techs from the index and its performance has been weak.

Of course, Buffett is right to say invest in what you understand, but today a successful investor must understand tech.

I am not saying you should behave like Musk — indeed I am not sure the world is big enough for two Musks — but I do think it is important to understand why Musk’s ventures seem to be performing so well.


These views are those of the author alone and do not necessarily reflect the view of The Share Centre, its officers and employees

Michael Baxter portrait photo
Michael Baxter

Economics Commentator

Michael is an economics, investment and technology writer, known for his entertaining style. He has previously been a full-time investor, founder of a technology company which was floated on the NASDAQ, and a director of a PR company specialising in IT.

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