Faith

Faith is such an incredibly strong and powerful emotion.

And, in some ways, it applies as much to investing and certain individual stocks as it does to other matters of the soul.

So, three guesses which stock we are going to talk about, and the first two don’t count.

If, for example, you bought Tesla in March of 2020 for $24 per share (or back in 2010 for $1.40), that subsequent experience was not only rapturous and joyous, but it was also something that you would really love to happen again.

The stock reached $400 per share within two years, and if this was you, then a) congratulations, and b) you almost certainly are converted. It’s almost impossible not to be. I mean, I get it.

Fast forward to today, and a Tesla bear may be able to give countless, cogent, reasons why the stock rally during the period above was the perfect storm of pandemic lockdowns, chip shortages, and meme-stock hysteria; or even if it wasn’t, of how the fundamental story has changed dramatically since, with the emergence of competitive models from traditional manufacturers, overwhelming competition from the Chinese, the saturated appetite of early EV adopters, the deceleration of growth, the collapsing of gross margins, continued struggles with the software and truly driverless automated vehicles, difficulties with regulators, management team losses, diverted CEO attention, or other concerns about corporate governance.

And a Tesla bull could give you his or her counterpoints with similar vigor, and be nearly certain that the future will be dominated by Teslabots, Robotaxis, megapacks, and whatever Elon comes up with next.

And yes, even starting at a market cap still exceeding $750 billion (diluted), there is a chance that such a dramatic move could happen again. A true Musk acolyte will believe the probabilities here are over 90%. An agnostic follower will be closer to 20%. An atheistic non-believer will be below 5%.

But – and this is the key point of this piece – for the truly faithful, the pain of not experiencing the upside, were it to happen, would exceed the pleasure of actually experiencing it. Think about that.

Let’s call it “opportunity loss aversion”.

And loss aversion is one of the strongest behavioral biases there is. This notion of “losses hurting more than similar gains feel good” is now (finally) accepted by all but the most argumentative scholars (hello NNT). This is encapsulated in the idea of “prospect theory” which not only was identified and formalized by Amos Tversky and Daniel Kahneman way back in 1979, but arguably - along with other work – planted the roots for the field of behavioral finance (once Richard Thaler showed Amos and Danny what their work in psychology meant for economics). Kahneman indeed won the Nobel Prize in Economics for it in 2002 (Tversky had passed by then), and Thaler followed up with his own Nobel in 2017 (and he has a good 25 years left…).

And that is why the most faithful fans of Tesla, or any other stock, will never, ever sell. I hope for their sake that they are right, but given that the market cap of the company, even after this recent drop, still exceeds $750 billion, the shares already imply foregone conclusions about Tesla’s leadership, not only in automaking and Level 4/5 autonomous driving, but in other areas too. A view that the stock price may possibly already be discounting this optimistic future is not something that the most faithful in the congregation even want to consider.

They just can’t. Humans aren’t wired that way. If the raging bulls maintain their optimism, and the stock continues to falter, oh well, it sure as hell was a fun ride, and “we did it for the mission”. But if they exit their positions, and the stock subsequently moves up by 16x again (however likely or unlikely), that pain would just be too much to bear. So how do you avoid it?

You do absolutely nothing. You don't sell the stock. You hold the stock. You cheer for the stock. You worship its leader.