12 Lessons Elon Musk Can Teach You About Investing
Over the past three years, as his businesses have borne fruit, Elon Musk has gone from being seen as an eccentric billionaire to a model of good investments. The founder makes precise and often out-of-the-ordinary movements from SpaceX’s space rockets to Tesla’s electric cars. His originality earned him fame – today, and he is one of the most talked-about names in Silicon Valley, a North American entrepreneurial pole that we have already explored in this other text.
Recently, for example, Musk authorized the purchase of the solar energy company ‘Solar City’ (of which he was already a majority shareholder) by his electric car company Tesla. Always direct, Musk called the acquisition “obvious.” But no one got it right, he didn’t make a point of explaining, and the manufacturer’s shares plummeted – after all, what does sunlight have to do with electric cars, even more so in a company that is going through a delicate moment of growth?
After some thought, some analysts are now betting on a medium to a long-term merger that will turn Tesla into a giant in the energy sector as a whole (it already manufactures its own batteries and storage boxes).
Aware of the market’s suspicions, the entrepreneur is in the process of publicly disclosing what he calls a “master plan” for Tesla later this week. “Finishing the plan while listening to the ‘Gatsby’ soundtrack. Seems appropriate,” he tweeted this morning. Since “The Great Gatsby” is a famous novel of excess and wealth — and the score he cites comes from an even more over-the-top 2013 film adaptation — Musk added: “It’s not easy to show irony in a tweet.”
The plan will be one more step in the chess game that only he sees clearly. Such skill led Tren Griffin, author of bestsellers on investors such as Charlie Munger and director of Microsoft, to list some of Elon Musk’s greatest lessons about the business world in quotes from the billionaire himself.
“Focus on something that is of high value to someone else and be very rigorous in that analysis, because the natural human tendency is ‘wishful thinking’ [positive illusions]” What’s critical to a successful business is making good products that people want to buy. In this context, a great product means not just something a little better than the competition or what people already have, but much better.
The example of SpaceX is quite interesting in this case. Traditionally, launching cargo into space has been thought of as a business that does not significantly increase demand if the price drops.
The result of this assumption about price elasticity was that traditional providers of this service decided only to exploit their models of non-reusable, sea-sinking rockets and not invest significant amounts in innovating and reducing prices.
In short, these traditional providers believed that lower prices would not yield more profit, so they kept prices fixed or raised them. This assumption created the opportunity for Musk to innovate by relaxing another assumption – that it was not possible to reuse rocket stages.
Musk reasoned that if Christopher Columbus and other explorers of the time had been forced to throw away their ships after every voyage, they wouldn’t have done much.
He proved that rocket parts can be reused and that other price-cutting innovations are possible. Musk now needs to demonstrate that more releases will be purchased because of the reduced price in order to increase his total market.
For example, a drop in price from $375 million to $100 million would be significant. But how many more releases would be made with this lower price? Nobody knows yet.
We can expect Musk to continue to innovate as well when it comes to finding new ways to increase demand. The massive constellation of communication satellites he proposed is an example of his search for ways to create new demands for SpaceX.
“It’s okay to put all your eggs in one basket as long as you control what happens to that basket.”
The keyword in this phrase is “control”. If you depend on others and don’t have alternative suppliers, suppliers can block your success.
For example, if you build a rocket and need to buy your propellant from a single supplier, then that supplier controls your fate.
That’s why Musk prefers to do everything he needs to or have multiple suppliers. He doesn’t want to buy components from traditional suppliers in the industry, who want the prices of launches to remain high.
“[Physics is] a good framework of thought. Reduce things to fundamental truths and reason from there.”
If you can’t write about something, you haven’t really thought about it. It’s a bottom-up mental process: what factors really govern the interests involved, rationally? What subconscious influences are forming automatic conclusions that may be dysfunctional or incorrect?
Gather all the relevant facts and then apply a rational process to produce an analysis of those facts and an investment theory. Even if you cannot rely on the principles of physics, you can adopt its basic character.
“Starting a business is not for everyone.”
For Musk, the first thing needed by anyone who wants to start a business is to have a high tolerance for pain. “A friend of mine says that starting a company is like eating glass and staring into an abyss,” he said.
“Usually, at the beginning, there is a lot of optimism and everything is great. Then you run into all sorts of problems and the level of happiness starts to drop, you go through a world of pain, and eventually you hit success — and most of the time, you won’t succeed.” “Tesla came very close to failure. If you are successful, after a long time, you will finally be happy again.”
Another tip from Elon Musk is that, whether you’re the founder or the CEO, you’re going to have to do a lot of things you don’t want to do. “If you don’t want to do your tasks, the company will not succeed… No task is too inferior.” Starting a business is brutally difficult, as he describes it. If you like to do brutally difficult things, you might want to give it a try. If you don’t like it, don’t start. It’s that simple.
“Constantly seek criticism.”
A well-written review of whatever you are doing is as valuable as gold, and you should look for it everywhere, especially among friends.
“Usually your friends know what’s wrong, but they don’t want to tell you not to hurt you,” Elon said. “Basically, you, the entrepreneur, should be based on the idea that you are wrong and your goal is to be less wrong.”
He’s blunt: people may not like change, but you have to embrace change if the other alternative is a disaster. And to learn from success or failure, you need effective feedback.
Musk and the likes of him have thick skin when it comes to criticism and also a scientific orientation. The best approach is to have “weakly held strong ideas”. Someone with strong opinions should know their topic well and from all sides. With a loosely held firm view, the person can adapt to new information and ideas as they arise.
Elon Musk’s work ethic is legendary: he is said to work 15 hours a day and sleep six hours a night.
“You have to work 80 or 100 hours a week, every week. It improves your chances of success,” she summarized. “If others are doing 40-hour weeks and you are doing 100-hour weeks, then even if they are all doing the same thing, in four months you will accomplish what it will take them a year to do.”
“I don’t think it’s a good idea to plan on selling a company.”
Musk is a poster boy for the missionary-type founder, as opposed to the mercenary-type. “My motivation in all my companies has been to get involved with something that can have a significant impact on the world,” he said.
The missionary is more likely to be able to conquer the difficult tasks and overcome the stress and obstacles involved with building a business because he has the necessary energy.
Sometimes great successes are inches from failure before they succeed. It is not easy to hear from others that you are wrong or even crazy. And investors who choose missionaries over mercenaries are not only doing what is right for society; they will be more financially successful.
Missionaries possess the quality that risk analyst and mathematician Nassim Taleb describes well: “The incredible ability to think rationally in terms of trial and error, without shame in failing again, starting over and repeating failure.”
“Any product that needs a manual is broken.”
The ways that great designers and engineers eliminate the need for an instruction manual is a beautiful thing to see. Some people have a natural aptitude for this kind of work in understanding what consumers want and would buy.
“If things aren’t failing, you’re not innovating enough”
Failing is an essential part. It’s how we acquire the information we need to innovate. A flawless system is a system with no progress. Economist Allan Meltzer coined the following aphorism to explain the idea: “Capitalism without failure is like religion without sin. Does not work”.
“The market is like a manic depressive.”
Anyone who says the market is always wise is not paying attention. Entrepreneurs and investors like Musk know how to see where common sense is wrong and create or buy undervalued options.
These entrepreneurs are looking for positive options in an environment full of other people’s mistakes. Generally, when the market is down, it’s the best time to invest and start a business. Talent is more available if you can find the money you need or have captured it in better times.
In achieving many of his goals in recent years, Musk has had the good fortune to be operating in favourable capital markets. When luck shines for you, don’t just take notes – make the most of it.
“Having a good heart matters.”
The problem here, according to Musk, is that process becomes a substitute for thinking in many large companies. “You are encouraged to behave like a small part of a complex machine. Frankly, it allows you to keep people who are not that smart or creative,” he said.
He goes further. “I don’t believe in lawsuits. In fact, when I interview a potential employee and he or she says ‘process is everything’, I see it as a bad sign.”
“People should be less risk-averse when there is not as much to risk.”
“When something is important enough, you do it even if the odds aren’t in your favor,” Musk said.
Its many successes are an excellent way to explain that (1) the financial returns from venture capital (venture capital) and research & development follow the law, and (2) why startups enable the creation of successful startups. That failed.
Nassim Taleb writes that “returns from research [and from convex-type investments such as venture capital ] are from Extremistan: they follow a kind of law in terms of statistical distribution with large and almost unlimited upsides , but, because of optionality, downside . limited.”
In other words, convex investing deals with bets that reflect a skewed distribution of possible outcomes. Taleb writes, “Convex proposals should be embraced – concave ones avoided like the plague.”
Billionaire investor Sam Zell uses even clearer terms: “Listen, business is easy. If you have a low low and a big high, you have to invest. If you have a big drop and a small high, run.”
This is why venture capitalists and entrepreneurs like Musk and Jeff Bezos are involved in areas and technologies before they become popular. When the crowds arrive in a certain investment area, an investor must invariably overpay for any investment, competition becomes very significant, and potential investments cease to be investments and become a way of destroying fortunes.
When you find a convex financial opportunity that has a small downside and a very large upside, is within your capabilities and undervalued, bet HIGH. If the big convex gamble is financial, you only need to get it right once to become rich, as it is the magnitude of success and not its frequency that determines the desirability of the outcome.
When looking for convex bets, areas with complex adaptive systems are the best places to look. Investing is an activity of probabilities, and areas, where the financial result can be impacted by positive Black Swans [abnormal and extremely difficult to predict events or occurrences], can be important opportunities.
Convex options can be found almost everywhere if you know where to look, and Musk is someone who does. Discovering convexity is easier if you want to do unusual and daring things, and convexity is a ‘sidecar’ for people who think big and different.
For example, going to Mars is very important to Musk. When he and Jeff Bezos began their journeys to lower the costs of launching rockets using unconventional methods substantially, the stakes were convex. A similar bet wouldn’t be nearly as convex now that they’ve proven their approaches to be viable.
This is why venture capitalists and founders inevitably have both spectacular results and many failures. Taleb describes how the process works: “It is through negative information, which reduces the space of what we do with knowledge of what does not work. For that, we need to pay for the negative results.” If someone tries to take failure out of the process, innovation stops.
Also Read : Quantum-AI App by Elon Musk