The Talented Mr Musk

It’s hard to browse the web without seeing Elon Musk’s name in some way, shape or form. The Chief of Tesla and Twitter or, “Chief Twit” as he calls himself recently made headlines again - Surprising? No. Was it for the right reasons? Again, no. This time, Musk broke the Guinness World Record for the largest-ever loss of personal wealth, losing around $182 billion since November 2021. This triumphs over the loss of previous record holder Masayoshi Son who saw $70 billion of his $78 billion fortune wiped out in the space of a day as a result of the tech bubble bursting in the early 2000s. Although the size of the loss is beyond comprehension, don’t be surprised if there isn’t a Go Fund Me Page for Musk just yet, as he is still respectably, the second richest man in the world.

In some ways, it seems distasteful to write about the grotesque wealth which billionaires possess – especially at a time when the level of global inequality is becoming increasingly disproportionate. But how Musk gained his fortune is just as important as how he lost some of it. Billionaires don’t keep their wealth stored as cash because inflation would simply erode its value. Instead, their wealth is spread across a mixture of asset classes – in Musk’s case the majority of his wealth is tied to a 14% holding in Tesla and the complete ownership of Twitter. Since the recession, technology shares have been riding on a wave of ultra-low interest rates and low inflation. Even today, it is a common occurrence to see tech shares being valued at more than 15x their book value. This was exacerbated by the unprecedented amount of fiscal and monetary stimulus during the pandemic which drove their valuations to all-time highs. Although the government intervention was needed, this came with the undesirable effect of widening of the inequality gap. At the time when the world was falling apart, Musk saw his net worth exponentially increase by $294.2bn.

However, the barrage of geopolitical events of last year have caused the price tsunami to finally come crashing down. The monumental US tech sector fell by more than 30% in the last year which is more than the overall drop in the S&P500’s value of 20%. Furthermore, with the US heading towards recession, semi-conductor shortages, energy prices, and the rise in competition within the electric car industry, 2023 could be challenging for Tesla and the wider technology sector. Some argue that the fall in the value of technology shares is reflective of the huge stimulus packages ending which is supported by looking at the price of Tesla shares. While it does appear to be similarly priced to its pre-pandemic level – it’s simply too difficult to disentangle the effects of this away from the market events that happened in 2022. From an investment point of view, this is a prime example of why diversification is crucial as opposed to putting all your eggs into one basket - Although having said that, eggs are proving to be quite lucrative in this current economy. The same mechanisms that have provided a tailwind for Musk's fortunes are now turning against him.

It seems like eccentricity is a fashionable trait among billionaires – think Bezos, Friedman, Branson, Berlusconi etc. But the one thing that markets hate is volatility. It’s Musk’s unpredictable and erratic shenanigans that repeatedly place him in the spotlight of the media and more importantly markets. Thus, the value of Tesla’s shares has always been disproportionately intertwined with the outlandish actions of Musk. The recent acquisition of Twitter was far from smooth with complex financing schemes and sadly many employees were being made redundant. Currently being accused of lying in court, this has placed more downward pressure on the valuations of Tesla and scepticism pointed towards him.

Somewhere in the world, Masayoshi Son is breathing a deep sigh of relief as he can finally relinquish one of the worst awards that Guiness has to offer. Ultimately, (and very much in hindsight) it’s not surprising that Musk has lost so much of his wealth as tech shares have been overvalued for a long time thanks to highly favourable economic conditions. What is crucially overlooked is that it’s a paper loss and not a material one. The world is constantly changing and its impossible to predict what the economy would look like in the future. Who knows, Musk could reclaim his title as the world’s richest man again once interest rates and inflation falls, and markets find the technology sector in favour again.

Lee Nguyen

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