The Art of Investing, Elon Musk Style

Hey everyone,

We're back with another legendary investor deep dive.

Today, we'll be conducting a case study on the real-life Tony Stark, The Techno King of Tesla, and The Dogefather. Yep, that's right; the one and only Elon Musk will be teaching us a lesson or two.

Now, I know what you're thinking: "Why the hell are we talking about Elon Musk in an investment report? The dude's a founder, CEO, and tech genius, not an investor!" Trust us, there's a method to our madness.

Let's address the elephant in the room – Elon's controversial reputation. Some may argue that his achievements have been overshadowed by all the chaos, from the dumpster fire that was his Twitter acquisition to that public spat with Iceland's Person of the Year. But here's the thing:

Just look at that résumé! Despite all the drama, Elon is an absolute beast at building companies. And guess what? There are tonnes of non-obvious investing lessons hiding in his story.

So, sit back, relax, and prepare for a mind-blowing journey into the wild ride that is Elon's career.

The Art of Investing, Elon Musk Style

Before we get into Elon’s art of investing, let's take a brief detour into the origin story of the visionary entrepreneur - a tale steeped in science fiction, space dreams, and technological wizardry. 

Born in Pretoria, South Africa, Elon's early life was filled with a love for science fiction, space exploration, and technology. This passion played a significant role in shaping his career trajectory and the companies he founded. At the ripe age of 12, his entrepreneurial spirit manifested early on when he created and sold a video game called Blastar for $500. Not bad, young Elon.

In 1995, Elon founded his first company, Zip2, with his brother, Kimbal, just before the Dotcom crash. His company luckily didn't burst into flames, and Elon managed to net $22 million on the company's sale to Compaq in 1999.

In November of that same year, Elon invested $10 million of his Zip2 winnings into founding X.com - an extremely early attempt at native online banking.

After that, things moved quickly. In March 2000, X.com merged with Peter Thiel & Max Levchin's Confinity (Elon's main competitor). The merger of the two companies became what we all know today as PayPal, which inadvertently created the PayPal mafia (basically the Avengers of Silicon Valley).

The PayPal story has a book of its own and is way too long to tell here. That story ended with eBay's acquisition of PayPal for $1.5 billion in 2002, with Elon banking $180 million.

Elon's first seven years in the brutal school of entrepreneurship dished out lessons he'd never forget. The mother of them all? The gut punch of watching his influence over the direction of Zip2 and PayPal shrink before his eyes. He's convinced that his early ventures could have skyrocketed even more if he'd had more voting power and given the finger to the VCs.

Mistakes aside, Elon did what every successful Silicon Valley founder who just had a windfall recommended against and spent little time waiting to start his next venture.

He ploughed $100 million of his PayPal winnings into founding SpaceX and $70 million into kickstarting Tesla within two years of PayPal's acquisition. As we know today, these two companies are absolute behemoths, with SpaceX recently being valued in a private funding round at nearly $140 billion and Tesla having hit $1 trillion as of late October 2021.

Talk about betting the house on the first poker hand...

The All-In Approach 

That CliffsNotes summary brings us up to speed on Elon's most well-known ventures - the stuff that's generated more than 90% of his wealth. Unfortunately, filling in the gaps would turn this post into an e-book, so instead, here's a helpful infographic showing the makeup of Elon's portfolio.

Elon has built a mega-portfolio.

Some notable names you may notice (in addition to PayPal, SpaceX & Tesla) - are OpenAI (creator of everyone's new favourite tool ChatGPT), Neuralink, Starlink, The Boring Company, SolarCity, DeepMind, and Stripe.

Let's also not forget about the Twitter acquisition, which isn't shown here.

While your first reaction from all of this may be that Elon is a professional flip-flopper with too much going on, there's a needle worth threading here that'll take us to Elon’s primary investing principle:

He goes all-in on every investment, whether building a company himself or funding the seed round of an iconic startup.

And, just to be clear, this isn't going all-in on a random new cryptocurrency after reading about it on the depths of Crypto Twitter and hearing that your friend from high school, who still lives in his parent's basement at the ripe age of 33, made $9 million on its ICO.

This is going all-in on real stuff. Stuff that Elon believes in, based on science and first principles. Stuff that has an outsized chance of changing the world.

When Elon founded Tesla, he didn't just want to build an electric car. Instead, he tried to make a car that could change the world and save the environment. He wanted to create a sustainable future where people could drive electric vehicles without worrying about them unexpectedly cutting out in the middle of the desert. His vision for Tesla was to accelerate the world's transition to sustainable energy. And he went all-in on that vision, so much so that he invested his entire net worth into it to cement an iron grip of control over the company's destiny.

This ties into the lessons he learnt from Zip2 and PayPal. After Elon was ousted as CEO of both companies, he made it his mission to prioritise control over his future ventures as much as possible.

So, in 2007, he converted $8 million of preferred stock to weaker common stock to boot the then-CEO of Tesla; prioritising control over monetary value.

Elon’s Portfolio

Let's examine Elon's portfolio below and tease out how he applies the all-in principle.

Until 2017, Elon only had seven liquidation events, with more than double the number of outflows. You'll recognise the most significant inflows from PayPal of $180 million and the DeepMind sale to Google, which netted him around $90 million in 2014.

Elon invests with a massive amount of conviction. After rigorous due diligence, he invests in what he believes in and ploughs as much as possible into that investment. Then, he ensures he has as much influence as possible to help the company succeed and holds until the payoff.

The all-in strategy has paid off for him, with the value of his Tesla stake as of November 2021 catapulting him to the world's wealthiest man.

The punchline is that going all-in on your investments is how you win big, just as long as they:

• Have earned your belief,

• Have a real chance of changing the world for the better, and;

• Aren't based on meme coin hype.

The Contrarian Take on Diversification

Elon's investment philosophy directly challenges the "Diversified Portfolio" concept that much of the investment world recommends. Instead, his investments are concentrated on the industries and products he understands and believes in most.

A contrarian body of thought suggests that concentrated bets on a few things are the way to win big. And this argument may have legs, even among the more conservative investors.

Charlie Munger, Warren Buffett's lifelong business partner and friend who shares Buffett's Value Investing philosophy, was recently interviewed on CNBC and said:

This quote was surprising as one generally puts investors like Charlie Munger into a different category than characters like Elon. The mainstream consensus is that Munger is a sensible, low-key investor that only invests in businesses that are simple to understand, have predictable cash flows, and have substantial competitive advantages (or a "moat," as he calls it).

Elon's companies are "complex" technology businesses that are so innovative that the market often misses their core purpose, which is reflected in the stock value assigned to them. As a result, his companies would fall into the investment category of "high-growth tech" - no-nos for Buffett and Munger. These companies are characterised by revenue growth exceeding 20-50% per year with little to no profitability.

However, one can see the alignment in investment philosophies between Elon and Charlie Munger when looking beyond the companies they are investing in/creating.

One of the most prolific value investors of the last century and arguably the most revolutionary entrepreneur of our generation both share the view that having too much diversification in one's portfolio will hinder their ability to generate returns that are better than average, something that is hard to do in the first place.

Building a Self-Sustaining Investment Universe

Elon has managed to create an ecosystem of billion-dollar companies revolving around him and his network, some having greater synergy than Disney's acquisition of Fox.

There are two sides to this. One is within his angel investment portfolio, and the second is within the companies he owns and runs.

Let us explain.

The Network

Investing within his network has given Elon a sizeable return. As we mentioned, he cashed in ~$90 million on DeepMind’s sale to Google, among other wins. Moreover, he's only ever lost 100% of one investment: Halcyon Molecular in 2012.

Remember the PayPal mafia, the impressive group of tech entrepreneurs who built PayPal alongside Elon?

Yeah, those guys.

They’ve created hugely successful companies off the back of PayPal. So successful that it propelled the group into Silicon Valley folklore.

Here are some of the other notable members of the PayPal mafia and their ventures:

You may recognise some company names there. No big deal, just a couple hundred billion dollars worth of market cap in one picture.

This group represents the core of Elon's network.

Although he never directly invested in many of the PayPal mafia companies, his angel investments were driven mainly through connections to either the idea or the founders. In 2011, for example, he co-invested in Stripe alongside Peter Thiel and Max Levchin, two of the original PayPal co-founders.

Irrespective of his billion-dollar network, Elon will only invest in what he understands deeply and with the people he trusts. As a result, he can assert more control beyond the traditional boardroom or executive setting.

As we've already figured out, what he knows includes many things. And when it comes to investing in the people he knows, Elon takes the saying "family first" to a whole new level. His brother Kimbal has arguably been the biggest beneficiary, having a helping hand in Zip2, Tesla, SpaceX, and the brain-computer-interface startup Neuralink. Elon's cousins, Lyndon and Peter Rive, who founded SolarCity in 2006, have also been on the receiving end of Elon's trust and capital.

Company Symbiosis

SpaceX, Tesla, and SolarCity form the foundation of Elon's symbiotic business conglomeration. These companies share an extraordinary relationship exchanging and sharing talent, investors and financing mechanisms.

The chart below illustrates the interwovenness of the three companies, with Elon at the centre of the universe.

The synergies between Tesla and SolarCity reached new heights when Elon facilitated their merger. Combining the two companies made perfect sense from an economic and strategic perspective, like a restaurant that owns a farm to source ingredients. In addition to the estimated $150 million first-year cost savings, vertically integrating the businesses encouraged collaboration and enabled seamless cross-selling of products to customers—much like a farm-to-table restaurant experience.

Tesla's board hailed the move as the birth of the world's first "vertically integrated energy company, offering end-to-end clean energy products" for their customers. With Tesla at the helm, everything from the car you drive to the energy that powers it and your home would be seamlessly connected and sustainable.

Doubling down on the nascent renewable energy industry again highlights Elon's appetite for risk and his self-awareness to combine two seemingly unrelated ventures and create a whole more significant than the sum of its parts.

This demonstrates the power of synergy, where the combined value of two businesses is greater than the sum of their individual values.

Aside from the strategic considerations, Elon’s companies have benefitted immensely from Muskian-style financial engineering that works something like this:

• SpaceX purchases $255 million of SolarCity-issued Solar Bonds as corporate investments.

• SolarCity requires upfront cash; SpaceX has billions from successful funding rounds and pre-paid NASA contracts.

• The arrangement benefits both: SpaceX earns a yield while SolarCity secures much-needed financing cash flows.

But how does this help my own portfolio?

Well, for starters, make sure you don't burn bridges with those ambitious people you knew from school who will start companies and do meaningful stuff. You might get to invest in them someday, or they may introduce you to other high-achievers you could work with. Remember, you are the average of the five people you spend the most time with, so choose wisely.

The symbiotic business conglomeration part is a stretch, but hear us out.

This is all about finding those investments (whether startups, public company equities, or investment funds) that are the "restaurants that own a farm." It’s all about identifying those businesses and/or founders with the ability and raw talent to combine seemingly unrelated products or ventures into something even more valuable than the individual parts.

Those are the companies and founders worth investing in.

The Hidden Value Investor

For the next lesson, à la Elon, we again turn to Charlie Munger. Upon closer examination, it's pretty obvious that these two successful individuals share more common ground than just their views on diversification (or lack thereof).

In recent interviews, Munger and Musk's positions on the global economy, inflation, central banks printing a boatload of money, and the medium-to-long-term investing horizon align well.

Munger, drawing on his nearly 100 years of life experience, believes that printing masses of money causes hyperinflation and leaves economies and societies in turmoil, citing examples like Germany's Weimar Republic before Hitler came into power.

Musk, being 50 years younger, points to more recent examples of countries succumbing to hyperinflation, like Venezuela. And, naturally, he approaches macroeconomics in a more formulaic way, opining on the All-In podcast that "if the amount of dollars created is greater than the increase in goods and services created in the economy, inflation will increase." A more science-y approach but consistent with Munger's outlook.

The reality is that Elon has more macroeconomic chops than people give him credit for. He's shown a deep knowledge of the global macro-environment, how economies work, and what money is. While his tertiary education in economics may have aided his knowledge base, most of his outlook has been built through starting companies. It's steeped in practicality that eludes the armchair macroeconomists with no skin in the game. Elon has been through three devastating recessions. On more than one occasion, his companies were on the brink, so one can understand that coming out of these kicking and screaming would have vastly deepened his macro-understanding.

One thing that’s clear is that both men align on their core investment principles.

Charlie Munger's core investing tenet is summarised in this quote:

Compared to Elon's, which he summed up eloquently:

Both men are saying the same thing but in different ways. They firmly believe that a company is worth investing in if it creates products the investor believes will benefit humanity in the long term. Bonus marks if the company has a substantial competitive advantage and its stock has a fair purchase price.

Coupled with that is their resolve to maintain (if not double down on) their conviction in the investment during periods when markets may vote against the company. This long-term view of investing ignores short-term volatility and, instead, looks at the fundamental promise of value to be delivered to society over many years.

Whether you like it or not, Charlie Munger and Elon Musk are long-term value investors. The only difference is the amount of risk they take on.

Don't Stop Believing (in Elon)

And there you have it, folks. We've gone deep into Elon’s mind, the man whose successes have been more than evened out by the amount of hate he's gotten over the years. We've explored his principles of going all-in and betting on products he believes in, as well as his penchant for creating a symbiotic business ecosystem. 

But the question remains: Is he a visionary or just a dude with too many ideas?

Elon's love-hate relationship with the media makes it hard to get a clear answer. One moment he's hailed as the saviour of mankind, and then he's labelled as a far-right activist. 

But let's be honest, the guy has an uncanny knack for turning impossible dreams into reality, even when everyone bets against him. From PayPal to SpaceX, from Tesla to Neuralink, Elon has repeatedly proven that he's not just a dreamer but also a doer. So, as tempting as it may be to write him off as a charlatan, maybe we should take a step back and appreciate the bigger picture.

Think of the sheer difficulty he faced in achieving his remarkable success. Elon came precariously close to failure on multiple occasions, and even when he was winning, there was a huge amount of suffering that went into it. The odds of success were far below 1% if you ask us. He nearly lost everything with SpaceX and Tesla, but his unwavering determination and conviction ultimately triumphed.

The extreme approach Elon took in doubling down on his investments is not for everyone. However, embracing the core principle of having faith in our investments can lead to greater resilience and success in the long run.

At the end of the day, we can certainly learn a thing or two from his willingness to go all-in, take risks and bet on challenging the status quo.

This, in a nutshell, is Elon’s Art of Investing.

That’s all for today. If you found this post insightful, share it with a friend or anyone who might appreciate it.

And if you need to read more about Elon, these are my favourites:

• Elon Musk: The World’s Raddest Man by Tim Urban (Wait But Why)

• The Elon Musk biography by Ashlee Vance and,

• Elon Musk by Walter Isaacson

Thanks for reading,

— Luca