Tesla and the frustrating groupthink of stock analysts

Tesla and the frustrating groupthink of stock analystsBloomberg published an article on Monday titled “Elon Musk’s Tesla Strategy: Win Big by Falling Short”. It’s a story about why Elon Musk routinely sets unreasonably ambitious targets for Tesla.

First, I almost let the egregious use of the word “strategy” in the title slide. But I couldn’t. Setting deadlines is not a strategy. It’s a tactic. I’ll leave it at that.

Second, the article mentions Musk’s annual sales target of 500,000 cars by 2018. That’s compared to about 50,000 annual car sales today. Super aggressive, clearly.

Here’s one excerpt showing the reaction of a stock analyst:

That’s two years ahead of his previous target, which itself was dismissed by Wall Street as nearly impossible. And 2018? ¬†That’s “too aggressive, setting up investors for disappointment,” wrote UBS AG analyst Colin Langan in a note to investors.

Here’s another reaction:

“We are all for setting aggressive targets,” wrote Joseph Spak, an analyst at RBC Capital Markets. “However, Tesla is increasingly asking the equity investor to sign up for a complex manufacturing ramp the likes of which we don’t believe [has]¬†ever been seen before. This brings both elevated expectations and execution risk.”

I have an idea. If you think Musk’s sales targets are unreasonably ambitious, how about you discount them? How about you build a margin of safety that makes you comfortable?

You’re a stock analyst. You get paid to analyze businesses and make judgments about their valuations. Would it be helpful if management gave you perfectly accurate forecasts at every turn? Of course it would. But that seems unlikely.

The real frustration is that stock analysts are afraid of independent thought. It’s much easier, and much safer, if you can estimate upcoming sales and earnings that fall in line with the estimates of other analysts. It makes everyone look like insiders, like they all got the right answer.

What happens if management doesn’t give guidance? Or if management gives unreasonable guidance? Chaos! Analysts would have to think for themselves. They’d have to build their own forecasts. They’d have to defend those forecasts after the fact, once the actual results came in.

It’s a perfect example of how the best you can hope for with groupthink is to land right in the middle. Not too high. Not too low. Safely obscure. Analysts hate having to go out on a limb. They might disappoint their investors.

One reason I’m frustrated is the lack of independent thought. It’s clear, based on the quotes in the article, based on the questions you hear at the end of earnings calls, that analysts are trying hard to create a herd mentality.

Another reason I’m frustrated is this is the genesis of the after-the-fact gotcha stories. It’ll be so clear in hindsight, if Tesla succeeds or fails, exactly what happened. But when you rewind to when the outcome was unknown, you see behaviors like these. Analysts are complaining about aggressive forecasts from management. It’s debate and discussion of the process, rather than a meaningful discussion of what a reasonable forecast would be, and what meeting that forecast would mean for Tesla.

We can take a couple of lessons from this. First, expectations matter. Know how people respond to the expectations you help them set. Yes, under-promising and over-delivering gets a lot of press. But there are times where it might make sense to deviate.

Second, have courage. Aligning with conventional wisdom can be helpful. You don’t always need to swing for the fences. Still, if your goal is to always land in the middle of the pack, you’ll have no hope of achieving excellence. Know when you’re trying to make a mark, to make your unique contribution. Those are the times to risk failure, in the hope of making a uniquely valuable call that differentiates you.

Don’t be like stock analysts. Don’t always peak over your shoulder, trying to copy everyone else’s work. A whole career of copycat groupthink is sure to make you unhappy.

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