June 15, 2018
What We’re Reading This Week
There is a concept in the world, related to car buying that basically says, you see more cars like yours after you have purchased a new car. When you look back on life before your purchase, you don’t recall seeing any of them on the road. This is called recency or frequency illusion and its very similar to the concept of confirmation bias, whereby one seeks out (intentionally or unintentionally) information that supports an opinion they already hold.
Jeff and I had this discussion recently about his wife’s car. Shortly after they bought it, he noticed it in the background of one of his favorite TV shows. He asked the obvious question, was his purchase influenced by subtle marketing queues on television or did he just notice it because he now owns that car? It was a real chicken and egg discussion.
Anyway, that’s a real roundabout way for me to tell you that I often find myself reading about things I have discussed with clients and friends over the past week. One would imagine that I would talk to people about things I had already read, but no, that’s rarely the case. Oftentimes, I don’t get the opportunity, mostly because I have a blog platform I guess…
So, on to Tesla. Normally, I don’t write about what’s happening at Tesla because I just don’t find it that interesting. However, a client I were discussing the carmaker this week and I couldn’t help but catch this story from Business Insider.
Apparently, Tesla is generating an incredible amount of waste and burning through tons of cash as it builds the Tesla Model 3. I don’t know much about electric cars and I don’t know much about, well, any kind of car manufacturing, but I do know a little about psychology and financial statements so I loved this:
“The cost of scrap has become so dramatic that, internally, Tesla documents sometimes quantify the amount of money wasted by comparing it to another eye-popping number — like the scrap cost’s equivalent measured in miles of $5 footlong Subway sandwiches (137.11 miles, in one case).”
That’s just great. It’s a fairly commonplace tactic – making a troubling number seem fanciful by comparing it to something silly. Alternatively, one could convert a number to an equivalent measure of something else to help someone better understand what you are talking about. When you consider that Tesla posted a $709.6 million loss in the first quarter of the year it’s hard to say what they were going for with this particular analogy.
I once had a client that measured his portfolio gains and losses in Kubota Tractors. “We’re up 3 Kubotas on the year!” he would exclaim. Or he would call and sadly tell me, “This month I’m down a Kubota.” It turned out that he didn’t actually own a Kubota tractor but he wanted one. He wanted the portfolio to earn a certain number of Kubotas before he would shell out the cash for one. I always encouraged him to make the purchase saying, “A Kubota in hand is worth two in the bush!” There’s a psychology lesson in there somewhere.
Lately, I have been known to write about how index funds interact with large public companies. So, here is an interesting story about Twitter being added to the S&P and how it will subsequently be purchased by many index funds. Of course, as of this writing, it already happened.
Since the announcement, Twitter is up 13%. That could be attributed to the fact that so many funds need to buy the stock or it could be because certain retail investors haven’t studied efficient market theory. Also, it could just be a good week for tech. The last two options are more likely than the first one because many companies will sell stock in advance of being listed on an index for the very reasons outlined above. In Twitter’s case, they sold convertible notes. Neat, right?
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