Two Cents | Making sense of the 'Musk effect'

Let’s get this out of the way upfront: Elon Musk is a lot, lot smarter than most of us. At 28, he had already sold his company (Zip2) to Compaq for more than $300 million. Three years later, he and others sold PayPal to eBay for $1.5 billion. Since then, he has gone on to disrupt not one but multiple industries.

Tesla has made electric cars not just mainstream but cool. Although he didn’t found Tesla, he was an early investor and the man behind the amazing cars. SpaceX is doing what no one else thought was possible: build reusable rockets. The Boring Company is all set to revolutionize high-speed urban transport via Hyperloop. Neuralink, where he is one of the co-founders, is developing implantable brain-machine interfaces, which some day may actually be used to enhance our mental capabilities. (I am going to skip SolarCity and OpenAI.) So, Musk has done in a few decades what almost no one else has done in their lifetimes. And, of course, he has amassed enormous wealth in the process, making him one of the (top three or four) richest people in the world.

So, Musk has done in a few decades what almost no one else has managed to achieve. And, of course, he has amassed enormous wealth in the process, making him one of the (top three or four) richest people in the world.

But Musk isn’t just a visionary and super rich. He is also phenomenally influential ( he boasts of nearly 50 million followers on twitter) and—now, how should I say it?—tweet-happy motor-mouth, who has an opinion on almost everything, including the valuation of his own Tesla stock, Reddit controversies and, of course, the bitcoin—the cryptocurrency everyone loves to hate. (Someone on twitter recently wondered why Musk hadn’t yet commented on the ship blocking the Suez Canal.) What Musk says matters, even when it really shouldn’t. And people who listen to him and act on his opinion often end up hurting their own interests. In fact, the US stock market regulator, the Securities Exchange Commission (SEC), has tried to get him off twitter, but without any luck.

Take a look at some of the controversies that Musk has waded into happily:

In August 2018, he tweeted a one-liner saying he is “considering taking Tesla private at 420. Funding secured.” That meant he was thinking of buying back his listed company and at a price of $420 a share, when the stock was trading well below $100. “Funding secured” meant he had already tied up the money needed to delist Tesla. None of that was true, prompting the SEC to come down hard on Musk and Tesla. In a humiliating deal, Tesla was forced to pay $20 million in fine, Musk was forced to step down as Chairman, two independent directors were put on the board, and Musk had to agree to have his tweets vetted by an in-house counsel.

On May 1, 2020, he put out a seven-word tweet saying, “Tesla stock price is too high imo” (imo is the digerati’s abbreviation for ‘in my opinion’). Wall Street, which is only used to CEOs talking up their stocks, was aghast and, in a knee-jerk, reaction hammered the Tesla stock some 9%, wiping out $13 billion in market cap. If any investor had taken Musk for his word and exited Tesla altogether, they would have been left kicking themselves because the stock not only recovered but continued to soar after that. By December 31, 2020, it had touched $706!

“Gamestonk!!” A one-word tweet with two exclamation marks by Musk at 2:38 am on January 27 this year added $4 billion to dying video game retailer GameStop’s market value, after Musk decided to insert himself into a controversial anti-Wall Street movement on Reddit. Members of Wallstreetbets thread on Reddit decided to take on some Wall Street fund managers who were hammering GameStop stock. By buying the stock and thereby driving the stock price up, the thread members were squeezing the short of the fund managers, who would have to buy the stock for delivery at higher prices. Musk had nothing to do with GameStop, but just the same he decided to bat for the anti-establishment small investor.

Cryptocurrency bitcoin is another beneficiary of Musk’s support. Early February this year bitcoin surged 15% after Tesla disclosed to regulators that it had invested $1.5 billion of its treasury money in bitcoins. More recently, Tesla has said that it will accept bitcoins for purchase of its cars. Bitcoin has been a hugely controversial and volatile cryptocurrency, but Musk’s backing, followed by Apple’s, has given it solid legitimacy. The fact that even regulators around the world are skeptical of bitcoin hasn’t stopped Musk from backing it. Still, if you were a casual investor in bitcoin, you would have had multiple heart attacks looking at the wild swings in price. After touching $57,000 on February 22, it plunged to $48,000 on March 3, before climbing up again to nearly $61,000 then again down to $54000. Can you imagine the rupee or the US dollar behaving like this?

The point is, Musk is a brilliant entrepreneur, but not everything he says is for you and me. As small investors with limited appetite for risk, we need to steer clear of the “Musk Effect”. Indeed, even Musk seems aware that his actions tend to be scandalous. On March 25, he tweeted a helpful suggestion to his followers: “If there’s ever a scandal about me, *please* call it Elongate”.

Ergo, for sure follow Musk on Twitter. But don’t put your money where his mouth is—unless you are willing to roll with the punches.

(The writer is Managing Editor of TV9 Kannada, and formerly Managing Editor of ET Now and Business Today. Views expressed are personal)