Examples of Emotional Trading: Tesla & Facebook

PUBLISHED: 20 Feb 2014 @ 19:10 | Comments (11) | More info about Lou Gutheil

In a story immediately preceding this one, my colleague, Thierry LaDuguie, wrote about “Emotional Trading – The Enemy of Trading.” Ironically, two US companies made the headlines and watched as investors appeared to react in exactly the manner that Thierry warned against. The share price of Tesla Motors (NASDAQ:TSLA) skyrocketed to record heights whilst the Facebook (NASDAQ:FB) share price plummeted from its record high of $69.08 that it had reached just yesterday prior to closing at $68.06.

The greater irony is that I was already disposed to writing about Tesla and Facebook before I had seen Thierry’s story. Coincidence? You decide.

The Tesla Story

Tesla shares closed yesterday at $193.64, but opened today at $214.99. Despite a typical morning drawback, it is now 12:45 in the US eastern time zone and Tesla shares are holding strong around $211.00, up 9% over yesterday’s close. This response came from the response to the company’s final report, not so much on its profit and loss, but upon its progress and its plan for 2014 and beyond.

Tesla finished the year with a $16.3 million loss. However, the company’s revenues of $615.2 million were more than twice those of the previous year’s $306.3 million. And that is what made the $16.3 million loss palatable, as the increased revenue helped to improve the loss significantly over last year’s $89.9 million loss. What I am saying here is that the company is heading rapidly in the right direction. Of course, I have already said that several times in the last year.

Tesla sales have been increasing without abatement with 5,500 units sold from July through September and 6,900 sold between October and the end of calendar 2013. The company is currently manufacturing some 600 cars per week, but it is expanding its production lines to accommodate a capacity of 1,000 per week.

I see the response as emotionally driven because the company is still losing money, so investors are reacting on the promise of a bright future combined with evidence that the company is heading in the right direction. I have been a fan of Tesla and I continue to be, which compels me to share one additional fact. Tesla’s revenues are somewhat negatively skewed because of how it is required to report revenue from leased vehicles. Things are, indeed, better than they look.

The Facebook Story

This one is really simple. Facebook has agreed to acquire WhatsApp. So WhatsUp that would drive the FB share price down? It appears that popular investor opinion is that Facebook’s $19 billion offer is exceptionally extravagant and far too much in excess of WhatsApp’s value. Some might even say that the acquisition is emotionally driven by Mark Zuckerberg. I beg to differ.

I believe that Facebook is a highly emotional company in terms of investor and user value. People are emotionally attached to and invested in Facebook. It follows that most investment decisions in Facebook are also emotionally driven. If you don’t believe me, go back and read all the news about Facebook from three months prior to its IPO and up until the present. It is what it is.

The problem is that this acquisition is ingenious and the response is emotional. Zuckerberg has a vision. Investors are frightened by risk. Fear is emotional. Focus on the vision.

By and large, most people are grossly unable to comprehend where Zuckerberg is taking Facebook. His grasp is driven by his vision, and he either has, or is able to acquire, the resources necessary to achieve that vision. The problem is that Zuckerberg, much like Steve Jobs, is not stodgy. He’s not even ordinary. He is operating in a realm that most of us don’t even realize exists. We are trying to catch up with technology while he considers that same technology as a thing of the past, useful for gaining revenue and for being the foundation upon which to create the future.

Facebook’s share price had fallen to $65.84 just after 10:00 am EST. That is an emotional, knee jerk reaction. It is now 2:00 pm EST and Facebook has recovered to $68.82, up 1.1% on the day.

Amazing. Absolutely amazing.

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