The Wisdom of Wally

I first wrote this 3 ½ years ago and believe it is an excellent reminder that, as investors, we are owners of the companies we buy shares in, even if indirectly through mutual funds. I also updated it at the end to show how Wally’s wisdom played out…so far.

My 14-year old client, Wally (not his real name), recently showed wisdom beyond his years when pondering an investment question. For background, four years ago Wally had a few bucks that he’d saved from birthday gifts and mowing his grandfather’s lawn that he decided to invest. The measly interest from a bank savings account wasn’t getting the job done so he chose, on his own, three individual company stocks to buy. Now, we invest our clients in mutual funds rather than common stocks, but occasionally a client will ask to invest a small amount of their portfolio in a company they like and this seemed to be a good way for Wally to learn about the stock market. Here are the companies he chose to purchase:

• Nike – When you really like a company’s products, seems logical to own the company too;
• Carriage Services – They provide funeral and cemetery services and demand for those aren’t likely to slack off any time soon;
• Tesla – There’s no denying their cars are cool.

Two weeks ago, Wally’s dad (also a client) called and told me Wally had asked for my number because he wanted to discuss whether it was time to sell his stake in Tesla. He realized the stock had appreciated considerably and wondered if this might be the high point at which selling made sense. When we spoke, I posed three questions to Wally to help him think through his investment:

1. What is your time horizon for needing the money in your investment? Wally and I talked about whether he was saving for something specific to buy in the short term or saving for the future. While the stock market is impossible to predict in the short term, history has shown that stocks generally rise over long periods of time. So, if Wally was considering a purchase in the next six months with this money, selling now probably made sense.
2. Think like an owner? As a Tesla shareholder, Wally owns a portion of the company. Buying stocks is NOT like betting on a horse at Keeneland where we make an educated, or uneducated, guess on what happens in the short term. Owning a portion of Tesla means we should analyze the company’s prospects for growing its sales, adding to its product lines and, ultimately, becoming profitable. If it can do those things, the stock should provide a return over time.
3. What would you buy if you sold? As Wally and I discussed, this means what would he invest in if he sold Tesla? In other words, if Wally decided Tesla’s ability to become profitable over the long term is questionable and he sold the stock, is there another company he believes will perform better?

Wally told me he believes Tesla cars are energy efficient but expensive and, if they can continue to lower their prices, they will sell more cars. Additionally, he believes people care about the environment and want vehicles that are more environmentally friendly and relatively inexpensive to operate. After we spoke, Wally maturely decided it was prudent to sleep on it before deciding to sell or not.

The next evening Wally told me he had decided to keep his Tesla stock and not sell. After thinking about it, he is still optimistic about the company’s long-term prospects to make money. He also thought it best not to spend money that he believes will grow in the future.

I don’t know if Wally’s decision on Tesla is correct or not, only time will tell, but I was extraordinarily impressed with his ability to think through a complex question and make a decision with his mind rather than with his emotions. And keeping emotions at bay is a valuable reminder for even the most seasoned investors.

Update: Since May, 2020 Tesla’s stock has risen from 55 to 252 – a 44% average annual return. Not too shabby.

Steve Byars, CFP®