So, some six months after anticipated, Tesla will be part of the S&P 500 index as of 21 December 2020. As Tesla will be the 10th, possibly the 11th largest component of the S&P 500, the index has invited submissions on whether they should allow the whole company in – in one go. After all, it will represent over 1.0% of the index as Tesla at current values is a $387 billion company.
For many investors Tesla is akin to Marmite – love it for its vision and leadership, loathe it because they feel its overrated and doesn’t possess the technology advantage over others. If you’re a passive investor, you are probably hooked up to a market capitalisation weighted index so you don’t have to have a view, you are about to own it.
Of course, news of its impending inclusion in the S&P 500 index hasn’t been lost on non-index-based investors who, seeing the forthcoming demand for Tesla stock from passive providers, have front-run the future indiscriminate buyers.
Tesla might be the best thing you’ve ever owned and if you’d bought it in March this year, before it quadrupled in price, you could be forgiven for thinking so. But I’d rather own it for my reasoning rather than be herded into it just because it has become part of another index based on its size as a company.
Also, do you want to be front-run by non-index investors who enjoyed a 13% return on the news of its S&P 500 index inclusion. In other words, a $40 billion plus appreciation in the company’s value – before you get to have a piece of it.
For us, it remains something of a headscratcher why the size of a company should have such a material impact on its weight in a portfolio. As we have said many times before, market capitalisation indices are for asset gatherers and institutional investors constrained in their investing methodology by their sheer size. For individual investors, each company represents an opportunity – own it because you want to, not because of its size in an index or any label attached to it.
Avoiding group-think, convenient labels and demarcations of little merit like value versus growth in favour of a portfolio of soundly run, well capitalised, businesses with low debt, good cashflow generation and governance should point you in the right direction. As investors ourselves, with ‘skin in the game’, we are aligned with investors not shareholders.