There's More Than One Way to Invest and Hero-Worship Isn't One of Them

Elon Musk is unassailable! I can't even recall who said that, but as Tesla (TSLA) shares crash to a new 52-week low today, that quote captures the zeitgeist perfectly. Tesla shares are a couple ticks away from a very round decline of 50% this year, and that is a brutal performance no fund manager can bear. So they sell. It's their job.

That's the problem with the herd mentality that's practiced with impunity: it is just as bad on the way down as it is good on the way up.

Even worse are the "analysts" on the sell-side - I used to be one many moons ago - who attempt to justify ridiculous valuations with even dumber "predictions." The "E" is supposed to justify the "P," not the other way around.

Tesla is the poster child for the, as Miles Davis would say, "Bitches' Brew" of hyperbole that preceded this year's Nasdaq crash. Tesla has never paid a dividend, and despite some vague promises from Elon Musk on last night's earnings call, has never bought back a single share. The value is in what other people will pay for it. The Greater Fool Theory, I suppose.

But it was not foolish to take an old, disused GM/Toyota JV plant (formerly known as NUMMI) in the Bay Area and parlay that into four plants around the world, an employee base of 100,000 people and the capacity to build two million units on an annual basis. That's building a company, and Elon deserves credit for that.

But you have to understand that the reason your screen is red so often this year, is that valuing a business is much more subjective than actually building one. Any valuation model is based on discounting future cash flows, and with higher interest rates - a higher discounting factor - you end up with a lower present value. Hence this year's plunge in the Nasdaq, led by TSLA and Meta Platforms (META) .

The only way to steel yourself against higher rates is to generate more cash flow from your investments. As the yield on the 10-year UST approaches Elon's favorite pot culture figure of 4.20%, there's just no reason to suffer the yield on the Nasdaq (as tagged by Invesco's venerable (QQQ) ETF) of 0.73%. So fund managers sell and this is the time of year when performance reviews are looming, so they need to act quickly.

That's why I started my HOAX portfolio just before Christmas last year. I figured that energy companies would generate copious cash flows as the world's chronic underinvestment in hydrocarbon exploration - multiplied by ESG insanity - would lead to higher dividends and aggressive share repurchases. Bingo. That happened.

We are benefiting from inflation, not being burned by it. Another way to effect that is my FLOAT model portfolio, which is entirely composed of floating-rate preferreds. Those securities actually pay higher dividends when interest rates rise. It's not beholden to the whims of the markets. The quarterly payments themselves actually rise.

I have named The PNC Financial Services Group  PNC.P as a key FLOAT holding in my Real Money column before, but the other nine names live behind the paywall of my site, www.excelsiorcapitalpartners.com. Sorry for that, but inflation is hitting my business, too. We small business owners all need to generate more revenues.

It's not easy to generate investment returns when the stock and bond markets are crashing, but I have given you two different ways to do so. They don't involve hero-worship, bizarre future predictions or yelling inanities into a TV camera. There is more than one way to invest. But there is only one way to lose. Don't.

At the time of publication, Jim Collins' firm owned puts on TSLA and META.