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Poor payback linguistics – Be wary about any jargon that sends a share price into overdrive

03/09/2015

Andrew Evans

Andrew Evans

Fund Manager, Equity Value

Take a deep breath and try and decode the following quote: “The shared mobility model, ie, shared transport empowered by smart technology, is significantly enhanced by autonomous cars, enabling higher vehicle utilisation. Higher utilisation overcomes the poor payback economics of electric vehicles (EVs). Reinforcing this is our view that EVs should work better in an autonomous, shared model.” 

We will provide you with our translation of what this recent broker’s view is actually saying in a moment but, first, take a guess at how much it effectively added to the share price of Tesla in a single day. Would you believe $1.5bn (£980m)? For, on 17 August, as the broker upped its price target for Tesla from $280 to $465 a share, the valuation of the electric car manufacturer jumped 5%. 

Let’s now look to translate that first paragraph from Jargomese into English – “autonomous” is essentially “driverless”, “shared mobility” means “containing more than one person” and “poor payback economics” ultimately boils down to “too expensive. So the broker is basically telling us: “Driverless cars will seem a less expensive proposition if they carry more than one passenger.” 

So … quite like a bus then?  An electric, driverless bus, true, but hardly a revolutionary new concept. Similarly, while any effort that may help improve the environment is to be applauded, sharing cars is hardly a new idea either. Car-pool lanes have been around – and generally underused – in the US for decades and the mere fact a car is driverless seems unlikely to encourage more people to try them. 

Furthermore, why was the jump in Tesla’s share price not accompanied by a collapse in the rest of the auto sector? After all, taken to its logical extreme, the broker’s argument envisages a world where everyone shares cars and if that means, for example, one vehicle between two, you might expect the share prices of other car manufacturers to react badly to this prospect of a halving of their market.                                             

This episode offers a number of investment lessons. One is that the fact $1.5bn of value can be attributed to the not terribly original idea of sharing cars is yet further proof – if yet further proof is needed – that the market can be a bit silly at times. On a related point, it by no means follows that, just because a company is doing something for the environment, it is automatically a good investment. 

It is also worth noting the broker’s argument introduces one further layer of assumptions into the Tesla story – an investment case that was hardly short of ‘ifs’ and ‘ands’ as it stood. Investors should watch out for this market affliction – what we might call ‘conjunctionitis’ – because the more things you have to assume must happen for a share price to do well, the less likely it is they will all occur. 

A final lesson relates to use of language and, as we warned in The means of seduction, the importance of being wary about investment stories that rely too heavily on jargon. The concept of sharing driverless cars is on the whole a straightforward one to grasp, which begs the question as to why the broker felt the need to dress it up in such tortuous language. 

If you were feeling generous, you might in this instance chalk the use of jargon up to over-enthusiasm and yet, time and again, you will see complex language used to explain investment ideas that at their heart are pretty simple – but also pretty unappealing. Here on The Value Perspective, when we spot an excess of jargon, it only makes us more determined to dig out the simple truth that usually lies beneath. 

Author

Andrew Evans

Andrew Evans

Fund Manager, Equity Value

I joined Schroders in 2015 as a member of the Value Investment team. Prior to joining Schroders I was responsible for the UK research process at Threadneedle. I began my investment career in 2001 at Dresdner Kleinwort as a Pan-European transport analyst. 

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