In the eighth article (8. Mr Market), I wrote about Tesla (TSLA) and its high quotation in relation to other carmakers. In my series of articles I haven’t touched the fundamental analysis basis.
Anyway, Tesla gives me the chance to highlight some points and concepts.

As you can read in the “Mr. Market” article, sometimes the agents that make up the market follow an irrational behavior.
Tesla (TSLA) for example in one week lost over 30% of its market value. While in the last six months, the market value has grown by 700%.

Be Rational!

We have to be careful, here isn’t a rational attitude behind those movements. Moreover, these movements are so fast and violent.
When people invest and follow the momentum caused by the herd instead of a rational cognitive process, the risk of losing our mind is high.
When the price goes up the classic thought is: “I’m missing the chance of my life to become rich, buy a boat and have a Bilzerian’s lifestyle”. That is called FOMO (Fear Of Missing Out).
When a stock goes down the thought could be: “OMG I will lose all my money and I will have to go live under a bridge”.
It is scientifically proven that money loss hurts more than happiness follows a profit (Source: PhD Daniel Kahneman, Nobel Prize in Economic Sciences), moreover, a money loss stimulates the brain side that processes the physical pain (source: Hidehiko Takagashi – Kyoto University).

It’ time to evolve.

Remember: we are a species of evolved human beings namely Value Investors, our decisions are based on data processing, not animal instincts.
I leave you with the first tool of fundamental analysis, which is one of the most known metrics in the financial world and it is the Price to earnings ratio (P/E).
I must specify that P/E is only one of the metrics used in finance but in this context, it’s worth writing about it.
The equation behind P/E is simply Price divided by Earnings.
Price is the market quotation while earnings are the net income of the company. 
You can use the total market capitalization (share price*number of share outstanding) divided by total earnings (most publicized company’s data), or simply by divided share price for earnings per share (EPS).
You can find this data on finance.yahoo.com, usually, P/E is already calculated and shows as one of the first data.
Metrics and ratios are used in the field of a relative quotation, namely allowing you to compare at a glance various companies in the same industry or to compare the same company over time.
With this first simple metric, you can do for yourself an incomplete evalutation of Tesla (TSLA).

But don’t fool yourself, a real business evaluation is more complicated.
Someone can argue that Tesla is a different kind of automaker because we have to expect more growth in various sectors tied to renewable energy, energy storage, self-driving car, robotaxi, and so on. But, even it’s true, be careful when the price of a company is tied more (or even just) to the future than to the present, mostly when you pay a price 1000 times the earnings.
The future is always uncertain.

Remember:

“Price is what you pay; value is what you get.”

Warren Buffett

This doesn’t mean that you don’t have to invest in Tesla.
My goal isn’t to give financial advice, only to share my thoughts.

See you in the next article about fundamentals valuation.

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