Elon Musk is an iconic entrepreneur who has initiated countless revolutionary projects and companies, such as SpaceX, SolarCity, and Tesla. Despite his success, why did he recently sell a significant portion of his Tesla shares? To understand this, we must examine the history of the company, relevant facts, and perspectives from experts.
Tesla was founded in 2003 by Martin Eberhard and Marc Tarpenning, where Musk joined as co-founder and chairman of the board. The goal was to develop ‘affordable electric vehicles’ and eventually Tesla would become a publicly-traded company in 2010. When the company encountered financial difficulties, Musk stepped in and provided enough funding such that he became the largest shareholder, owning 28.9% of the company’s stock, according to Business Insider.
Recently, Musk sold almost all of his 1.9 million shares, over one third of his holdings. Some experts have speculated that this is a sign of a pending financial crash, as it is typical for large stockholders to reduce their exposure to risky investments during uncertain economic times. However, this notion is debated since Musk had recently stated in interviews that risk was an essential factor in his decision-making.
John Crandall, an economist at the University of Oregon, believes Musk’s sale of Tesla stock was to diversify his investments and “spread his (rather extensive) risk in a savvy way.” The expected high value of his Tesla stock was already factored into Musk’s net worth, and by selling it now, he noticed an opportunity to make a considerable profit and would be better hedged against a potential crash caused by, for example, the pandemic.
The facts surrounding the sale suggest that a substantial decision-making process had taken place, as no singular factor could provide a sufficient explanation on its own. People have argued that Musk sold the stock to invest in future projects or to boost his philanthropic efforts, but the more plausible inference is that Musk wanted to secure his wealth.
Musk can be seen to be taking the responsible precautionary measure of reducing his exposure to high-risk stocks, while simultaneously recognizing an opportunity to make a big profit by cashing out. In other words, Musk’s decision is a reasonable balance between complete destandardization and sufficient risk.
Musk’s Lower Tax Payments
Another factor which influenced Musk’s decision was the US government’s potential tax hikes. According to Kenneth Davies, an expert in taxation laws at the American Bar Association, such higher taxes might have caused Musk to reduce his Tesla shareholding in order to minimize the payment of personal taxes. It is also possible that Musk sold his shares for tax planning reasons.
It is difficult to ascertain the exact amount of taxes Musk was attempting to avoid, but if he had kept his Tesla position instead of selling it, he would have seen a significant increase in his tax obligations. For example, if he had to pay a 40% tax rate, his out-of-pocket cost would have been $168 million, almost the same amount he received when he sold his shares.
Therefore, while Musk’s decision has been questioned by many, economists argue that any decision which minimizes taxes and secures wealth is prudent. In addition, it is safe to assume that Musk’s decision was based on multiple factors and not a single one.
Musk’s Prior Patterns of Investment
It is important to note that this is not the first time Musk has sold shares in Tesla. According to Goldman Sachs, Musk sold his shares three times – in May, June and August – amounting to a total of $1.7 billion. In fact, Tesla was the only large asset Musk sold any of, likely as it represents a larger part of his wealth than any other assets. It should also be noted that Musk has never sold close to the full amount of his Tesla shares before.
This can be interpreted in multiple ways, but most likely it was due to Musk’s belief that he should not be too exposed to one asset, as well as his desire to diversify his investments. By selling his shares, he was able to mitigate any risks associated with Tesla’s high volatility and, to some extent, his own reputation.
What is certain is that Musk was within his rights to do this and many have even drawn parallels with other wealthy businessmen, such as Warren Buffett, who have also sold shares in the past. By selling the shares, Musk was able to protect his wealth and, moreover, it implies that he has a certain level of confidence in the future of Tesla.
Musk’s Potential Use of Investment Platforms and Strategies
In addition to the sale of Tesla shares, Musk has also adopted more involved strategies to protect and grow his wealth. For instance, recently he has been exploring and investing in platforms such as Open Exchange, a multi-strategy investment platform offering access to a wide array of investing strategies and investments. By using such a platform, Musk is able to access a new range of investment options and strategies, while simultaneously reducing investor fatigue, which can be experienced by holding too much of the same asset.
Furthermore, Musk has been known to use hedging strategies to balance out his risk and exposure. For example, he could hedge his Tesla position by shorting competitors’ stocks, such as General Motors, as if Tesla’s stock price were to fall, he will make a profit from his short position which will partially make up for any losses he has incurred from his Tesla stock.
Other experts have argued that Musk could utilize options instead of straight equity. For example, Musk could purchase an option to purchase Tesla shares at a predetermined price, something known as a call option. By doing this, he was able to exercise the option to buy 26,871 shares and benefit from the price appreciation. This allowed him to take advantage of the market movements without putting up any capital.
Musk’s Investments in Space Exploration and Renewable Energy
Apart from his investment in Tesla and subsequent decisions, Musk has also focused on space exploration and renewable energy with companies such as SpaceX and SolarCity. His ambitions in Mars exploration are well known and it is likely that a portion of Musk’s wealth is being used to fund further projects in this area. Additionally, SolarCity, a company in which Musk is the majority shareholder, is still moving forward with its plans to install solar panels on millions of homes and businesses around the world.
It should also be noted that Musk has been particularly secretive about his other investments and that it is difficult to estimate their value or the extent of his involvement. Despite this, it is safe to assume that Musk will continue to be an investor in various innovative projects.
Conclusion – Elon Musk’s Overarching Vision
In conclusion, Musk’s decision to sell his Tesla shares is understandable in the context of diversifying his investments, minimizing taxes, and reducing risks. Furthermore, he has also made investments in space exploration, renewable energy, and other unspecified areas. While the total amount of his investments is unknown, it is evident that Musk remains invested in projects which fulfil his overarching vision of “accelerating humanity’s future”.
