Should You Buy a Tesla or Some Shares of TSLA?

The Tesla Model S, Motor Trend Car of the Year is introduced at the 2013 North American International Auto Show in Detroit, Michigan, January 15, 2013.

Photo by STAN HONDA/AFP/Getty Images

A colleague forwarded on to me a reader query: If you’re intrigued by the highly positive reviews of the Tesla Model S, does it make more sense to buy a Tesla or to buy stock in Tesla?

The first general principle that’s relevant to this is that you should probably be saving more money. Me? Really? Well, I don’t know you and I don’t know your finances. But most Americans do not save enough. Many Americans perceive their income to be inadequate to their current consumption needs, but if you are contemplating buying a luxury car that is an excellent sign that your income is in fact perfectly adequate to your consumption needs. Planet 401(k) sucks and I disapprove of it as a matter of public policy, but you owe it to yourself to try to make the best of it, and that means saving probably more than you are now. How much should you save? It’s hard to say definitively. This calculator might be helpful. Another thing to think about in particular is “are you maxing out your tax-subsidized accounts?” Again, doing retirement security through tax subsidies is bad public policy. But it’s the public policy we have, so you should work with it.

All that said, if your reason for not buying a Tesla is that you realize you need to save more then you should probably save in the form of a low-fee index fund, not a speculative stock.

But let’s say you’re comfortable and you’ve got adequate retirement savings. This is really just a question of tens of thousands of dollars burning a hole in your pocket. You are excited about Tesla, excited about the Model S, excited about electric cars, and excited about Elon Musk. You’re a believer and you want to show that you’re a believer. Even if that’s the case, the argument for shares over cars is pretty strong. People talk about the high price of Tesla’s cars, but while obviously to be a huge mass market hit they need to make them cheaper, even if they can’t ever do this there’s no reason you can’t be a successful company selling high-end luxury cars. The real problem is scale and infrastructure. People sometimes express this as a problem of “range,” but that’s not right. A car that can go 200 miles before refueling is a fine car. The problem is that electric cars are hard to refuel. But if lots of people owned electric cars, then parking lots all across America would feature charging outlets and highways would be dotted with superchargers. After all, if you were the only person in North America to own a gasoline powered car you would be the one with the range problem. It’s the gas stations, not the internal combustion engine, that make gasoline-fueled vehicles convenient.

All of which is to say that buying a Tesla really only makes sense if you think other people are going to buy one and electric vehicle infrastructure will keep improving. If you need a new dining room table and you see one you love for good price, then you should buy it. The value of the table does not depend on the larger success of the table manufacturer. But the value of a Tesla car sort of does depend on the success of Tesla as a firm. And if you think the firm will succeed, then when you want to buy the stock.

Now note of course that if everyone who loves the Model S follows this advice, the Model S will fail and everyone will lose their money. “Don’t be an early-adopter, even of technology platforms you believe in” is not a generalizable maxim. And that, if anything, shows that moralizing about the virtues of prudent savers versus profligate spenders is much too simplistic. To have progress and innovation, firms don’t just need access to capital, they need access to enthusiastic consumers who are willing to take risks. When the iPad was first released, it was obvious that saving your money and waiting a year for the improved version was the right strategy. But had everyone refused to buy the original iPad there would have been no iPad 2 and, in fact, no tablet market at all. So even though it’s probably financially irrational to rush out and buy a high-end electric car, if you do it you can award yourself a Hero of Innovation Prize with a special commendation in the field of network effects.