• Christian Armbruester

Risk, Revisited


Why shares in Tesla may be less risky than buying bonds or property.

What investments carry more risk: shares in Tesla, a 30yr Treasury bond, or London property? If we were to look at the classic definition of risk by asset classes, then the bonds would clearly be considered the safest of them all. If we look at volatility, then that tiny flat in Chelsea would certainly be considered risk free, as the price seemingly never goes down. And by both measures, shares in Tesla are clearly the riskiest investment we can make. The problem with risk is that things can change, and it stands to reason that we must also adjust our expectations accordingly.

A little over 10 years ago, the yield in long duration US Treasuries was higher than 5%, whereas now we are approaching zero faster than we would like to admit. Clearly, the risks and rewards have changed and if we adjust our returns for inflation, holding government debt in most countries offers negative returns these days. Worse, if interest rates were ever going to rise, we could be looking at huge losses if we tried to sell out of our positions before maturity.

What about London property? There is Brexit, the chance of a prolonged economic down-turn, and thanks to COVID-19, there are also people fleeing the city centres to the suburbs. The dynamics of demand and supply have changed dramatically as of this year. Lest we forget that property is also an illiquid asset class. In other words, there may not be any buyers for our 500 square foot, lower ground, studio we want to swap for a country mansion with twenty acres of land somewhere outside the M25.

Which brings us to Tesla, and nobody can deny that electric cars can travel faster from zero to sixty than vehicles powered by a combustion engine. There is clearly a reason why the stock has risen some 400% this year, although I am still trying to figure out why a company that has only ever lost money is now worth more than the entire global automobile sector. Be that as it may, at least there is hope and you tell me which of our three different investments will be worth more in twenty years’ time. Have I mentioned that space travel is the future of mankind?

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