Tesla’s Big Surprise. Don’t Bet Against High-IQ.

Tesla stock (TSLA) surged today (and in the after hours) on an announcement of a mystery product line, as tweeted by CEO Elon Musk:

Due to hype and growth potential from the Nevada battery factory, Tesla stock could go to $250 soon*…don’t bet against high-IQ and rich people, as exemplified by Tesla and the booming web 2.0 scene. Unless you enjoy losing money, don’t bet against the fed, free markets, or the consumer. Those who have bet against high-IQ companies like Facebook, Tesla, Google, and Apple have been taken to the cleaners.

To put this theory to test, I compared the 5-year performance of what I perceive to be highest-IQ sector, the QQQ (Nasdaq 100 technology index in purple), and compared it with the lowest-IQ/most ‘blue collar’ one, the energy sector (XLE in green and red).

The two were almost tied, until the oil crash of 2014:

The energy sector is also more volatile, plunging in 2011 due to fears of a global recession stemming from Europe’s debt crisis. Technology, being that it’s not macro-sensitive, held up very well. Although the left goes on about Exxon’s record profits, profit margins for the tech sector are much higher.

So why has the energy sector fared so poorly? It comes down to IQ. Would you rather bet on the Beverly Hill Billy Oil Company or Microsoft? It’s obvious. The reason is two fold: first, low-IQ people (low IQ relative to tech CEOs and employees) gravitate to the most volatile, profit-thin, macro-sensitive industries such as energy, home building, and commodities because they aren’t smart enough to get into high-tech.

Second, because they aren’t smart they have poor common sense, are spendthrift, and incestuous/nepotistic (hiring on ‘people skills’ and family or college connections – not talent and intellect). But what about petroleum and chemical engineers? Yes, they are smart, but tech companies, especially web 2.0 and internet, tend to be staffed entirely by people as smart as engineers, and these smart people directly influence how the company is run. In the low-IQ sectors, the smartest people have little influence on executive operations.

In the Fall and Winter of 2014, the entire energy sector got annihilated as oil plunged $90 to $45, due to over-expansion and leverage. A lot of these energy companies were profitable provided oil was above some threshold (like $70 or so), and they borrowed heavily to expand operations on the assumption oil prices would remain high. This highlights the problem with the blue collar sectors: volatility from macro factors and incompetence/poor planning due to low-IQ management. For example, the CEO of Chesapeake Energy Corporation, Aubrey McClendon, ran his company into the ground as the stock fell from a high of $70 in 2008 to as low as $15, until his resignation on April 1, 2013:

On April 18, 2012, a Reuters report revealed that McClendon borrowed as much as $1.1 billion against his personal stake in thousands of company wells, raising the potential for conflicts of interest and raised questions on the corporate governance and business ethics of Chesapeake Energy’s senior management.[24] On May 1, 2012, Chesapeake’s board announced that an independent, non-executive chairman would be named and that McClendon would relinquish his position as chairman of the Chesapeake Energy board.[25] On February 20, 2013, Dow Jones reported that a Chesapeake board review of millions of pages of documents and more than 50 interviews of Chesapeake and third-party personnel found no improper conduct, no improper benefit to McClendon and no increased cost to the company.[26]

On June 7, 2012, Reuters reported that McClendon had used Chesapeake employees to perform $3 million of personal work, including engineering and accounting support and the repair of his house, in 2010.[27] McClendon’s employment contract expressly permitted such personal services by company employees and provided the formula for reimbursement of associated salary and other company costs.[28] According to Chesapeake‚Äôs proxy statement filed with the SEC on May 11, 2012, McClendon reimbursed the company for all but $250,000 of the employee costs.[19] The Reuters account also stated that McClendon had used corporate planes for non-business-related travel for the McClendons’ family and friends.[27] “For safety, security and efficiency” reasons, McClendon’s employment agreement authorized the personal use of company aircraft by McClendon, his immediate family members and guests.[29]

But you see this divergence of performance not just between low-IQ v.s. high-IQ sectors, but between entire countries. Compared to other nations that are struggling with slow growth, corruption and inflation, one reason why America has done well is because we do have a meritocracy that rewards the best and the brightest, and most policy makers – especially the fed and Republicans – are reasonably competent. There is room for improvement though, in that it wouldn’t hurt to have more high-IQ people in government.

* Disclaimer: I do not own Tesla, and this is not an endorsement to buy Tesla.