No Simple Stories

Adam M. Grossman

I’VE OFTEN COMPARED the stock market to a Rorschach test. Depending on your perspective, what’s happening can look very different. But even in a market full of Rorschach tests, one company’s stock stands out: Tesla. Some people see it as a world-class company that’s changing the world. Others see it as a company led by an erratic genius that one day will inevitably fade—like MySpace or Polaroid.

Recently, a blogger named Alex Voigt wrote that Tesla’s head start in electric vehicles “will soon make Toyota look like what it is—a loser.” He then added for emphasis: “Dead man walking.”

Is Voigt right or wrong? As the world’s largest car maker, Toyota today is hardly a dead man walking. But the future is an open question. As an investor, how might you think about this debate? While I don’t get involved in picking individual stocks, there are useful lessons here for investors.

To an outside observer, Toyota might seem hopelessly out of step. While Tesla now produces more than a million electric vehicles (EVs) a year, and is growing at 40% annually, Toyota produces barely any. That seeming reluctance comes from the top. As recently as December, Toyota’s CEO, Akio Toyoda, reiterated his longstanding skepticism of EVs. He said a “silent majority” aren’t ready for fully electric vehicles. That stands in contrast not only to Tesla, but also to many of Toyota’s other competitors, including Volkswagen, Ford and GM, which are aggressively pursuing an electric future.

Is it possible that Toyota is, in fact, so out of step—or is there another way to understand this? Steven Spear is an operations expert at MIT who spent years in Japan and wrote his dissertation on Toyota. In Spear’s view, the debate shouldn’t be framed simply as a competition between Tesla and Toyota, or even as a battle between electric vehicles and conventional or hybrid cars. While in theory all car companies are in competition with one another, the reality is that they have different missions.

“Toyota’s brand,” Spear says, “has been affordable reliability for mid-market customers… for a reasonable price, you get your pick of formats suited to your needs that’ll run forever if you take reasonable care of them.”

That explains why Toyota has appeared lukewarm on EVs so far. “EVs are not yet a mid-market product,” Spear says, “not until charging is more convenient by speed and accessibility.” Instead, EVs “are primarily a premium product” for high-income consumers with the resources and flexibility to manage around an EV’s limitations, including long charge times.

In other words, it’s not that Toyota is behaving like an ostrich with its head in the ground. The company knows what it’s doing, and it’s simply doing something different. For that reason, it’s wrong to view the car market simplistically as a zero-sum game between Toyota and Tesla, or between any two companies or technologies. Toyota doesn’t have to fail for Tesla to succeed.

First lesson for investors: Be careful of simple stories. Things are rarely binary, so it’s important not to go too far out on a limb with any investment viewpoint.

Another lens through which to view this question: the innovator’s dilemma framework. Developed by the late Harvard professor Clayton Christensen, this theory explains why great companies sometimes fail. When innovative companies become overly wedded to the products that drove their initial success, they sometimes stop innovating. When that happens, they become vulnerable to upstart competitors.

BlackBerry offers a recent example. It dominated the smartphone market for a time, but its CEO underestimated the iPhone, confident that users wouldn’t want to type on touch screens. Result? BlackBerry’s market share fell to zero.

On the surface, Toyota might look like it’s making the same mistake. In the late 1990s, Toyota invented hybrid technology and, since then, has sold tens of millions of hybrid cars and trucks. Maybe Toyota is in denial of electric vehicles because it has—and continues to—enjoy so much success with hybrids.

This sounds logical, and Christensen’s theory might support it. But there are two problems with this conclusion. First, as articulated by Steven Spear, it may be that there’s room for more than one technology in the car market. In addition, it may be that Toyota has its own playbook and its own timeline. Of note: A few weeks back, Toyota made the surprise announcement that Akio Toyoda, the EV skeptic, would be retiring. In his place will be Koji Sato, an engineer who currently leads the company’s Lexus division. Not coincidentally, Lexus has developed one of the company’s only EVs.

In making the announcement, Akio Toyoda acknowledged that he may be out of step with his posture toward EVs. He referred to himself as “old fashioned” and said he had reached his “limits” leading the company his family founded.

That said, he seems to be warming to EVs. A video shows Toyoda riding in a prototype Lexus EV with Sato. At the beginning, Toyoda looks a little unhappy and makes some critical comments. But when he hits the accelerator and the car takes off, he lets out a hoot. In that moment, it seems, Toyoda became an EV convert. “I’m seeing a whole new side of this car now,” he says.

Second lesson for investors: The innovator’s dilemma is a real phenomenon, but it’s not an inevitability. Smart leaders like Akio Toyoda can change—and change quickly.

Another reality for investors is that business competition is often more nuanced than it appears. So far, I’ve focused only on the most well-known players. But there’s a much broader universe than Toyota, Tesla and the other names we know. Last week, for example, Berkshire Hathaway’s Charlie Munger described the success of BYD, a Chinese EV maker in which Berkshire’s a shareholder: “BYD is so much ahead of Tesla in China… it’s almost ridiculous.”

Third lesson for investors: Beware of what psychologists refer to as “availability bias.” In drawing investment conclusions, be sure to look beyond the data that’s most readily available. Today, BYD cars might not be on our radar in the U.S., but that could change.

Back in the 1990s, political scientist Francis Fukuyama coined the term “the end of history.” His argument: In the post-Cold War era, the evolution of political systems would reach a sort of end point, with no further evolution beyond that. In the years since, the world has witnessed further evolution, and Fukuyama has backed off from his theory. There’s no such thing as an end point, and that also applies to investing.

Fourth lesson for investors: All investments will ebb and flow. Depending on the time period chosen, one investment or another might be outperforming. But that can all change tomorrow. Whether it’s because of a new CEO or a new technology or a change in corporate culture, companies—and their stocks—often move in ways that are impossible to predict.

The Toyota vs. Tesla debate is a microcosm that illustrates this reality. It helps reinforce why investors’ best bet, in my view, is to sidestep these questions entirely by simply owning both Tesla and Toyota—and all of their competitors—via a diversified portfolio of index funds.

Adam M. Grossman is the founder of Mayport, a fixed-fee wealth management firm. Sign up for Adam’s Daily Ideas email, follow him on Twitter @AdamMGrossman and check out his earlier articles.

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