Promise and Peril: Railroads, Tech Stocks, and Otherworldly Executive Compensation
This is not an investment newsletter. I have neither the expertise nor the inclination to pose as an investment adviser. Like many people, I have no objection to money – I prefer having it to not having it – but I also prefer to spend the remainder of my days living life to the fullest rather than concerning myself with the agonies and ecstasies of daily market gyrations.
Experience, that sadistic taskmaster, has taught me that the value of investments can go down as well as up. During the dotcom bubble at the end of the 90s, my personal wealth rose on a portfolio of technology stocks. (This was while I worked in the technology industry on the vendor side, not when I was a market analyst.)
I was doing so well with those investments that I came to believe that the stock market represented easy pickings, a store of plenty that I could plunder at my leisure. My investment stakes were not all that large, but they had one commonality: they all grew in value. I envisioned early retirement, a life of leisure in a tropical paradise where the sun never sets.
Some of my fellow lucky looters convinced themselves that technology companies, as investment vehicles, were somehow impervious to conventional market cycles and market fundamentals. You could somehow ride a stock to limitless riches without having to worry about how the company would make a profit. Who needs to play by the old rules of rigorous business plans and near-term profitability when you all need is vague promises of future riches and massive dollops of frothy hype?
As it turned out, technology companies were not immune to traditional market forces. The boom, as you might recall, was followed by a resoundingly nasty bust, as the 20th century gave way to the 21st. Some of my technology holdings, including companies I’m embarrassed to mention here, went to zero in value. They became defunct companies, or they were sold in distress for pennies on the dollar.
Reality had mugged me, in an assault as ferocious as the attack I suffered as a five-year-old child, when another boy of my age chose to test the hardness of my skull with a wooden mallet. (Over the years, friends and family, when considering my early misfortune, have said it explains a lot.)
How I Learned to Appreciate Railroads
What did I learn from the dotcom bust? First and foremost, I learned that you really could lose money on the stock market. During the boom, I thought losing money on stocks was a fate reserved for old fogies who shunned technology investments because they didn’t understand what technology companies did, or because they couldn’t fathom how technology companies would magically navigate a path to profitability and sustained cash flow. Although I didn’t immediately transform into a fusty old fogie – not then, anyway – I also learned that investing in publicly listed technology companies could be hazardous to your wealth, if not necessarily to your health.
When I found the resilience to return to the market, you might be surprised to learn where I chose to make my modest investments. Rather than putting my money in computer or network hardware, or software, or silicon, or anything related to information technology, I allocated a small measure of investment capital to railroads, a technological marvel associated with the 19th century. I did so because railroads met certain criteria: robust returns, including attractive dividends, and a high degree of risk mitigation. I wanted to ride on relatively stress-free investment vehicles, where I could place my money and forget about it for the next twenty years. That’s what I did, and it worked out mostly as I’d hoped, as illustrated by a recent article in the Globe and Mail. Here’s a quote that reflects the approximate reasoning I followed in choosing railroads as investment vehicles:
“There are no realistic, long-term, cost-competitive alternatives to shipping goods and commodities by rail, and there are no new railway networks being built,” the CIBC report says.
It’s the mother of all barriers to entry.
As it so happened, I was looking for an asset category that could not be meaningfully disrupted and displaced. Disruption might be exciting for the disruptors, but it’s no joyride for the disrupted. I found a sedate play with railroads, and the return on investment has been satisfactory, as exemplified by this excerpt from the aforementioned article:
For the past three decades, the TSX has consistently been dominated by a business that revolves around just two companies moving stuff on a pair of parallel steel rails.
The Canadian railway duopoly, consisting of Canadian National Railway Co. and Canadian Pacific Kansas City Ltd., sports a mighty average annual return of 15.5 per cent, which is best in class by a decent margin, according to a CIBC World Markets report released last month.
An investment of $1,000 parked in those two stocks would have turned into more than $75,000 over that 30-year period. The same investment in the big banks, the next best performer, would have netted just $37,000 over the same time.
Victims of Fashion
I don’t have nearly enough money to buy a private plane or a yacht, but I was able to retire on my own timeline and my own terms. Retirement has allowed me to do what I’m doing now. I have made some recent technology investments, too, but having been incinerated in the pyre of the dotcom bubble, I monitor those investments more closely than others in my understated portfolio. Paraphrasing the modern aphorist George W. Bush: Once burned, well, don’t get burned again.
There are so many things that can go wrong with technology investments. I’m not saying you (or I) should never invest in technology stocks – sometimes the value proposition is too compelling to resist– but it’s critical to understand exactly what you’re getting into. Don’t let the prospective rewards, shiny and bright, blind you to the risks.
The technology industry is a little like the fashion industry: what was hot just a short time ago can become obsolete and greatly devalued in what seems like a flash. Today’s tech darling is tomorrow’s has-been. Market domination can be shockingly ephemeral, compounded by the fact that the success of many technology companies turns on their ability to attract and retain the industry’s best and brightest brainpower. If star architects, engineers, and executives decamp, taking their talents elsewhere, their former employer suffers the consequences.
Another challenge, when investing in technology companies, involves valuation. Once an expectation of success haunts a particular technology stock, a stampede of institutional and personal investors boosts the value of the shares like Taylor Swift devotees buying dynamically priced concert tickets. The result is that you could own shares in an outstanding technology company, but if you don’t time your entry wisely, the stock’s future (higher) value could already be baked into the share price. At that point, there is considerable risk that your future gains will be more modest than you might have assumed. This is the downside of investing in a “sexy” sector, where the assets are popular and widely perceived as glamorous, exciting, and lucrative.
Nonetheless, I know you can make big money on technology stocks. I can see the charts and I’ve read the articles that attest to the money investors have made by taking a flutter on the Super Seven tech stocks. All the same, I submit that there might less stressful ways of making your money work for you.
Tesla and the Gamesmanship of Elon Musk
Speaking of stress, let’s turn our attention to Tesla, currently under the excitable helmsmanship of Elon Musk, a celebrity on par with Taylor Swift. Elon Musk is uncommonly rich, a flamboyant CEO, and – it has to be said – a complicated man.
I’m not sure whether Elon Musk is a great CEO, but he is unparalleled as a self-promoter. I question his abilities as a CEO, as a managerial technocrat, because he seems to spend an inordinate amount of his time on X (yes, formerly Twitter), which he also owns and still seems to have a hand in running. He also runs SpaceX, and is a founder of neuroscience company Neuralink and the tunneling firm Boring Co. He's busy in many places. As his press clippings and fame attest, he has the rapt attention of the business media and occasionally the paparazzi.
Musk was in the news again yesterday, receiving extensive coverage from all the major organs of the business press, including the Wall Street Journal, Bloomberg, Reuters, and the Financial Times, to name but a few. The occasion: A Delaware judge had struck down Elon Musk’s garishly opulent pay package – valued at nearly $56 billion(!) – after determining that the process used for securing its approval was “deeply flawed.”
From the Wall Street Journal:
The decision, issued Tuesday in the Delaware Court of Chancery, calls into question how Tesla’s board plans to compensate Musk, a serial entrepreneur with an array of other business interests.
It also raises questions about whether his ties to his board are too close and puts greater attention on Musk’s personal wealth. Musk doesn’t accept a salary from Tesla, and while in recent years he has ranked as the world’s richest person, most of his assets are tied up in shares of his companies.
Tesla, as a publicly traded company, is a financial pillar for his business empire. Musk has also borrowed against his stake in the electric-car maker.
In the weeks before opinion landed, Musk had begun pushing for greater control over Tesla, where he is the largest shareholder with 13% ownership.
He said he felt uncomfortable transforming Tesla into a leader in artificial intelligence and robotics without controlling around 25% of the company. At the time, Musk said the Tesla board was waiting for a decision in the Delaware case before revisiting his compensation.
Perhaps the best quote in the article, however, is this one, which gets to heart of the matter:
"The board never asked the $55.8 billion question: Was the plan even necessary for Tesla to retain Musk and achieve its goals?” the judge wrote.
It’s a great question, and I will now grapple with it.
GDP-Level Compensation
Perhaps I’m just out of touch and behind the times, having retired recently from gainful employment, but a sum of approximately $56 billion – give or take a measly few hundred million either way – seems excessive remuneration for anybody, even Elon Musk.
Look, there’s no doubting Musk’s status as a self-promoter – his otherworldly knack for self-aggrandizement is on a scale that would make Donald Trump weep with envy – but we’re talking about $56 billion (that’s with a ”b,” folks, not an “m”), which is more than the 2022 GDP of Sudan and slightly under the 2022 GDPs of the Democratic Republic of Congo and Myanmar.
Musk might think his pay packet should exceed the GDPs of all those countries and perhaps also of Luxembourg (about $82 billion), but that doesn’t mean it’s a good idea for anybody else. He can attempt to justify his outlandish demands with clever subterfuge and sophistry, which is what you’d expect of a relentless self-promoter, but it’s still a brazen gambit that makes one question his sense of economic, ethical, and social proportion. Such a demand lands in an ungainly region where audacity sits uneasily alongside the edgy principalities of megalomania and narcissism. Avarice is also in the general vicinity.
Conversely, I don’t know anything on a personal level about the people who ran the railroads in which I invested. I don't think they're prolific on social media, but I could be wrong. Nonetheless, I’m sure the executive leadership of those companies was sufficiently competent throughout the period in question, as the consistent financial results strongly suggest. If, to qualify as worthy investments, those businesses required egregiously remunerated CEOs (on national GDP scales), I would not have backed them.
A company shouldn’t need a $56-billion man or woman ensconced in its mahogany row as a contingency for success. If it does, the risks – of his sudden departure, of his self-destructive behavior, of his capricious nature, of his wavering commitment –would be too great. An organization’s ongoing success should never be predicated on the presence and contributions of one person. A large company is not a Marvel superhero movie, though it has been firmly established that Marvel superhero movies can sustain a large entertainment company.
Fortunately for Tesla, the company does not depend exclusively on Elon Musk for its success. It’s conceivable that Tesla could succeed without Musk, especially if Musk continues operating like a fulltime troll on Twitter (sorry, X) while demanding remuneration of a magnitude fit for a modern-day Croesus. (To be fair to Croesus, if he were somehow reanimated by Larry Ellison and set loose in Silicon Valley, he might be content to make ends meet on a few billion.)
Not everybody would agree with me, though – about Musk, that is, not about Croesus. Here’s a quote for your delectation, excerpted from a Business Insider article:
Joshua Tyler White, a former financial economist for the SEC and an assistant professor of finance at Vanderbilt, also said Tesla will likely appeal, but that a new pay package will be front of mind for the company.
"They need to come up with a new package and soon because they're going to lose Musk's interest in the company," he told BI. "They've already seen his interest turn to other ventures, and they can't risk losing any more of his focus, especially when Tesla is at a crossroads in terms of competition with China."
Where do I begin to deconstruct this madness? As should be apparent, the argument undermines itself. Musk’s interest is already lost, diffused across multiple companies, projects, and ventures. His focus is attenuated, and it is likely to be diminished further, irrespective of how much money the Tesla board throws at him. He plays his own games, according to his own rules. His muse could take him anywhere, or everywhere, sequentially or all at once.
Yes, Tesla is at a crossroads in EV competition against Chinese companies, but that happened on Musk’s watch. He was unable to preclude or mitigate the competitive threat from China. Regardless of how much you pay him, Musk, like everybody else, has his limitations, though he seems less cognizant of them by the day. In this regard, perhaps he should disregard inspiration from the one-dimensional icons of Marvel’s cinematic universe and pay more heed to the timeless admonition of Clint Eastwood’s Dirty Harry: “A man’s got to know his limitations.”
Asset or Growing Liability?
Still, I grudgingly admire Musk’s unequaled talent as a self-promoter. He has convinced some people – and not only his obsequious board of directors – that he is indispensable, at any price, to Tesla’s success. The truth, of course, is that nobody is indispensable. There’s a point at which anybody can be replaced, particularly when said individual is pounding the table for compensation of $56 billion. Deep down, Musk might know this to be true, but he could never admit it. The efficacy of his performative act, measured by the attention and adulation he receives from others, depends on the audience's unqualified belief in his powers.
Tesla, like the other lavishly hyped Magnificent Seven (or Super Seven) tech stocks, must meet exalted standards. The company’s valuation is already high, replete with a gaudy P/E ratio. Any misstep or wrong move is subject to the market’s remorseless punishment. When expectations are lofty, driven higher by successive waves of hype, you have no choice but to satisfy them, quarter after quarter.
This past week, Alphabet and Microsoft delivered impressive quarterly results and encouraging guidance, yet both stocks declined the following day because investors had higher hopes and bigger expectations. Nonetheless, the likely trajectories of both those companies, which dominate lucrative market segments and are well placed to harvest gains from AI in the cloud, remain promising. Their foundational strengths should enable them to keep pace with rising expectations, and each of those companies has a CEO more focused on business fundamentals than on burnishing a personal brand on social media.
I’m not as sure about Tesla, and I’m also not sure Tesla’s immediate priority should be paying Elon Musk a ransom of $56 billion, ostensibly to secure its future.
In the real-world marketplace where people buy and lease automobiles, Elon Musk has become nearly as much liability as asset. A Bloomberg survey this past summer indicated that “disapproval of Elon Musk” ranked as the top reason that Tesla Model 3 owners defected from the brand. While subsequent surveys on Musk as brand albatross were more ambiguous, does a company really need or want a CEO whose domineering presence dissuades a significant percentage of customers and prospective buyers from purchasing its products? It's not supposed to work that way.
Musk’s seemingly endless sequence of controversies on Twitter (X) are alienating a significant cohort of EV buyers. How do unpredictable bouts of obnoxiousness and increasing customer estrangement justify remuneration of $56 billion? How did we get here?
I can’t comprehend the twisted logic, but I know we live in interesting, increasingly absurd times. Be careful out there, especially when you’re making investments in tech companies.