Buffett Skips Tesla, Seeks Value Buys Over 1.97% Rise

Key Takeaway

• Elon Musk suggests Berkshire Hathaway should buy Tesla stock, despite its 1.97% rise contrasting with Berkshire's more modest gains.
• Warren Buffett's investment criteria, favoring low price-to-book ratios and high dividends, don't align with Tesla's financials.
• Berkshire seeks "big opportunities" fitting their selective strategy, making a Tesla investment unlikely given its current metrics.

Musk Suggests Berkshire Buy Tesla

Over the recent weekend, Tesla's CEO Elon Musk made a notable suggestion on X, the social media platform he owns, proposing that Warren Buffett's Berkshire Hathaway should consider purchasing Tesla stock. Musk described the move as "an obvious move," sparking discussions among investors and market observers. This suggestion comes amidst Tesla's shares (TSLA) experiencing a 1.97% increase, contrasting with Berkshire Hathaway's shares (BRK.A and BRK.B) which saw a rise of 0.96% and 1.01% respectively.

Buffett's Investment Criteria

Warren Buffett, known for his selective investment strategy, has historically favored stocks with specific characteristics, which are largely different from those of Tesla's. A study titled “Buffett’s Alpha,” published six years ago in the Financial Analysts Journal by AQR Capital Management researchers, sheds light on Buffett's investment success. The study identifies that Buffett's preferred stocks typically have low price-to-book ratios and betas, alongside high dividend-payout ratios and profit growth rates. Tesla, however, aligns with only one of these criteria, showcasing impressive profit growth over the past five years but failing to meet the other standards. Tesla's price-to-book ratio is higher than 88% of S&P 1500 stocks, its beta surpasses 94% of these stocks, and it does not offer dividends.

Berkshire's Investment Strategy

During Berkshire Hathaway's recent annual meeting, Buffett mentioned looking for "occasional big opportunities" to utilize the company's nearly $200 billion cash reserve effectively. He emphasized the importance of selecting investments that meet their criteria, stating, "We only swing at pitches we like." This approach underlines the cautious and calculated investment strategy Buffett has adhered to over the years. The performance of investment funds that closely follow the criteria identified in the “Buffett’s Alpha” study, such as the AQR Large Cap Defensive Style Fund and the iShares Edge MSCI USA Quality Factor ETF, further validate the effectiveness of Buffett's investment philosophy. These funds have shown returns closely matching Berkshire Hathaway's, reinforcing the selectiveness of Buffett's investment choices.

Management Quotes

• Elon Musk, CEO of Tesla:

  "It’s an obvious move."