Politics and Investing: What You Can Learn From the Collapse of SolarCity

Going green is the trendy thing to do these days, and with the many enticing tax benefits of “going green”, sometimes it might even make sense to do so.

This post is not to debate the benefits or drawbacks of green energy. It’s simply to point out the danger of making investment decisions based on your political views and/or personal beliefs. To be clear, this is about investing your money long-term, not trading stocks.

Let’s take SolarCity as an example. Founded in 2006, SolarCity is among the biggest solar companies in the United States. Elon Musk is the current chairman (and also one of the cofounders, according to Wikipedia). Personally, I’m a huge fan of Musk. His brilliance is undeniable. But I wouldn’t invest in a company he started just because I like him or I agree with him on several political issues.

And that is the point of the post: NEVER, EVER, EVER invest a substantial portion of your portfolio based on your political or personal beliefs. To visualize why, let’s first take a look at SolarCity’s stock chart:

SolarCity Stock Chart

According to this chart, you could have bought SolarCity stock at ~$15 dollars per share IF you had bought the shares when the company had its IPO in December 2012. In 2013, the stock was on fire and reached its peak of nearly $85 per share in February 2014.

It would have been easy to get caught up in the hype of SolarCity during this time with Elon Musk being involved, the price of oil rising (making solar a more attractive energy alternative) and the stock price skyrocketing; however, if you understood the fundamentals of the company, it would have been easy to see why investing into SolarCity was extremely risky: they haven’t made a profit in 4 years.

Had you cashed out at the peak in 2014, I recognize that you would have made a ton of money (that would’ve been a trade, not an investment). But what about the people who didn’t cash out at the stock’s peak? Or even worse, what happened if you bought the stock in February 2014 because you really believe in solar?

The answer is simple: you would have been wiped out. Fast forward to 2015 when the price of oil collapsed, and all of the sudden solar became a less attractive alternative energy source. As I write this today, May 15, 2016, the stock currently trades at a meager $19.60 per share, down a whopping 77% from February 2014. If you bought and held this stock, the only possible way you would be profitable is if you bought SolarCity in the first month of trading in December 2012. Had you bought and held at any other point, you would have a losing position right now.

To quantify this loss, let’s assume you had a brokerage or retirement account of $50,000 in February 2014. Had you invested that money into SolarCity, your account balance today would only be worth about $11,500. Had you invested your account into an index fund that simply tracks the S&P 500, your account would be worth over $57,000.

Conclusion

The example above illustrates the dangers of investing based on your political or personal beliefs. Had you purchased SolarCity stock rather than a simple index fund that tracks the market in February 2014, the decision would have caused a $45,000 swing in your account balance. If you are saving $5,000 or $10,000 per year, that decision sets you back many, many years, if not a decade.

If you absolutely must invest in a company that is high risk like SolarCity because you believe in what they are doing, I’d recommend putting a maximum of 5-10% of your total portfolio value into the position.

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