NEW YORK (TheStreet) -- The number of comments I received from How Much Longer Can Short-Sellers Stand Tesla? describing the perils of betting against Elon Musk and Tesla (TSLA) was surprising. I know for every comment on any given article there are hundreds of investors who don't comment.
Increasingly, I found a serious disconnect between the criteria many investors use to allocate capital and how the markets actually work.
There is a difference between a stock and the underlying company. The price of a stock and the value of a company are correlated, to be sure, but it's a much looser correlation than most understand.
Tesla opened for trading on Tuesday at $230 and closed at $248. Did Tesla the company rise in value $2.2 billion in under seven hours? Of course not. The underlying assets including cash, plant equipment and so forth didn't change in value.
Same can be said on Wednesday. Tesla's market cap fell over $600 million, but the company was the same at the end as it was of the beginning of the day. At the time of writing the shares are lower, but the same amount of cars and profitability is expected today as was yesterday.
To explain why a company's stock can change dramatically while the company itself isn't changing, we need to examine the mechanics of an auction based market. For any given stock at any given time, investor emotions at the individual and group level drive the price, not the underlying fundamentals of a company.
Case in point, OCZ Technology Group -- now OCZ Storage Solutions and part of Toshiba -- announced it intended to declare bankruptcy in December. I wrote about it here and here. Despite the fact the company was worth zero, the shares continued to trade for as high as an $18 million market cap. Why in the world would someone pay 27 cents a share for a company with no (or nominal) value, and no prospects?