Warren Buffett has been suggested to buy Tesla stock by Elon Musk, CEO of Tesla, over the weekend. Musk made this suggestion on X, the social media platform he owns, calling it an “obvious move.”
However, it’s highly unlikely that Warren Buffett would agree to this suggestion. Tesla’s stock has characteristics that differ significantly from the types of stocks Buffett traditionally invests in. While it’s not impossible for Buffett’s Berkshire Hathaway to purchase Tesla stock, it would be uncharacteristic of Buffett to do so.
We understand Warren Buffett’s investment preferences thanks to a study published in the Financial Analysts Journal six years ago, titled “Buffett’s Alpha.” Conducted by researchers at AQR Capital Management, the study uncovered the key factors behind Buffett’s long-term success. Prior to this study, many believed Buffett’s success was solely due to his unique insights and couldn’t be replicated.
The study revealed that Warren Buffett’s successful investments typically met specific criteria: they had low price-to-book ratios and betas, along with high dividend-payout ratios and profit growth rates.
Tesla meets only one of these criteria—it has shown impressive profit growth over the past five years. However, it falls short in other areas: its price-to-book ratio is among the highest in the market, its beta is higher than most stocks, and it doesn’t pay dividends.
Given these factors, it’s highly unlikely that Tesla stock fits the “occasional big opportunity” Warren Buffett mentioned at Berkshire Hathaway’s annual meeting over the weekend. Warren Buffett stated that they only invest in opportunities they like, implying that Tesla doesn’t meet their investment criteria.
Supporting this conclusion is the performance of investment criteria similar to those identified in the researchers’ study. Two funds, the AQR Large Cap Defensive Style Fund AUEIX and the iShares Edge MSCI USA Quality Factor ETF, closely mirror Berkshire’s returns by implementing similar criteria.
Since the study was published in November 2013, Berkshire Hathaway stock has generated an annualized return of 12.5%, compared to 12.3% for the iShares ETF and 11.3% for the AQR fund.
