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Elon Musk Isn't Warren Buffett's Biggest Fan

By Anders Bylund – May 9, 2020 at 8:21AM

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The Tesla CEO doesn't want to follow in Buffett's footsteps, though he does admit that bean-counting has its place in the business world.

When Elon Musk speaks, people listen. The CEO of SpaceX and Tesla (TSLA -8.62%), who made his first fortune from running an online bank that later became PayPal (PYPL 1.29%), can move markets in a single tweet or a few seconds of airtime.

Beyond that powerful media profile, Musk also deserves a lot of attention simply because of his interesting and often unique points of view. If Musk says something crazy, well, maybe there's a grain of truth somewhere in that opaque statement. His thought processes did build several billion-dollar businesses and a fantastic personal fortune, after all.

So when Elon Musk made a two-hour appearance on comedian Joe Rogan's popular podcast this week, the video version amassed 5 million views in less than 24 hours -- instantly landing the episode among the 50 most popular clips in a series of nearly 1,500 episodes. Moreover, Musk's last appearance on Rogan's show in September 2018 stands as the most-watched entry in the entire podcast series.

So I tuned in to see what all the excitement was about. Less than 10 minutes later, Elon Musk explained how he views investors versus inventors.

Silhouette of a man sitting on his briefcase, apparently in deep thought.

Image source: Getty Images.

The value of inventors

"If you organize people in a better way to produce products and services that are better than what existed before, and you have some ownership in that company, then that that essentially gives you the right to allocate more capital," Musk said.

So far, so good. That's quite a Foolish point of view, in fact. Like Musk, Fool co-founder and master investor David Gardner appreciates game-changing inventions and their inventors. Great ideas deserve capital infusions that take them from the drawing board to the production line, and then onto store shelves. No argument here.

Inventors and investors

There's a conflation of consumption and capital allocation. Let me take Warren Buffett, for example. To be totally frank I'm not his biggest fan, but he does like capital allocation and he reads a lot of annual reports of companies and other bean-counting and it's pretty boring, really.

He's trying to figure out, does Coke or Pepsi deserve more capital? I mean it's kind of a boring job if you ask me but it's still a thing that's important to figure out. Which company is deserving of more or less capital? Should that company grow or expand? Is it making parts and services that are better than others -- or worse? If a company is making compelling products and services, it should get more capital and if it's not, it should get less.

This bit sounds controversial at first. Warren Buffett is an investing genius of nearly universal acclaim, so it sounds wrong when Musk claims that he isn't much of a fan.

But Musk does seem to appreciate when Buffett does best. It's not necessarily the inventor's job to figure out which product ideas or business plans might deserve large investments and which ones should become a mere footnote in your company's operating history.

In Musk's off-the-cuff example, Coca-Cola (KO 1.12%) and PepsiCo (PEP 1.22%) both sport market caps just south of $200 billion, even though Pepsi's annual revenues are nearly twice as large as Coke's. Coca-Cola makes up for its narrower revenue stream by producing 29% operating margins versus Pepsi's 16%. The two companies have earned market values of similar scale through two very different business models.

Inventors like Musk are running the day-to-day operations in both cases, always looking for new flavors, more effective marketing campaigns, and better ways to produce and distribute the final products. Investors like Buffett evaluate the business prospects of each new idea and allocate funds and assets to the right projects. As it happens, Warren Buffett is an outspoken fan of Coca-Cola, and Berkshire Hathaway (BRK.A 1.68%) (BRK.B 2.17%) owns 9.3% of that company. Buffett and Berkshire have no ownership stakes in Pepsi.

A businessman, facing away from the camera, scratches his head while looking at two arrows on the wall that point in opposite directions.

Image source: Getty Images.

Do you really have to pick a winner?

"There's a big difference between someone who's making an incredible amount of money designing and engineering fantastic products versus someone who's making an incredible amount of money by investing in companies or moving money around the stock market or doing things along those lines," Musk said. "It's a different thing and to put them all in the same category seems very simple."

Here, the Tesla executive was referring to how "billionaire" has become a four-letter word in the modern vernacular, making extremely rich people the targets of public scorn. In Musk's mind, bankers and investors might deserve that pejorative label more than the makers and inventors who built their wealth on something more than Buffett's number-crunching and risk assessments.

It should come as no surprise when Musk, an engineer at heart, sees more value in invention and thing-making ideas than in the mathematics of accounting and investing decisions. Fair enough. That won't stop me from following Warren Buffett's sage investing advice, or from evaluating Tesla in the light of Buffett's classic wealth-building ideas. You really can get the best of both worlds.

Anders Bylund owns shares of Tesla. The Motley Fool owns shares of and recommends Berkshire Hathaway (B shares), PayPal Holdings, and Tesla and recommends the following options: long January 2021 $200 calls on Berkshire Hathaway (B shares), short January 2021 $200 puts on Berkshire Hathaway (B shares), short June 2020 $205 calls on Berkshire Hathaway (B shares), and long January 2022 $75 calls on PayPal Holdings. The Motley Fool has a disclosure policy.

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Stocks Mentioned

Berkshire Hathaway Inc. Stock Quote
Berkshire Hathaway Inc.
$413,300.00 (1.68%) $6,830.00
Berkshire Hathaway Inc. Stock Quote
Berkshire Hathaway Inc.
$272.80 (2.17%) $5.78
Tesla, Inc. Stock Quote
Tesla, Inc.
$242.40 (-8.62%) $-22.85
The Coca-Cola Company Stock Quote
The Coca-Cola Company
$56.65 (1.12%) $0.63
Pepsico, Inc. Stock Quote
Pepsico, Inc.
$165.25 (1.22%) $1.99
PayPal Holdings, Inc. Stock Quote
PayPal Holdings, Inc.
$87.18 (1.29%) $1.11

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