It's been a wild year for the stock market, with the coronavirus pandemic punishing investors, then seemingly rewarding them. In less than a five-week span, the broad-based S&P 500 shed 34% of its value. Then, during the second quarter, the benchmark index recouped most of what it had lost, with the technology-heavy Nasdaq Composite galloping to one record high closing after another.
Mind you, all of this has occurred with the U.S. leading the world in COVID-19 infections, and an unemployment rate of 11.1%, a level not seen consistently since the 1930s. It's been a head-scratcher of a year that just seems to get weirder by the day.
Tesla CEO Elon Musk speaking at the groundbreaking of the Gigafactory in China. Image source: Tesla.
Elon Musk zooms past Warren Buffett in net worth
For instance, we witnessed something this past Friday, July 10, that would have seemed laughable just six months earlier. I'm referring to Tesla (TSLA +0.07%) CEO Elon Musk surpassing legendary investor Warren Buffett, the CEO of Berkshire Hathaway (BRK.A 0.70%)(BRK.B 0.73%), in net worth. For context, Buffett began 2020 with a net worth that was over $60 billion higher than Musk's.
Heading into this past weekend, Buffett's net worth stood at a cool $69.2 billion, which isn't at all too shabby for a guy who had $10,000 in seed capital in the 1950s.
Meanwhile, Musk's net worth chimed in at $70.5 billion. Musk owns approximately 20.8% of Tesla's outstanding shares, and has one of the most generous pay packages on the planet for a CEO, assuming he can guide Tesla to certain market value and operating goals. This pay package, approved in 2018 by shareholders, allows Musk to receive 12 equal blocks of 1.7 million stock options, all dependent on certain goals being attained.
The first goal was for Tesla to maintain a six-month average market cap in excess of $100 billion. Tesla achieved this goal in late May, which resulted in Musk receiving $775 million worth of options. Today, the value of these options has risen by more than 150%, and Musk looks to be on the cusp of achieving another payment milestone. Assuming Tesla can average a $150 billion market cap over six months, Musk stands to receive another options payout that'll further inflate his net worth.
Berkshire Hathaway CEO Warren Buffett at his company's annual shareholder meeting. Image source: The Motley Fool.
There's more to this story than meets the eye
Some folks might view this as a proverbial passing of the torch. But Musk's massive gains and Buffett's pretty dismal performance in 2020 (with a $20 billion reduction in net worth since Dec. 31, 2019) don't tell the full story.
For example, Warren Buffett's net worth would be markedly higher had he not so generously donated shares of his holdings in Berkshire Hathaway to various charities (like the Bill and Melinda Gates Foundation) over the past 14 years. Including a recent charitable donation of $2.9 billion to five charities, Buffett has now given away more than $37 billion in Berkshire Hathaway stock since 2006. Had the Oracle of Omaha simply cashed out these holdings and not donated them, he'd be the third-richest person in the world today, with a net worth of more than $106 billion.
Yes, Musk has a higher net worth, but that's only because Buffett has pledged to donate a significant portion of his fortune to various charities before and after his passing.
Another key difference between Musk and Buffett is the transparency of their net worth. In the case of Buffett, everything is public. This is to say that his net worth is correlated to the performance of Berkshire Hathaway's stock, and therefore the performance of Berkshire Hathaway's investment portfolio and roughly five dozen owned businesses.
This isn't entirely the case with Elon Musk. While a significant portion of his net worth is tied to the underlying performance of Tesla's stock, and therefore its operating performance, approximately $15 billion of his net worth is derived from privately held SpaceX. Valuations for privately held companies tend to be all over the board, especially when discussing a space transportation business that has no precedent. In other words, where net worth can be concretely defined in Buffett's case, there's some room for interpretation when it comes to assessing Elon Musk's net worth.
Image source: Getty Images.
Additionally, there's a big difference between Buffett and Musk when we're talking about business maturity. Warren Buffett has been building up Berkshire Hathaway for well over five decades, and has delivered an average annual gain of 20.3% for Berkshire's stock since 1965. Buffett's roughly five dozen owned businesses from all walks of sectors and industries deliver relatively predictable cash flow year in and year out.
That's not the case with Tesla and SpaceX. These are young businesses that are entirely built on innovation and disruption. Tesla has yet to produce a full-year profit based on generally accepted accounting principles (GAAP), while SpaceX is privately held, and therefore not required to disclose its income statements.
To build on this point, every next-big-thing investment over the past quarter of a century has needed time to mature. Though space transportation and electric vehicles (EVs) look to be the future, they aren't going to become the future overnight. The probability of the bubble bursting on EV manufacturers like Tesla has increased dramatically in recent weeks.
Musk may hold the nominal edge in net worth for the time being, but the maturity and transparency of Buffett's company, along with his charitable giving, make Buffett the clearly wealthier individual, in my view.
