Tesla’s stock rose eightfold in 2020, generating an extraordinary return in a year full of uncertainty. Looking through the lens of financial science, it’s worth asking what implication Tesla’s return has for investors.
Stock prices are set by the trading between buyers and sellers. Fierce competition ensures that new information is reflected the instant buyers and sellers begin trading on it. This process makes stock prices our best prediction of the future.
In the 1960s, two approaches were developed to test the efficacy of such predictions. The first analyses stock price changes to determine whether they reflect all available information. The second tests the performance of professional investors for evidence they can reliably predict future stock prices. The insights from the work of academics Eugene Fama and Michael Jensen have been confirmed numerous times: trying to outguess share prices to beat the market is a losing endeavour.