Why Investors Pour Money into Fiscally Losing Companies like Uber, Lyft, Tesla, and Pinterest

The stock market can be a tumultuous landscape, especially for those looking to make a profit from companies that are currently losing money. Take, for example, Uber, Lyft, Tesla, and Pinterest. Their stock charts are notorious for their undulating like a yo-yo. If you assume you can consistently make money by simply buying and holding their stocks, you might be in for a rude awakening.

Short-term Profits through Trading

However, there are strategies that can turn a profit in these volatile situations. One popular method involves trading options, specifically buying 'puts' when the stock prices are decreasing and 'calls' when they start increasing. A 'put' is a contract that gives the holder the right, but not the obligation, to sell a specified amount of an underlying security at a specified price within a specified time, while a 'call' is the right to buy. This requires a bit of lag to ensure the direction is clear, but can yield significant returns.

For instance, if you bought one share of Tesla stock at $190 on June 1 and sold it on June 13th when the stock appeared to be headed downward, you might have netted around $20 in profit. However, capturing these returns through options can involve much smaller investments compared to direct stock purchases.

Investing for Growth and Innovation

Two primary reasons investors sometimes invest in companies facing fiscal losses are the potential for high returns and support for innovation. These investments are often favored by high-risk, high-reward investors who understand the potential for future profitability. The goal is to capitalize on the company's growth trajectory and eventually exit with substantial gains when the stock price is high.

Companies like Tesla are exemplars of this strategy. Simply reinvesting their profits into growth, rather than prioritizing immediate profitability, allows them to innovate and expand rapidly. As their market stabilizes and they become more efficient, they can turn a profit. This model of reinvestment is common in fast-growing companies like Uber, Lyft, and Pinterest.

One key to investing in these companies is to have a deep understanding of the business model and its potential to eventually become profitable. Analysts and investors must meticulously assess the prospects for future profitability. When the share price is still low due to market uncertainties, a well-timed investment can result in significant returns.

Risk-Averse Investors and Established Companies

Conversely, risk-averse investors tend to prefer investments in more established companies where the share price is stable and dividends are higher. These investors prioritize steady, consistent returns rather than the thrill of high-risk, high-reward ventures. They are often more focused on current rather than potential profits, choosing to hold onto proven, dividend-paying companies that they trust.

In summary, investing in companies that are losing money, such as Uber, Lyft, Tesla, and Pinterest, requires a deep understanding of market dynamics, risk tolerance, and the potential for future profitability. While high-risk investors see these companies as opportunities for large returns through strategic trading and stock picking, more conservative investors opt for more stable, blue-chip companies.