Could buying Tesla shares be a smart way to start investing?

Buying Tesla shares five years ago would have turned out very well. If our writer wanted to start investing now, should he make that same move?

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Looking at the share price performance of Tesla (NASDAQ: TSLA) over the past few years, I realise I missed an opportunity! In the past five years alone, Tesla shares have soared by 1,340%.

That means that, if I had put £1,000 into the shares five years ago, I would now be sitting on a Tesla holding worth over £14,000. That presumes that I had not sold out when the shares hit a high in November 2021, in which case I would be sitting on over £23,000.

But what if I wanted to start investing for the first time today? Could buying Tesla shares now be a smart way to go about it?

I think the answer could be either yes or no. The reason why throws up some important lessons for new investors, as well as more seasoned ones!

The future is not the past

No matter how often we hear that past performance is not necessarily a guide to what will happen in future, it can sometimes feel hard to take it in. After all, some businesses – like some cricket or football teams – continue to do well year after year.

But it really is the case that Tesla’s incredible recent streak ought not to set expectations for what comes next.

After all, think about how many new entrants and established automakers have ramped up their electric vehicle sales in recent years.

It is no coincidence that Tesla has been cutting prices on some models, threatening to hurt its profit margins. Indeed, the company’s most recent quarterly earnings report showed that its operating margin was lower than in the previous quarter.

One share does not a portfolio make

Even if I did feel upbeat about the outlook for the carmaker, if I was to start investing just by buying Tesla shares I would be making a classic beginner’s mistake.

No matter how great a business may seem, it can suddenly perform badly. That might not even be due to its own making. For example, if soaring lithium prices made electric vehicles uneconomic or a recession hurt demand for new cars, Tesla could fare badly.

That is why smart investors all diversify across a range of shares.

If one starts investing with limited funds, it can be tempting just to invest in what seems like the best share available (even Warren Buffett did this with his first stock market foray, although he was only a schoolboy then).

But if I could start investing only by buying into one company, Tesla shares would not be on my shopping list. I would invest in an index fund that offered me indirect exposure to a diversified range of holdings.

Great businesses at attractive prices

That does not mean that buying Tesla shares might not still be a great way to start investing. After all, it has a strong brand, large customer base, and unique technology. But a couple of caveats apply.

First, I would start investing as I meant to go on: by diversifying.

Secondly, whether thinking about buying Tesla shares or any other ones, my focus would not be on the past share price performance.

Instead, I would consider how attractive the current valuation looked compared to what I saw as the company’s long-term business prospects.

Only if Tesla shares looked attractive to me on that basis would I consider adding them to my portfolio.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

C Ruane has no position in any of the shares mentioned. The Motley Fool UK has recommended Tesla. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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