4 Lessons You Can Learn From Elon Musk's Twitter Fiasco

We wait with bated breath to learn if Musk can turn Twitter around.

One of the biggest stories of 2022 was Elon Musk's purchase of Twitter for $44 billion. The lessons we learn may have to do with the way Musk purchased the social media company. They may also have to do with the number of people who put their own money into the venture. Regardless of whose actions we're looking at, here are four investment lessons we are left with.

1. Study the leader

Before investing in any company, it's important to look at the leadership team. Is there someone at the helm with a strong track record, and is that person surrounded by equally competent people?

One of the messiest parts of the Twitter purchase was how hard Musk tried to get out of the deal. After signing the deal in April, Musk spent months looking for a legal loophole that would allow him to back out.

Musk only went through with the $44 billion purchase after Twitter sued and a judge gave Musk a Friday deadline to complete the deal.

Now, if Musk was any other leader, you might wonder if he has what it takes to run a company. However, after 20 years in business, Musk's space transportation service SpaceX is doing well. And finally, after 17 years without turning a profit, Musk's automaker Tesla became profitable in 2020.

Imagine we're not talking about Elon Musk, though. What if you were considering investing in a company whose current CEO once ran Compaq, a computer company that failed to innovate and ultimately failed? You would want to look closely at that leader's overall track record.

The point is this: The CEO is the captain of the financial ship. If they don't have a clear idea of where they're going or how to get there, you're taking a risk by investing.

2. Consider the company's history

It's difficult to see why Musk wanted to purchase Twitter in the first place. After all, Twitter has been around since 2006. In all that time, it's only been profitable for two years, 2018 and 2019. In 2020, Twitter lost more than $1 billion, and in 2021 lost another $222 million.

Once you hitch your wagon to a specific company, its highs are your highs, and its lows are your lows. Imagine that you bought Twitter stock in 2018. You'd be feeling pretty good about your purchase. However, two years later, you'd wonder what you'd gotten yourself into.

No one can predict whether a company is going to become more or less profitable, however, looking through the entirety of a company's earning history offers a better sense of the risk you're taking.

3. Determine your risk tolerance

When Musk went to banks like Morgan Stanley and Bank of America, they signed on to loan him $12.5 billion toward the Twitter purchase. Billionaire investors like Oracle co-founder Larry Ellison and Saudi Prince Alwaleed bin Talal pitched in too. In fact, the Saudi Prince and his Kingdom Holding Company are the company's largest shareholder after Musk.

Each of Musk's investors must have trusted the man to turn Twitter into a profitable company. Of course, investors like these are less impacted by losing a few million.

As for everyday investors, part of the equation is determining how much you can afford to lose. If you have a low tolerance for risk, look for companies with a long record of making a profit. Your money may not grow as much as it would with a business that shoots off like a rocket, but you'll sleep better at night.

4. Don't believe the hype

Public companies spend a great deal of time hyping all that they have to offer. It's important to keep investment dollars coming in if they want to grow their businesses.

Buying into any investment because it happens to be hot or because everyone you know is getting in on the action is rarely a good idea. Unless you've done your due diligence by investigating the history of the company and its leaders, you're not ready to put your money in the pot.

The sweet lesson in all of this is that sometimes you can skip over the mistakes by learning from the mistakes of others.