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Here is how investing in growth stocks works.

The stock market is a forward-looking mechanism that discounts pro-actively, often 6 to 18 months into the future. Price momentum usually leads earnings and sales growth in the first phase of any long-term stock market trend. Then, if fundamentals don’t catch up, there’s a mean-reversion.

The market constantly discounts events and processes that haven’t happened yet. As a result, it will sometimes discount events that will never happen. With other words, sometimes is right, sometimes is wrong, but it is not stupid. It makes an assumption, sometimes based only on a good story, other times based on real fundamentals; it discounts that assumption pro-actively, but in the same time it is expecting positive feedback in terms of actual earnings and sales growth. If the latter don’t come, a correction follows. If earnings and sales growth numbers confirm and exceed market expectations, the trend continues.

In the case with Tesla, the stock had doubled in the six months preceding the announcement of it first profitable quarter. The market has been expecting and discounting that event. Apparently, a bull market and a large short float (40%) have contributed to the size of the move, but the story of Tesla is not too different than the story of many other high growth technology companies with innovative products. In 2003, Blackberries were the hottest phones on the market. Blackberry stock quadrupled in the 12 months leading to its profitable quarter. Then, in the next five years, it quadrupled a couple more times (that 16X for those who have missed math at school).

Here is a graph comparing the market caps of the major publicly traded car companies – Tesla Motors, Toyota, Honda, Ford and GM. The German Daimler (owns Mercedes and Chrysler) and BMW have each a market cap of about 50 Billion Euro. Volkswagen, which also makes Audi and Porsche, has a market cap of about 75 Billion Euros.

Apparently, Tesla’s earnings and revenues are very far from its competitors’ numbers, but Tesla is a lot younger company. Every big tree starts as a small acorn. Blackberry was a $1 Billion dollar company in 2002. Then it became $80 Billion in 2007. Apple was a 5 Billion dollar company in the early 2000s.

Elon Musk might not have the marketing genius and presentation skills of Steve Jobs, but he is a long-term thinker like Jeff Bezos. He has e detailed long-term plan of how Tesla is going to take over the world. First start with an expensive, high-margin sports model. Then gradually increase its scope by creating cheaper vehicles that could be afforded by a larger number of people. Tesla is not just an expensive toy for people with a lot of money. It is a freaken spaceship on wheels, which is technologically superior just like Apple’s products were 3-4 years ago. Consumer Reports just called them “the best car they have ever tested”. Most importantly, the early adopters love Tesla and talk about with with exclamation marks. The hardest group to please is loving Tesla. What they love today, many of us are likely to love 2-3 years from now.

If Elon’s plans work out, 10 years from now, Tesla’s market cap could easily be close to the big players of today as electric cars will be seen everywhere. What if in the future all cars are electric? Tesla is already licensing its superior technology to Daimler and Toyota.

Of course, there is always a chance that the company might turn out to be a flop. The market is currently giving Tesla the benefit of the doubt. It has discounted a bright future. Remember that the market is forward looking and myopic at the same time. It doesn’t discount too far into the future, and for a good reason. The further you go into the future, the higher the uncertainty. For a long-term price trend to be sustained, Tesla will need to deliver some serious earnings and sales growth. The good news for Tesla is that it has already made good money for a lot of its investors, which means that Elon Musk has earned their trust and patience, just like Jeff Bezos has done. This will give him more room to maneuver and experiment.

There will be the inevitable 40%-50% corrections along the way, but a $100 Billion market cap is achievable in the next 10 years. How many people do you think are going to ride the whole trend? If history is a good indicator, very few.

We live in fascinating times:

• Warren Buffett is on Twitter. At least he tweeted once – “Warren is in the house”, probably trying to subtly remind us that he still likes housing stocks. 🙂 In 2008 he didn’t know how to listen to his voice machine and this is why Lehman went under. When all is said and done, he remains the best investor of all times. The Steve Jobs of Investing.

• A few weeks ago, the Associated Press twitter account was hacked, which caused a mini flash crash in the world most liquid asset – the S & P futures. We don’t even remember that anymore. A few weeks is nine months in social web time.

• News and rumors are breaking faster on the social web than on $2000 a month Bloomberg terminals. They are analyzed faster and with much deeper perspective on the social web too. No research shop could possibly compete with 30 independent analysts, who could devour any earnings or economic report in a matter of minutes. At least, it can’t compete on velocity.

The world is going faster. A lot faster. Does that mean that you have to become faster in order to survive and prosper. No! Velocity is not your forte in a world driven by high frequency algorithms that make several thousand trades in a second. Your only chance of survival is to become the slow money. To step back, look at the big picture, spot trends (catalysts) that are going to last for more than a few days and find a way to ride them.

Being The Slow Money doesn’t mean that you have to think like Warren Buffett. He likes to joke that he loves businesses that could be run by idiots, because sooner or later it will happen. He says the he hates uncertainty and wants to invest in companies that are likely to be still around 10 years from now and with higher earnings.

The truth is that no one knows how the world will look like 10 years from now. Maybe people will still eat Cheerios, maybe they won’t. Who knows. We might be all on customized nutrition pills by then. Investing in companies likely to be around 10 years from now is not a guarantee of success. We don’t know how their shares will perform in the meantime. There are no sure things in the market. What is widely perceived as being safe, could be very risky, especially if the consensus opinion is on your side.

Being the slow money means that you don’t have to obsess with every move in the markets and try to find an explanation behind it. Being ‘the slow money’ means that you don’t need to own 50 different positions and to chase after every breakout to make a few percents. Being ‘slow money’ also means that you might have to cut from your exposure to the fast web…

It is not a secret that 3D printing has been one of the most discussed industries in the past 6 months and one of the best performers in the past 12 months. There are currently four relatively liquid, publicly traded stocks that represent it: 3D Systems ($DDD), Stratasys ($SSYS), Proto Labs ($PRLB), The ExOne Company ($XONE) and it seems that they are all setting up for higher prices.

The two big ones $DDD and $SSYS took quite a beating after $XONE had its IPO on February 8th.

There are two ways to look at an IPO in a hot industry:

1) It is positive. It shows that investment banks are confident in market’s ability to absorb the new supply. Stocks from the same industry that are already public often appreciate in anticipation of the new IPO.

2) Too much additional supply of shares is just like overbuilding capacity – it is not a positive in long-term perspective as it puts pressure on prices.

$XONE is a tiny company with current market cap of $500M. It is unlikely to be the major catalyst for the selloff in $DDD and $SSYS. The total market cap of the all publicly traded 3D printing industry is still relatively small for a small surge in supply to matter.

The main reason behind the pullbacks was probably earnings related and not living up to market’s expectations. Mr. Market constantly discounts evens that have not happened yet. As a result, it will often discount events that will not happen. This is not to say that it will remain blind-sighted forever. A good story is not a long-term catalyst. The market gave the benefit of the doubt to $DDD and $SSYS for quite some time and it bid their prices substantially during most of 2012, but it expected those two to start to deliver in terms of real, organic earnings and sales growth. It did not happen, so some dissapointed market participants just took profits and sold, which put downside pressure on the industry.

There was also a sentiment aspect to the pullback. All of a sudden, in January every local TV and radio were covering 3D-printing and talking about its ginormous potential. Wall Street loves to sell to front page headlines after a substantial move.

In March, both $DDD and $SSYS bounced near their rising 200dmas, where long-term buyers typically step up to support their holdings. Since, then they have been under quiete accumulation. Granted, they still have a lot of work to do in the process of building the right side of their new basis, but the whole sector seems to be setting up again.

From technical perspective, both $DDD and $SSYS had at least a couple of tight consecutive closes and have recently broken their downtrends to the upside. They have been making higher highs and higher lows.

$PRLB has been consolidating after its monstrous earnings gap in February and above $50, it could fly again. It has a small float of only 19M shares, which is a prerequisite for volatile moves.

It is earnings season, so don’t forget to check their earnings dates.