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3/3 investing

January 31, 2023

Taiwan Semiconductor Manufacturing (TSM) is a key player in the semiconductor market, a serious mega cap and also sensitive to the ups and downs of US, Chinese relations which seemed to have thawed a little recently. I think if I was a leader of either of these countries that keeping a reasonable trading relationship going would be an absolute priority because it is so important to global prosperity and keeping the world a peaceful place. Russia doesn’t really matter; at the end of the day it is a tin pot dictatorship with nuclear weapons but China does. At some point in the not too distant future it is going to be the largest economy in the world. We can’t let them cut adrift.

TSM has a promising chart which has just moved to a 3/3 score. We could even move that up to 6/6 because an ETF called iShares Asia 50 (AIA), which holds 12.2pc of the fund in TSM has a similar looking chart so also scores 3/3.

The simple strategy is to buy shares or ETFs when they score 3/3 and hold them until they stop scoring 3/3 when you either promptly exit or start looking for an exit. If you do this with all the shares in your portfolio you are effectively hopping from 3/3 to 3/3, which could be a smart thing to do.

If too many shares stop being 3/3 this becomes a warning sign that the whole market may be heading for trouble and a period on the sidelines might be advisable.

An interesting something new is that TSM is investing $40bn in new plants in Arizona so it can make chips in America. It is one of the biggest investments in the history of US capitalism. Some observers worry that this is going to pressurise margins but the guys at TSM must think it makes sense. The world needs an awful lot of electronics and TSM plays a key role in meeting that demand. How many companies could invest the way they do. No surprise that Warren Buffett has been buying the shares.

TSM’s fab production goes global

Finally, let me talk about our plans to expand TSMC’s global manufacturing footprint to increase customers’ trust and expand our future growth potential. TSMC’s mission is to be a trusted technology and capacity provider, with a global IC — large IC industry for years to come. Our job is to provide the optimal solutions for our customers to enable their success.

These including technology leadership, manufacturing, cost, trust, and recently, also including more geographic manufacturing flexibility. Based on customers’ requests, we are increasing our capacity outside of Taiwan to continue to provide our customer the optimal solution they need to be successful. TSMC’s decisions are based on our customers’ need and the necessary level of government support. This is to maximize the value for our shareholders.

Our decision are also based on the talent pool, land, electricity, and water needs for TSMC’s long-term growth. In the U.S., we are in the process of building two advanced semiconductor fabs in Arizona. Our U.S. customers welcome us to build capacity in the U.S.

TSMC Arizona will continue to provide the most advanced semiconductor technology commercially available in the U.S., enabling next-generation, high-performance, and low-power computing products in the future years.

Each of our fabs will have a clean room area that is approximately double the size of a typical logical fab. We are also considering building additional mature node capacity outside of Taiwan. In Japan, we are building a specialty technology fab, which will utilize 12- and 16-nanometer and 22-, 28-process technologies. Volume production is scheduled for late 2024.

Our N3 has just entered volume production in Tainan Science Park. We are also preparing for N2 volume production starting in 2025, which will be located in Hsinchu and Taichung Science Park. While capacity is not born overnight and takes time to build, we are committed to expanding our global manufacturing footprint to increase customer trust and expand our future growth potential. Depending on the demand from customers and level of government support, our 28-nanometer and below overseas capacity could be 20pc or more of our total 28 and below capacity in five years or more time.

While the initial cost of overseas fabs are higher than TSMC’s fabs in Taiwan, our goal is to manage and minimize the cost gap. Our pricing will remain strategic to reflect our value, which also includes in the value of geographic flexibility. At the same time, we are leveraging our competitive advantage of lost volume, economies of scale, and manufacturing technology leadership to continuously drive costs down. We will also continue to work closely with all government to secure their support.

By taking such action, TSMC will have the ability to absorb the higher cost of overseas fabs while remaining the most efficient and cost-effective manufacturer no matter where we operate. Thus, even as we increase our capacity outside of Taiwan, we believe long-term gross margins of 53pc and higher continue to be achievable, and we can earn a sustainable and healthy ROE [return on equity] of greater than 25pc while delivering profitable growth for our shareholders.

Q4 2022, 12 January 2023

I know it is a big quote but this is an important initiative by an important company. The technology revolution depends on TSMC making these huge bets and thankfully they have the money and the confidence to make them. Nobody else is going to match what they are doing which is why they enjoy such spectacular operating margins and achieve such a high return on equity.

AIA offers good Asian spread

Below is the chart for iShares Asia 50 (AIA).

Below are AIA’s top 10 holdings which are an impressive list making this ETF an excellent choice to gain exposure to growth in Asia.


3/3 makes strategy very simple. You just need to find shares, ETFs, leveraged ETFs, cryptos, whatever that score 3/3, buy them and hold until they stop scoring 3/3.

Against that is the truth that there is no magic bullet in the stock market. If 3/3 was a guaranteed route to success it would be too easy and investing is never going to be that easy. There is no substitute for common sense.

Investors have just had a big shock with a dramatic fall in valuations for high growth shares driven by a rise in interest rates. We had a super boom and them something close to a super bust.

My guess is that when the dust finally settles we will find that these wild gyrations in share prices have occurred while many companies have soldiered on, doing what they do, doing it well and continuing to deliver respectable results.

Investors veer from manic to depressive and shares react accordingly. We need to plot a path through this craziness and this is where my indicators can be helpful and also my common sense approach to fundamentals. Is it 3G? If so, I am interested. Is it 3G plus something new and something special about the chart? Then I am very interested.

Hence my growing enthusiasm for building a portfolio around a group of high performing ETFs with some extra oomph from a prudent allocation in leveraged ETFs plus, if we can find them, some 10+ shares with that extra bit of magic.

Inevitably it is a judgement call whether any particular ‘something new’ is going to really move the needle. Taiwan Semiconductor Manufacturing seems bent on shifting from being a Taiwanese powerhouse to being a global powerhouse. It is reminiscent of Tesla’s strategy of building gigafactories close to its customers. It is easy to imagine that such companies are going to be the global giants of the 21st century.

Intriguingly, helped by its Arizona plant, TSM has reportedly won a large order from Tesla for advanced 4 nanometer chips. It’s a small world and that could also be a ‘something new’ with companies like Tesla and Apple designing their own chips and dealing directly with TSM rather than going to chip design companies like Intel. AMD and Nvidia and leaving them to source from TSM.

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