The number of exciting, explosively growing companies in the world is incredible. I have been investing and writing about investing for a long time and I have never seen anything remotely like the present period. As I noted in the last issue you can build a portfolio of 100 shares in today’s stock markets and every single one will be a star performer. Indeed, I strongly recommend subscribers to build exactly such a portfolio.
The trick to doing this incidentally is just to buy the good ones. If you read the newspapers, which I mostly don’t, especially the financial pages, they are always worried about values being too high, bubbles, short-term negative factors, which happen to be in the news at the time, you can become drawn into their world of worry.
Don’t be. A shrewd observer of stock markets once pointed out that in a bull market shares climb a. So if the press and many of the so-called experts are worried, paradoxically that is a good sign.
Much more alarming, as famously happened in 1929, investors became far too complacent. One expert talked about the US having reached a plateau of permanent prosperity just before the crash began.
Two points I would make about the crash are that first, the bulls were actually right, many exciting things were happening in the 1920s and 1930s like wireless, movies, household appliances, mass manufacturing, road building for the automotive age and much more.
Unfortunately this exciting period was temporarily crushed because the authorities reacted to the crisis in the most disastrous way possible, which is my second point. They squeezed when they should have inflated and a relatively run-of-the-mill stock market crash turned into the great depression and the long-ruhning train crash that was the 1930s. Furthermore, as we know, when America sneezes, the whole world catches a cold.
So worry is good for stock markets, complacency and euphoria are bad. My impression is that it is very much a world of worry out there, not least because of the virus and the undoubted economic pain that many people and businesses are suffering because of lockdown.
Another thing to realise is that the connection between how a company is doing and how its shares behave can be surprisingly loose. There is, to put it mildly, not a one to one relationship between corporate and share performance.
On the contrary I think of many shares, especially those in companies where a great deal of the present value depends on hopes and expectations for future performance as rather like bitcoin.
Bitcoins are a virtual currency or crypto currency as they are popularly known. In 2013 there were moments when you could buy one bitcoin for around $1. The latest price is over $11,000 and has been higher. There is no particular fundamental about bitcoin to which you can point to explain such an incredible rise.
The main thing that has happened is that bitcoins have captured the imagination of investors and huge global demand has met limited supply squeezing the price sharply higher. My take on bitcoin is that they are a perfect speculative instrument so I do believe they are worth buying and holding but there is no way of analysing the phenomenon to make predictions about the price.
Many people do make predictions but they are just guesses. Maybe they will go to $1m a coin one day and maybe they won’t. Who knows?
Now consider that shares have something in common with bitcoins. The main reason why they go up, just like bitcoin, is too many buyers chasing a limited supply, especially when you consider and individual share.
The main reason why they go down, again just like bitcoin, is because sentiment changes, eddies in the wind and a bout of profit-taking triggers a sell-off.
The difference between shares and bitcoins is that there are fundamentals, which can be analysed. Over time companies can become dramatically bigger. Witness Amazon about which I wrote last month. This justified a higher share price over time but along the way there will be dramatic movements, which have very little connection with how the business is doing.
This has less to my growing belief that for many investors the best strategy is (a) only buy shares in exciting, growing businesses and (b) once you have bought, pay no attention to the vagaries of the short-term investors make the price roller–coaster all over the place. Sit tight, do nothing and have faith in the company whose shares you have purchases.
Company owners do this and it works incredibly well for them. Bezos didn’t sell his shares when the first wave of profit taking hit. He didn’t even sell when the price fell through the floor in 2001-02.
He had an advantage because he knew the business was going well but absent any announcement from the company to the contrary there was no reason to assume it wasn’t. There was no warning from the company on trading and the quarterly reports highlighted a business that was growing explosively.
One problem was that back then, around the turn of the millennium, investors were obsessed with profits. They didn’t see the growth, they saw the lack of profits and the absence of any clear pathway to short-term profitability.
As we now know the lack of profitability was a sign of strength. Bezos could see both a massive opportunity and huge advantages in scaling before the competition could arrive. He jhad a far bigger objective that short-term profits. He wanted to win the battle for territory and it is his success in doing this and developing other exciting businesses like Amazon Prime (a subscription business) and Amazon Web Services, the world’s largest computing infrastructure business that has made Amazon the trillion dollar plus behemoth it is today.
I know it is not easy to have that kind of faith. Companies do crash and burn. There are no certainties in investing but I think if you build a 100 share portfolio of stocks with Amazon-like potential, if you invest equal amounts in each one and if you have faith and never sell you will make a fortune.
The bizarre thing is that making money in the stock market is actually rather easy if you have faith.
Traders don’t which is why over 75pc of customers with spread betting, CFDs and share buying business, IG, lose money. When you trade stocks you are buying and selling shares which are shooting up and down based on the vagaries of the market.
When you buy and hold, for years, you are investing in the performance of the company; that is why long-term investing is the only way to invest if you want to make money.
Warren Buffett is obviously a good share picker but his biggest trick is that he very rarely sells. In the early days Buffett was not a very good share picker. He bought loads of duds. It was his partner, Charlie Munger, who opened Buffett’s eyes to growth shares. Once he started investing in growing shares, companies like American Express, Gillette, The Washington Post, Coca-Cola and other great growth stars of the 20th century; that’s when he began to pile up the billions.
Growth plus patience proved to be an incredible winning formula for Buffett and Charlie Munger, who is also a billionaire but most people still don’t get it.
Along with these mantras, growth, long-term investing and never-sell, another of my mantras, especially in the 21st century is technology. I joke that my three favourite sectors are technology, technology and technology but actually I am deadly serious.
I really do believe that for most people most of the shares in their portfolio should be technology shares. My main reason for this is my belief that humanity is at an early stage of the most important revolution of them all, the technology revolution. Obviously it stands on the shoulders of early revolutions like the industrial revolution, the enlightenment, the Renaissance and the switch by humanity from a hunter gather lifestyle to a settled existence based on agriculture, towns and cities.
I think it is the big one and that in coming centuries human life is going to change out of all recognition. The wonders we have seen so far like wireless phones with the power of IBM computers is just the beginning. This is why I think that investing in shares in the companies making this revolution happen is going to be incredibly rewarding.
A new element in this process is Covid-19, one of the most extraordinary Black Swan events to ever hit financial markets. It is becoming increasingly apparent (a) that there are no easy solutions, no magic bullets about to arrive and take us back to the pre-Covid era and (b) that lockdowns and social distancing have turbocharged the technology revolution.
The pre-eminent example, much recommended across all my publications, is Zoom Video Communications. What a business!. The company has reported the two greatest quarters of growth in software history and the shares have exploded.
At the beginning of the year the price was around $65. They are $559 as I write this and I think they are going higher. I actually think Zoom is a candidate to become a trillion dollar business one day. I am sure that sounds wildly fanciful for a business that was valued at $18bn at the start of the year but then think about what they are doing.
Zoom is the king of video conferencing, which CEO and founder, Eric Yuan, expects to move to the heart of modern communications. He is also offering what he calls UCaaS, Unified Communications as a Service. Lastly he believes that the way we work has changed for ever and that video communications is going to play a central role in this process.
The company is the overwhelmingly leader in a sector, which is growing explosively and where the opportunity is enormous. I certainly think Zoom deserves to be one of the 100 shares in your 21st century portfolio.
The shares are expensive, for sure but that is where the value guys get it so wrong because they have never been able to buy Zoom Video Communications or shares in countless other exciting companies like it. You have to believe, not overthink it and just buy.
Let’s make it really simple. Zoom Video Communications is playing a key role in the biggest revolution in human history. What is that worth? I don’t know but surely a lot.
I often talk in my publications about 3G shares (great growth, great story, great chart). Latterly I have added an M for magic so I want shares, which are 3G+M.
Now I have some more letters. I want shares that are 3G+M+SN+FW. This stands for 3G+M plus something new plus a following wind. Find shares with those characteristics and Zoom is a perfect example and you should do well.
Imagine a portfolio with 100 shares which are all 3G+M+SN+FW. What an opportunity you would have with a portfolio full of such all-star performers.
