An Investment Strategy for the Next Decade by Ted Shaker
The advent of a new year is traditionally a time for both forecasting and recollection. Upon sitting down to do exactly that, I found myself thinking back to a chance encounter that occurred nearly a quarter-ofa- century ago. It was the summer of 1990 when I bumped into a friend from high school that I had not seen in five years. For someone in their early 20’s, a five year period was literally a quarter of a lifetime, so we decided to stop in at a local pub to catch-up. He explained that he was just hired by a new company that was created by a small group of former faculty and students from Stanford University. Their intension was to provide hardware to the telecommunications industry. On the surface, this appeared to be quite pedestrian. My friend, however, went on to explain that they were developing something he referred to as an ATM switch. After explaining that this device would allow for the revolutionary exchange of diverse large blocks of data across the existing telephone copper-wire infrastructure, I had an immediate epiphany and loudly exclaimed “…you are going to change the world!” He replied in the affirmative with a subtle smile, acknowledging my understanding of the revolutionary changes occurring.
Those of you old enough probably have figured out by now that the company was Cisco Systems. The epiphany that I had, to put it simply, was the advent of what came to be referred to as the Information Age. In the 90’s, those fortunate enough with such early foresight had the potential to select a couple dozen stocks that appreciated over 10-fold by decade’s end. The reason for relating this story is to point out that an astute vision of future transformational developments can be the nexus for a successful long-term investment strategy.
The investor that can catch such a secular trend early in the cycle can ultimately generate considerable personal wealth. Today, I believe that there are some striking similarities with the dramatically disruptive advances that led to the development of the internet in the 1990’s. We may again be seeing such a life-changing tectonic shift in technology, one with the potential to completely change the way the world does just about everything. While the 90’s witnessed the development of the internet for people, today we seem to be in the developmental stages of the internet for essentially everything. There are four disruptive technologies that comprise this new transformational theme: mobile, cloud, social networking and wireless machine-to-machine connectivity. To help illustrate my point, let’s take a look at what a Sunday drive 10 years from now may be like:
You and your spouse get into your new luxury sedan for a leisurely afternoon drive. The steering wheel has sensors, recognizing you as an authorized driver. You instruct the car to start and the voice recognition software that comes pre-loaded with the car’s on-board computer recognizes the command and starts the vehicle. You tell your computer your destination and the navigation system plots the most efficient course, allowing for current traffic conditions. As you are driving, the computer tells you that the fuel tank has only 40 miles of travel left simultaneously displaying several re-fueling stations, ranked by price, that are en-route. During the drive, you discuss potentially taking a trip to Disney World. Your computer automatically searches for flights and hotels. You hold several seats on the flight of choice for a period affording you time to decide. You go on to discuss dinner options. After settling for Italian, your computer presents a list of the nearby restaurants ranked by price and customer review. Your computer then makes a reservation for two and asks if you would like to pre-order drinks and an appetizer. Coincidentally, your kids call and ask if they could get a pizza. You verbally place the custom order through your on-board computer, with the payment automatically processed through an encrypted account. The delivering pizza shop sends a picture of the driver and expected delivery time to the mobile devices of both you and your children. While driving to the restaurant, you discuss the need for a new big screen TV. Your computer lists a set of options on the car’s display to help you refine your search. You find a good deal and place the order for curbside delivery between 2-4PM on Tuesday. During this discussion, you have been somewhat distracted, not realizing that the truck in front of you has stopped. Your radar sensors in the car’s front-end detect the condition, immediately communicating to the on-board computer which then automatically applies the brake, thus stopping the vehicle. Being startled by this sudden stop, your wristwatch emits a pre-selected audible tone indicating an elevated heart rate.
After dinner, your computer informs you of a business email received from a client requesting the status of a shipment. You use your mobile device to sync with your car computer to check on the status. The RFID ribbon in the package indicates that the shipment is en-route and expected to arrive at its intended destination by noon tomorrow. You issue a reply to the email with a spoken response. For the last half of the drive home, you decide to disengage the audio interface with the car’s computer for an uninterrupted personal discussion. Upon arriving back home, you see the most beautiful crimson and purple sunset over a distant grove of trees. You instruct your sunglasses to capture the image with its high-def micro camera which is the size of a pinhead. Three pictures are then displayed on the inside of your lenses. After choosing to save the second picture, you then instruct the glasses to send the picture to your social media home page and to also display the new picture on the back of the tee-shirt you are currently wearing, replacing the previous image of your favorite team’s logo. The point of this exercise is to illustrate how an astute investor with thoughtful foresight can develop a keen and potentially lucrative long-term investment thesis. All of the technologies just discussed currently exist today. What does not yet exist, however, is how all of these technologies are coordinated for consumption. In essence, this futuristic portrayal depicts how the whole can be far more powerful than simply the sum-of-the-parts.
As is the case for most everything in life, success comes down to execution. When developing an investment thesis such as this, it is crucial to maintain a long-term investment horizon. In recent years, the definition of “long-term” appears to be continually contracting, with many advisers now considering a two-year period as long-term. When attempting to capture such a revolutionary secular trend with such outstanding prospects, it might be better to consider the historic definition of long-term, that being 7- 10 years. Time-tested wisdom states that no one ever goes broke taking profit; but, exiting a position early in the cycle can eliminate a tremendous opportunity. Again, look back to the internet boom of the 90’s for reference. An investor may have had the urge to take profits in 1995 after considerable gains. Doing so would have cost such an investor another five-fold gain in nearly all of the top stocks within this trend. Another area of concern, valuation assessment can be very problematic when executing this type of strategy. Many of the stocks of companies involved in such transformational endeavors tend to have what appear to be exorbitant valuations, when standard measures are applied. Ineffective valuation assessment can result in many missed opportunities. The history associated with the internet build-out of the 90’s clearly calls into question the efficacy of traditional valuation measures. A better method at that time was to select the best-in-class businesses and to then individually assess their total market potential once their business models begin to mature. By means of a current example, one can look at the world’s pre-eminent online retailer. At its current price, the stock is selling at 11 times next year’s revenue, without any net income. At first glance, such valuation appears to be ludicrous. But, upon the realization that online retailing currently garners only 4% of a $20+ trillion annual global market, the growth prospects for such a well-positioned and defensible business would indicate that the current stock price is actually ridiculously cheap.
Assuming the risk associated with such high relative valuations requires that the prudent investor employ a certain degree of risk mitigation. Although we are taking a shot at predictive forecasting when developing this investment strategy, it should be well understood by all that none of us know for sure what, or who, will succeed. This simple fact clearly demonstrates the importance of diversification within this approach. Some companies will be wildly successful, while others will go bankrupt. As we have seen in the past, there will be companies that appear to be a sure bet only to end-up as a mere footnote (e.g. America Online); while others not thought of as being involved in this transformational process will adapt and create tremendous wealth (e.g. Corning). Additionally, along these same lines, keep a sharp eye on the IPO market as some of the greatest wealth generators for this trend have not yet come to market.
It should be relatively clear by this point that this far-reaching investment strategy requires more patience, perseverance and risk-tolerance than what would typically be needed with most other approaches. An individual investor wishing to initiate an investment following this strategic theme may be well-served starting with the following best-in-class businesses operating within this dynamic space:
• Google (GOOG) may very well be the very best business in the world.
• Amazon.com (AMZN) is far-and-away the best positioned internet retailer in the world.
• Apple (AAPL) continues to exhibit strong user engagement in the rapidly growing mobile space, with their Apps Store surpassing $10 billion in sales in 2013
• Netflix (NTFX) is clearly the best company with streaming content.
• Sierra Wireless (SWIR) is the global leader in modular machine-to-machine communication.
• Facebook (FB), Twitter (TWTR) and LinkedIn (LNKD) are all first-movers within the dynamic social media space. This trio is exhibiting tremendous growth in user engagement with amazing future opportunities.
• Salesforce.com (CRM) is the leader in cloud computing boasting over 2,000 large business clients.
The following list should provide the motivated individual investor fertile ground for further research (presented in no particular order): YELP, P, YHOO, SINA, BIDU, EBAY, V, LLTC, UA, GLW, SALE, CGNX, DISCK, DWA, PCLN, INVN, IIVI, VEEV, LPSN, NVDA, LLTC, TIBX, WDAY, CNQR, RAX, NTGR, XLNX, NUAN, PEGA, RST, ADBE and ATVI.
In closing, regardless of your personal opinion as to the likelihood of this particular vision of the future, one takeaway should be the process employed in developing this investment strategy. It appears that a similar thesis can be formulated for at least a couple other areas currently involved in transformative development. Energy and Biotechnology are both benefiting from rapid technological advancements, which would be a subject for another discussion.
Disclosure: The author currently has positions in stock or stock options of the listed securities.
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