Browsed by
Tag: GOOG

I like the cut of this JIB

I like the cut of this JIB

Comments 6 comments

F.A.N.G.

Have you heard of FANG before? It’s a common acronym for some of the largest technology companies in the United States that have had massive gains over the past few years. The acronym has gotten a little messy thanks to the desire to add Apple and the re-naming of Google as Alphabet, but here are the companies traditionally thought to be a part of the “FANG stocks” :

  • Facebook (FB)
  • Amazon (AMZN)
  • Apple (AAPL)
  • Netflix (NFLX)
  • Google/Alphabet (GOOG)

You might recognize a few of those names from the October edition of the Freedom Portfolio. Investors who have held any of the above companies for any length of time over the past decade have to be pretty pleased with the results.

But I don’t want to talk about those companies right now.

B.A.T.

There’s an equivalent acronym for Chinese companies that is a little less commonly know: BAT. Like with the FANG companies, the BAT companies are some of the largest technology companies in China (and the world). Thankfully, the acronym is a little cleaner in this case. The BAT companies are:

  • Baidu (BIDU)
  • Alibaba (BABA)
  • Tencent (TCEHY)

Again, a lot of these companies are in the Freedom Portfolio. For Americans who don’t have much (if any) experience with these foreign companies, it can sometimes be difficult to wrap their heads around what exactly these companies do. For that reason, it has become common to associate the BAT companies with American equivalents as a shorthand. It’s not ideal, as oftentimes there are just as many differences as similarities, but it can be a good starting off point for understanding what these companies do. Here are the common equivalents given to the BAT stocks:

  • Baidu – Google
  • Alibaba – Amazon
  • Tencent – Facebook

It should be repeated that these comparisons are far from perfect. I would argue that in many ways Alibaba is more similar to Ebay (EBAY) than Amazon and Tencent is far more involved in gaming than Facebook is. If you find yourself interested in any of these companies, I would very strongly recommend digging in deeper to learn more and discover how the companies differ from the companies they are often compared to.

But I don’t want to talk (too much) about these companies, either. 

J.I.B.

No, I want to talk about a even less commonly known acronym: JIB. I know it’s less commonly used because as far as I can tell, it’s an acronym that I am coining right here, right now, although I’m sure it will be spread like wildfire and be used worldwide in a matter of months. JIB refers to three more Chinese tech companies that I believe have some interesting growth potential:

  • JD.com (JD)
  • iQiyi (IQ)
  • Baozun (BZUN)

Like with the BAT stocks, there are some commonly used equivalents.

  • JD.com – Amazon
  • iQiyi – Netflix
  • Baozun – Shopify (SHOP)

JD.com

Just like with the BAT stocks, I want to stress how imperfect these comparisons are. That should be evident with the JD / Amazon comparison, considering that Alibaba was also listed as “the Amazon of China” above. How can two companies be the Amazon of China considering how dominant Amazon is in e-commerce in the United States? The short answer is that the competitive landscape is simply different. In most ways, JD.com is actually an underdog to Alibaba in China. Alibaba has a larger market cap, has a bigger share of the Chinese e-commerce market, and has more cash on its balance sheet.

So why is JD.com like Amazon? Their business models are very similar. Like I mentioned before, Alibaba is more like an eBay in that it is largely facilitates transactions between two parties instead of directly selling things. Their consumer-to-consumer business is like traditional eBay where the seller and buyer are brought together on the platform, but then the seller is responsible for inventory and order fulfillment. They also have a business-to-consumer business where Alibaba again acts more like a middle-man. JD.com, on the other hand, has invested much more in terms of building out fulfillment centers and a logistics network. This gives it a lot more control over the quality of both the products being sold and the delivery of products which could give it an advantage long term over a company like Alibaba, despite currently being the underdog. 

Another similarity/difference worth noting, especially recently, is leadership. Just as Jeff Bezos has played an integral role in the rise of Amazon and continues to be an incredibly important leader, the same can be said of Richard Liu for JD.com. Unlike Jeff Bezos, though, there are some dark clouds hanging over the JD.com founder and CEO. A few months ago he was arrested over a rape allegation. As of the time of this writing, the case is still under investigation. While JD.com is larger than any one person, it would definitely be a blow to the company if he was forced to step down.

iQiyi

To carry on the theme of imperfect comparisons: While iQiyi is called the Netflix of China because of its subscription streaming video service, it isn’t nearly the leader to the same degree as Netflix is in the United States. They do, however, have another interesting connection with Netflix in that they have a licensing agreement with them. It seems like a good win-win scenario for both companies right now: Netflix gets some of their content exposure in China and iQiyi gets some presumably appealing content that other Chinese streaming services can’t offer.

Another way that iQiyi differs from Netflix is that it also has a fairly popular free, ad-supported video service that is more similar to YouTube. That’s a little interesting because iQiyi was recently spun out of Baidu (the aforementioned Google of China) and YouTube is a division of Google.

Lastly, while the Netflix comparison is the more popular one, iQiyi prefers to think of itself as being more similar to Disney (DIS). Why? So far Netflix has focused solely on video content, while iQiyi offers games, novels, and other merchandise which makes it more similar to a company like Disney, which does a great job of finding different ways to monetize their various properties through toys, clothing, amusement parks, etc.

One last point of interest is iQiyi has a partnership with fellow JIB member JD.com. JD.com has a membership program somewhat similar to Amazon Prime and one of the perks that were recently added was a membership to iQiyi’s program. Like the Netflix licensing deal, this seems like a win-win for both companies in that it makes JD.com’s membership more appealing while also giving iQiyi a greater membership base.

Baozun

Baozun might be the hardest of the group to describe what they do because unlike Netflix and Amazon, many people might not have heard of Baozun’s commonly named equivalent: Shopify. Luckily, I wrote something just last week about Shopify and what they do.

As with all of the companies discussed so far, while Baozun is similar to Shopify in many ways, it also has some differences. One of the larger differences is that while Shopify tends to focus on small companies trying to set up an e-commerce solution, Baozun has a lot of larger, more established companies as clients who are trying to get access to the Chinese market. The Motley Fool has a good article that explains some of the similarities and differences.

Baozun has some big names as clients: Nike (NKE), Microsoft (MSFT), and Starbucks (SBUX). Why would these massive companies feel like they need a company like Baozun? Because Baozun can help those non-Chinese companies quickly set up online stores on all of the biggest Chinese e-commerce sites and apps, like fellow JIB-er JD.com, Alibaba’s (BABA) Tmall, and Tencent’s (TCEHY) WeChat. There are a lot of major non-Chinese companies who are scrambling to get access to the Chinese market and its  increasingly internet-connected and growing middle-class. Baozun is well position to profit from that trend.

Current Events

I’m pretty excited about the prospects of all of the JIB companies that I mentioned above, and all in the Freedom Portfolio, but I would be remiss if I didn’t mention what has been going on with them lately. Put simply: They’ve been getting hammered. Two of them are down double digit percentages and the third isn’t far behind. There are a bunch of possible reasons behind the drops:

  • General market volatility over the past month
  • Concerns about a slowing Chinese economy
  • Concerns over tariffs and the continuing trade war with the United States
  • Concerns over increasing Chinese government regulations

All are completely valid concerns and I don’t mean to dismiss them, but if you’re looking at holding these companies for the long term (3+ years), then none of those worry me too much. In fact, I’ve been looking at the recent drops in the JIB companies as a possible opportunity to add to my positions. Trade wars down last forever. Economic slowdowns don’t last forever. The opportunity in front of these companies in terms of a growing middle-class not only in China but elsewhere in Asia is real and is too big for me to ignore, though. I wouldn’t be surprised if the next year or two is tough for these companies (part of the reason why I am holding off on making any moves), but over the long term, I like their chances of being big winners.

In short, I like the cut of their jib.

When do I sell?

When do I sell?

Comments 0 Comment

During the tumultuous dew days for the market last week, I wrote a very short piece where I said, “I’m not selling a single share today and have no intention of selling any shares anytime soon”. First, I have a confession. In my haste to get something timely out that day and my desire to use the strongest possible language to convey how strongly that I felt that people shouldn’t be selling their positions in a panic during the two day market drop, I used some imprecise language. I actually did end up selling some shares last week, just a few days after writing that I had “no intention of selling any shares anytime soon”. That would seem to clearly violate what I wrote, even though I believe the actions that I took don’t at all violate the spirit of what I mean. What do I mean? First, let me explain a bit about when I decide to sell.

As I mentioned before, “I prefer my retirement accounts to be 100% invested in stocks at all times”. One reason is because, as somebody who is in their mid-30s, I feel like I have a 20+ year time horizon for riding out market downturns and letting compound interest do its work. In recent history, the S&P 500 hasn’t had a 20 year period where an investor would’ve lost money. Now, there’s a first time for everything and all of the typical caveats about past performance not being an indicator of future results apply, but I’m willing to take the chance that 20+ years from now the market will be higher than it is now.

Another reason is because I don’t see a compelling reason to keep a cash cushion around. Cash doesn’t earn any kind of return, and every dollar that I have in cash is one less dollar that can be earning me around 10% in the market. I don’t believe I have any ability to time the market in terms of selling high and/or buying low, so a cash cushion seems just as likely to sit around unused for years as it is to be used buying stocks on sale. 

Which brings me back to the trade that I made. I originally had no intention of selling anything. But the more I watched Square (SQ) shares drop further and further, the more interested I got in adding to my position to take advantage of the 30% off sale going on. The downside of not having a cash cushion, though, means that if you want to take advantage of market drops to buy something, you have to sell something else.

When I wrote about the Freedom Portfolio, I mentioned being a little uncomfortable with the number of positions, and said, “I wouldn’t be too surprised if I ended up trimming one or two companies over the coming year”. At the time, I didn’t imagine I would be considering selling a mere few weeks later, but I also didn’t expect one of my higher conviction positions to drop 30% either.

So I went through some of my lower conviction positions and finally decided to sell all of my Alphabet (GOOG) shares. Why Alphabet? There were a number of reasons, but the short answer is that I was becoming less and less convinced that my original investing thesis still held true. Would Google remain as dominant in online advertising? Does YouTube still have a large growth runway ahead of it? Will self-driving cars be a reality soon and can Waymo monetize it? Will the privacy concerns swirling around Facebook (FB) start to weigh on Alphabet? Will the rumors of employee discontent around internal political bias and military contracts and exploring getting back into China make it a less desirable place to work? The question marks were piling up, and I was concerned enough to be okay selling my position in exchange for one I had higher conviction in.

I apologize for being misleading with my earlier post. It wasn’t my intention at all. I wanted to emphasize how I was staying fully invested and not reducing my exposure to stocks in reaction to the market downturn, but I was imprecise with my language. I’ll try to do better in the future.

The Freedom Portfolio – Oct 2018

The Freedom Portfolio – Oct 2018

Comments 7 comments

Welcome to the first ever installment of the Freedom Portfolio! As a reminder, the Freedom Portfolio represents my attempt to beat the market (represented by the S&P 500 index) by buying and selling shares of individual companies. The portfolio represents the vast majority of individual publicly traded companies that I am invested in. I’ve been managing this portfolio since 2003.

The Freedom Portfolio will be the primary way that I will measure how I am doing in my quest to beat the market, and October 1st, 2018 represents the starting point of where I will be measuring. My plan is to check in every quarter with an update on both the Freedom Portfolio’s return and the return of the S&P 500.

A few important points about the data below:

  • M. Falcon? – Can’t remember what those crazy allocation terms stand for? Check out: The Freedom Portfolio – Defining my Terms for a refresher.
  • Performance – The last two columns measure the performance of the given position since I bought it both in absolute terms and relative to the S&P 500. For example: Disney has gone up 89% since I purchased my shares in 2013, which might sound good, except it’s actually under-performing the S&P 500 by 18 percentage points during that time.
  • Start Date – While October 1st, 2018 is the official start of the Freedom Portfolio, many of these positions have been held for me for years prior, which is what the performance numbers are based on. I included them simply to provide some context on which positions might’ve grown to the size they are currently (Amazon, Netflix, Axos Financial, for example) and to give a striking visual of the power of holding quality companies for the long term.
  • Serenity Now – As of this moment, the portfolio is a little heavy on Serenity sized holdings. I don’t expect this to be the case moving forward. In preparation of launching this portfolio (and so I could make the claim that it represented the vast majority of my investment in individual, publicly traded companies), I had rolled over a 401(k) from a previous employer. As a result, I entered into a few new positions and added to some smaller ones, which coincidentally resulted in a lot more Serenity sized holdings than normal. Eagle-eyed viewers can probably identify the new positions by virtue of their 0% return so far. I expect this Serenity imbalance to remedy itself by the next check-in, as certain companies over-perform and others under-perform.
  • Lots of positions – There are 28 different companies that make up the Freedom Portfolio right now. That’s a little on the high side for me, and I wouldn’t be too surprised if I ended up trimming one or two companies over the coming year.

Without further ado, here are the current companies in the Freedom Portfolio:

TickerCompany NameAllocationPerformance*vs S&P*
AMZNAmazonBabylon 5423%343%
NFLXNetflixEnterprise669%598%
SHOPShopifyEnterprise 261%227%
DISDisneySerenity89%-18%
ATVIActivision BlizzardSerenity116%68%
AXAxos FinancialSerenity255%158%
MELIMercado LibreSerenity166%117%
SQSquareSerenity59%52%
TSLA Tesla Serenity36%-7%
ILMNIlluminaSerenity166%119%
TWTRTwitterSerenity27%-23%
NVDANvidiaSerenity193%165%
IQiQiyiSerenity25%18%
RDFNRedfinSerenity-8%-14%
OAK Oaktree Capital Serenity2%-2%
JDJD.comSerenity-5%-6%
GOOGAlphabetSerenity0%0%
ISRGIntuitive SurgicalSerenity3%2%
AABAAltabaSerenity0%0%
MKLMarkelSerenity0%0%
TCEHYTencentSerenity-12%-19%
BIDUBaiduSerenity0%0%
KSHBKushCoM. Falcon38%35%
NVCRNovoCureM. Falcon 16%14%
TDOCTeladocM. Falcon 58%50%
BZUNBaozunM. Falcon-7%-7%
BLXBladexM. Falcon-19%-28%
NVTAInvitaeM. Falcon-10%-10%

*: Approximations. As of 10/3/2018

I’ve already written about one company in the portfolio (KushCo) and I plan to write about a handful more over the coming months to explain why I am optimistic about the company. In the meantime, I wanted to open the floor to you. Any companies above that you have questions about? Some that you wouldn’t want to invest in or would even consider shorting? Let me know!