If I offered you the chance to invest in a monopoly, would you? Of course you would. Monopolies are companies with no competition, they own a whole market (or the vast majority of it) and hence can charge whatever they like for their products, and make much higher profits than firms in a competitive market.
But monopolies are illegal, right?
Technology changes everything.
In the first half of 2017, the S&P500's total return was 9.7 percent. This is actually a great performance, as 10% has been the average annual return over it's history. So how did I manage over 40%? I only invested in stocks and I didn't use any leverage, so it wasn't some form of high risk trading - it was mostly just a small subset of the S&P500. More specifically, tech stocks. Why?
It's all about software. Software changes everything. Think about software based companies, versus more 'traditional' companies selling physical products. Even in a very simplistic way, it's easy to see how the former have much higher potential. Software can be sold (or monetised in some other way) to an essentially unlimited amount of people, without being constrained by manufacturing and/or logistics. This is a colossal advantage.
Just look at how the list of the largest companies in the world has evolved over the last few years: Oil giants and banks that had been the biggest firms globally for decades, have been swiftly replaced by tech stocks. Oil used to rule the world, now software does.
So what does this mean for investing?
Look at how fast and how large Apple & Google have grown, for example. No other non-tech company has ever done that before, in the history of humanity - and they don't seem to be slowing down either. Take Facebook as another example, it was only founded in 2004, went public in 2012 and is already the 8th most valuable company in the whole world. If you had purchased 1,000$ of Facebook stock in 2012, it would now be worth nearly $9,000. Not bad.
Things are changing, and that changes the rules of the game.
Think about the industrial revolution: potential for production and distribution hit a new order of magnitude. A farmer or artisan could never compete with machines or factories. Now we're going through this tech revolution where technology is to factories, like factories are to one man businesses.
People are still stuck with some traditional investing views, which are based on only a couple of (mostly technology-free) centuries of history - but technology changes everything, so we can't use the same rules and ideas anymore. If you're investing to make money, it would seem to me that it makes complete sense to choose the companies that have the highest potential for large returns. And right now, that's the companies that are shaping the future.
For the haters, and the doubters.
1. It's just a bubble...
As with anything there are many skeptics - I've heard quite a few people saying that we're just in a tech bubble. The story goes something like this: "These valuations are crazy, totally unfounded, it will all crash and burn soon like the .com bubble of the early 2000s." These people are wrong. In the .com bubble the internet created huge hype and people were simply throwing their money at any internet based business, without having the faintest idea what it did or how it worked, out of pure greed. That's a recipe for a bubble. But now take a moment to think about Google or Facebook and all the other platforms they own such as Youtube and Whatsapp and ask yourself the following questions:
Is it recession proof? If another recession were to hit you might cut down on eating out, you might postpone buying a new car, but would you stop using Google/Facebook/Whatsapp?
Do you see it being present in the future? All of these companies have such a stronghold on our lives that it's very hard to imagine a future without them. What would you do if you couldn't Google something? Can you see people living without Gmail or Youtube?
Will it play an even bigger role in our futures? Facebook shows no signs of slowing down; not only does everyone seems to have an account (over 2billion people, out of the less than 4billion with internet access), but if you stop and think about it, they are slowly controlling more and more of all global communication too. I don't know about you, but 95%+ of my communication is done via a mix of Facebook messenger, Whatsapp messages and Whatsapp calls (Facebook owns Whatsapp).
A lot of these companies are such big, yet lonely, cogs of our technological world, that they could be considered monopolies. Who's Google's competition? I imagine if things keep moving in this direction, at this pace, there will eventually be some legal intervention, but that's a whole other story. For the time being, I'm happy owning a part of a few monopolies.
I'd highly recommend Peter Thiel's book 'Zero to One', which explores this particular idea in a lot more depth. He's amassed a fortune of nearly $3 billion through tech venture capital, so I tend to listen to what he has to say.
2. Stock picking is a fool's errand
Look at the history of the stock market, and you'll see that on average it has delivered 10% returns per year. It has also been notoriously difficult, if not almost impossible, to beat this kind of return over an extended period of time. It's not hard to find studies that seem to show quite convincingly that stock picking is a fool's errand (I'd recommend reading A Random Walk Down Wall Street), but then how do people like Warren Buffett do it? Is technology challenging this idea?
It's not stock picking that's the fool's errand, it's market timing, as short term prices are driven by irrational human psychology. In my modest opinion, it's about figuring out the current trend - where is the world heading? Once you've done that, you can figure out the best companies in that sector and invest in those. In case it wasn't clear yet, I think we're still only at the beginning of the technological era.
3. But some of these companies don't even make any money...
This is a common cause of confusion. If company X is hardly making money - or even losing money - how can it possibly be worth X billions? The missing link is that the value of a company can be defined as the sum of the net present value of all expected future dividends. In other words, if you were to own this company for ever, add up all the money it will make in the future, and discount that to today's value - that's what the company is worth. Intuitively this makes sense, it would be fair to trade a company for all the money it will make in the future. Would you rather have all future earnings now (discounted to today's value), or own the company and receive earnings year by year? It's exactly the same, that's why it's the fair price of a stock.
The caveat is that no one knows what future earnings will be. That's why we sum all expected dividends. So it could be the case that there is a company that is currently making little money, or losing money, but if people think it will generate high profits in the future, then the stock price will reflect that. A good example of this is Tesla. It's already worth more than BMW, despite only producing a tiny fraction of the cars that they do. It's also still losing money, but it's worth so much because so many people expect that it will absolutely dominate the automobile and energy industries in the future.
All my investment for you to see.
I share all of my trades and investments, completely for free. To do this, I use a platform where there is even an option for you to automatically copy my investments, meaning that you can make the exact same returns as me, with no effort whatsoever! So if you're curious about what I'm currently investing in, you can find all my trades here.
I'm not suggesting that one should invest solely in tech stocks. Of course, one should still have a sensibly diversified portfolio. This article is merely my own opinion and not intended to be financial advice. If you're seeking financial advice please consult an independent financial adviser. Past performance is not a guarantee of future results.