11/2020
Many of the best-of-breed Technology stocks exhibit counter-intuitive characteristics which may cause investors to miss the boat on them for the wrong reasons.
1. tech stocks have already surged substantially, thus there is limited upside
2. “overvalued”, so you should stay away
3. tech stocks are already behemoths, so growth is limited and
4. tech stocks are mostly unprofitable and in the red – so investing in them is highly risky
My personal experience investing in tech in the past 2 decades have been otherwise. Tech stocks investing can truly create life-changing returns and brain-illuminating knowledge. We have previously written how you could have Tripled your Wealth with Global Tech stocks. In fact in our previous Tech class on 24 Oct 2020, we have shown our investor students that $1 million invested in 2010 just 10 years ago in the Technology Select Sector SPDR ETF, XLK, would now have grown to $4.97 million (yes almost 5x!) as at 30 Sep 2020, despite accounting for the current Tech and S&P 500 correction.
If you had starting investing your $1 million into Global Tech just recently in the last 5 years, that amount is worth $2.19 million as at 30 Sep 2020, despite accounting for the Tech and S&P 500 recent correction. Comparing the XLK to its peers like the Invesco Tech ETF, QQQ or Vanguard Information Tech ETF, VGT would have confirm and re-confirm the 5x and 2x returns over 10 and 5 years respectively.
You simply cannot achieve this phenomenal return in Singapore. In fact, if you had invested $1 m in 2010 in the local FTSE STI when it ended 2010 at 3,190 points, you would have lost $240,000 as the FTSE STI closed at 2,423 points on Fri 30 Oct 2020, a whopping loss of 767 points or 24%! Indeed, a colossal difference.
Let me review on the above and educate on the investment decision of investing in tech so that the smart and sharp investor will not miss the tremendous investment opportunities from tech for misplaced reasons.
Tech Stocks are already up a lot, so don’t jump on the bandwagon
One of the behavioral biases investors suffer from, especially pronounced in the fast changing and more volatile tech sector, is anchoring.
A lot of investors attach a lot of thought and framework to a reference point, normally their first entry level for the stock, its IPO price or the first time when they look at the stock. This first price is likely to influence your opinion of the stock, potentially forever.
The more relevant the anchor seems; the more people tend to cling to it. The more difficult it is to value something, the more we tend to rely on anchors that give us an artificial sense of control, reference and supposedly, knowledge.
Let me illustrate.
When I first established a heavy position into shares in Tencent (0700.HK) in 2011, I have had to swallow many pots of pride and puzzle. Tencent IPO in Hongkong on 16 Jun 2004 was just priced at HK$3.70. It was already a 10-bagger or 10x in the winter of 2011 when I started to buy the stock in a big way around the HK$37 – HK$40 level as the market went into a correction in Aug 2011 due to worries in the European debt repayment of countries like Portugal, Italy, Greece and Spain, or what came to termed as the PIGS debt problem.
Have I overpaid at HK$37 – HK$40 for Tencent? That was a key puzzle that kept ringing around my mind even weeks after I have bought the shares.
Subsequently, Tencent started to appreciate and continued to climb through the Global Financial Crisis, GFC and by end-2013, its revenue had climbed to RMB 60.44 billion while its operating profit rose to RMB19.28 billion. The operating profit margin of 31.8% continued to confirm the strength, growth and high profit margin of its WeChat/Weixin communication tool and gaming business.
By then, Tencent had migrated its flagship QQ service from a primarily PC to a primarily smart phone experience and enhanced their marketing leading WeChat/Weixin app from a communications tool to a multi-functional platform through initiatives such as smart phone games, official accounts and Weixin Payment. For technology companies, catching the mobile revolution was key in generation of continued profitability, something that investors should focus on, not just valuations.
Come 15 May 2014, Tencent announced a 1 for 5 share split. The price closed at HK$107.88 post-split.
Tencent climbed above HK$155 on 20 Jul 2015, 1 year 2 month and 5 days later, post-split. Then came the RMB devaluation fears which culminated in a global sell-off on Black Monday 24 Aug 2015. The severe correction sent Tencent shares down to HK$123 by Tue 25 Aug 2015.
Just 2 weeks before, Tencent had reported its 2Q215 results. 2Q2015 quarterly revenue was up to RM45.83 million on non-GAAP net profits of RMB15.18 million. Essentially, Tencent was already making more profits in a quarter in 2015 compared to the whole year of 2013. Also, at the reported quarterly EPS of RMB1.52 or annualized at RMB6.08, the PER was just above 20x, on the low range of its historical range. It was thus a no-brainer then for me to continue to add to my holdings at the price of HK$123, in a big way again.
As investors, never let a crisis go to waste. Neither should you let a pumpkin go to waste. If I may quote Benjamin Graham, the guru that taught Warren Buffet – “Adversity is bitter, but its uses may be sweet. Our loss was great, but in the end, we could count great compensations”.
Tencent share price subsequently surged through HK$200, then HK$300, then HK$400 through 2015, 2016, 2017 and 2018. It was on its way to HK$500 when the Beijing government and regulators started to halt the approval of new games for sale from March 2018. This came about as government officials had expressed concern about gaming addition and the impact video games have on the country’s youth. More than 14,000 games were released in 2017 in China, but that number slowed down to less than 5,000 games of about 35% of 2017 new games released.
Not surprisingly, that sent the share price of Tencent tumbling from HK$429.20 on 7 Jun 2018 to HK$252.20 by 30 Oct 2018.
Come 14 Nov 2018, Tencent released its 3Q2018 quarterly results. Revenues grew 24% to RMB80.60 million while non-GAAP net profits grew 30% to RMB23.33 million. Compared to 3Q2015, revenues have grown 80% while non-GAAP net profits grew 54% over a 3-year period despite the ban on new releases of its various new game titles from March 2018.
The results released propelled the share price up from HK$272.20 to HK$288 which also was a no brainer time for me to add further to my holdings. At HK$288, this price was already 167% or 2.67x more than the price on 15 May 2014 when Tencent went for a 1 for 5 share splits.
Note that Tencent continued to post a very high gross margin of 44%, albeit down from 48% on a YOY comparison. Most investors would have focused on how much the share price has run up. However, the sagacious Tech investor should understand that if companies like Tencent have strong economic moats, they are exemplified through long periods of high growth. And during these periods of high growth, the gross operating margin can remain elevated. Thus, any price weakness is a ADD on signal, rather than a SELL. We will obviously go through in detail how to look for exemplification of economic moat in our upcoming Tech class on 28 Nov 2020.
Tencent closed at HK$591 on 30 Oct 2020.
This is a massive 105% gain on my last buy price of HK$288 in 23 months or just under 2 years. If I had convinced myself that I had missed the boat after it had gone up a lot from the share split price, I would not have enjoyed this tremendous run-up.
Also, in our October 2020 media interview on Global Technology, we had advocated a BUY on Tencent Holdings at HK$505. Thus, the HK$591 at month-end Oct 2020 was a tremendous 17% return in a month!
I continue to hold on to my Tencent shares and even top-up regularly as-and- when there is price weakness as I believe it will be one of my 10x (a 1,000% gainer) stock.
LESSON LEARNED Companies that beat the market by an extreme margin will most likely, keep on this momentum. They will likely give up the impression that they are running away from you if you have not invested in them. Investors who refuse to invest in a good Tech stock simply because it has run up a lot from where they first spotted the stock could potentially miss out on huge returns simply because they anchor their opinion to the first information and price levels they have referenced to. Investors should move away from Anchoring bias as Tech stocks are very reactive to any news that affect their growth and future trajectory.
As detailed above modern media have hyped up tech stocks in many ways to give the impression to many newbies and even old-hens in investing that tech stocks are:
1. tech stocks have already surged substantially, thus there is limited upside
2. “overvalued”, so you should stay away
3. tech stocks are already behemoths, so growth is limited and
4. tech stocks are mostly unprofitable and in the red – so investing in them is highly risky
We have covered point 1 above in this article and will address points 2, 3 and 4 in our upcoming 28 Nov 2020 Tech class where we will also present you the best ideas and the best-of-breed Tech stocks to own in your portfolios for a steady and possible 5x in 10 years or 2x in 5 years time. Click on the link HERE to catch the Early-Bird Special which is on offer for the next 2 weeks till 15 Nov 2020 only.
Feedback and testimonials from our last 24 Oct 2020 class –
“You are my first investment teacher to start my journey in investment. Attended most of your lessons in SGX (20 – 25 years ago). Yes, Very fulfilling. One of the best profits I ever done (on Osim stock recommended then). Thanks to you and God. Amen”
Mr Joe Chan (Went on to build a university and hospital in Cambodia)
“Pinterest shot up 24% because of the metrics you shared. wished I bought it earlier.”
Mr Darren Tan (Owner & Entrepreneur)
“Thanks for the very comprehensive presentation. Really changed my mind on the tech stocks. Look forward to the next class”.
Mr Lionel Loo (Who has been attending our regular classes for almost 7 years now)
GCP GLOBAL RECOGNISED AS ASIA’S FOREMOST EDUCATOR IN REITS IN THE SINGAPORE CORPORATE AWARDS 2019
OUR LATEST MEDIA INTERVIEW ON REITS –
1. Hunting for Tech Stocks to Achieve Awesome Returns
https://omny.fm/shows/money-fm-893/how-to-think-through-tech-stocks-to-aim-for-a-r-aw
Our partnership with Money FM89.3 in its maiden launch of Money Matters
3. Evaluating the S-REIT space
https://www.facebook.com/352565835119256/posts/1105695543139611/
REITS FOR A GOOD CAUSE
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OUR LATEST PUBLICATIONS -
1. Triple Your Wealth in 3 years with Global Tech stocks
2. The Ability to Deliver DPU growth is the Key in S-REITs superior performance in 2020
https://gcpglobalsg.wixsite.com/gcpglobal/post/the-ability-to-deliver-dpu-growth-is-the-key-in-s-reits-superior-performance-2020
3. The best REIT investing advice that I learned from my two-year old baby
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