Amazon, Tesla, and Bitcoin – Edward Iftody
From the late 1990s until the mid-2000s, I worked in the investment industry in Canada. I loved the Amazon story, I thought it was a revolutionary business, but I never bought a single share of Amazon’s stock until mid-2017 (more about that later).
Had I made a reasonably sized investment back in the early 2000s, by my calculations, I’d be long retired. My mistake was equally rooted in not fully appreciating how little the mainstream media understands disruptive companies and not trusting my own instincts and common sense.
Today, I firmly believe investing in disruptive businesses, focussed squarely on he future, is a very good bet over the long run. However, investing in disruptive businesses is not for everyone. Without question, making the necessary commitment to a disruptive investment is often much harder than investors think.
In this article, I’m going to talk about what you need to know before you invest in a disruptive business.
- Pricing strategies of financial analysts
- How the media undermines up and coming disruptive technology companies
- Similar to value investing, timing disruptive investments are extremely difficult — you need to be in for the long haul
- Is Bitcoin the next disruptive technology opportunity?
- Some rules I use to evaluate new disruptive business models
20 years ago, I was a professional in the investment industry and CNBC was playing in the background all day at work. Back in those days, CNBC hated the unpredictability of Amazon’s earnings. Analysts and anchors constantly complained about the large quarterly losses and gave very little credit to the ever-growing revenue streams and customer growth. In hindsight, it may seem strange the media was so firmly against Amazon, but I think there was a good reason for this bias.
The investment industry has always considered Warren Buffett a god — and for good reason. His value-Investing style has stood the test of time and made multi-millionaires of many Berkshire Hathaway investors.
Warren Buffett follows rules. His value-style investing relies heavily on accounting techniques to discover undervalued stocks. Here lies the biggest problem with analysts trying to evaluate disruptive business strategies; analysts have to rely on traditional tools like PE ratios, debt levels, profitability, dividend growth, balance sheets — all of which are incredibly useful when evaluating well-established companies no longer in a strong growth phase. Analysts have to rely on these traditional valuation techniques because there is really nothing else they can use to determine a company’s ‘fair market value’.
The first mistake – assuming ‘fair market value’ can be easily calculated for disruptive business models
If you’ve ever studied in the financial field, you’ll quickly be introduced to financial formulas and evaluation techniques that seem to suggest calculating the fair market value of a company is as reliable as reading a company balance sheet. I think this kind of training unintentionally creates the impression that calculating the ‘fair market’ value of a company is a straight-forward process. This is absolutely not the case for disruptive companies.
Finding a ‘fair market’ value is extremely difficult to determine for businesses that are heavily re-investing profit back into a rapidly expanding business. Buffett’s value-based investing style relies heavily on companies being mature and being managed in a conservative (or at least a consistent) way.
Amazon is notorious for spending heavily in some financial quarters or even over years, re-investing into new markets and new business models. These periods of heavy re-investment make financial analysis a messy affair. Since analysts and investors usually only have a rough understanding of how Amazon is re-investing in between quarterly reporting periods, it can be very difficult to estimate profitability and revenue growth.
Catherine Wood, from Ark Investments (famous for her $7000 price target on Tesla by 2024) thinks disruptive technologies often cross-over a number of different market segments, making determining the value of a company even more difficult. Consider Tesla for a moment — is it a car company, an energy storage company, a solar company?
It’s also very hard to estimate the rate of adoption of new disruptive technologies. If you combine rate of adoption with companies spanning a number of new disruptive technologies, the difficulting of determining a fair market value quickly multiplies.
The second mistake – underestimating the influence placed on analysts
I think the vast majority of analysts are doing their best to be fair and unbiased in their recommendations, but I know analysts are under constant pressure to make certain recommendations and in the past, I’ve made the mistake of underestimating that pressure.
I know analysts are under constant pressure because when I was in the business of recommending mutual funds to independent mutual fund advisors in the early 2000s, (and I was a complete nobody) I frequently faced a surprising amount of inappropriate pressure from mutual fund companies to add their securities to the dealer’s recommendation lists. I imagine it’s no different for the majority of analysts working today.
On the other hand, some analysts just seem to like being in the news (or at least their broker wants to be in the news), so sometimes analysts make outrageous calls on stocks they don’t really care about, hoping the call will be quoted by other news sources.
Tesla shares could drop to $10 in a worst-case scenario, Morgan Stanley says – May 21, 2019
The third mistake – underestimating the influence of advertising
I also underestimated the influence of lobbyists and big-dollar advertisers. Cable news needs ratings to drive advertising dollars and cable news needs to keep their advertisers happy.
Am I directly accusing cable news outlets of biasing their coverage to the benefit of advertising customers? No, I’m not, but it’s hard to believe the coverage of Amazon in the early days was completely ‘down the middle’ when big customers of CNBC were watching their business models slowly get devoured by a rapidly growing, revolutionary business model like Amazon.
Not convinced yet? Just take a look at this recent article on Forbes entitled Here’s How Tesla’s Stock Could Hit $0. Is Forbes just looking out for the public? Maybe it’s just another click-bait article, but I’m guessing Forbes isn’t too excited about people investing in a company that spends $0 on advertising.
Of course, the media plays an important watchdog role in government and business. Without media, investors would be largely defenseless against dishonest company executives. However, I think a healthy dose of skepticism should be applied when consuming media. Investors really need to ask themselves, ‘Who does this article really serve?’
In mid-2017, after losing tons of money in energy stocks (I rode oil prices from around $80 to $40) I finally asked myself;
Why am I still investing in the past? Why don’t I start investing in the future?
Asking myself this question led me to full-time investing in disruptive technologies. Today, I’m glad I made the transition. However, if I’m completely honest, the first several months (and in fact the next few years) of investing full-time in disruptive companies was very challenging psychologically.
This is another, often overlooked aspect of Warren Buffett’s value investing style that is actually mirrored by disruptive technology investing – his patience to stick with an investment long enough for it to make money. Value investing takes patience because it can take years for the market to realize a company is undervalued. This is no different for disruptive technology investing. It takes time for the public to accept and integrate new disruptive technology into their lives.
I used to own my own cloud-based fintech company for years. After so many years of being exposed to the benefits of cloud computing, making my first disruptive technology investments into Microsoft and Amazon in mid-2017 for exposure to their AWS and Azure business models was a pretty easy decision. By the time I made my technology investments, the transition to the cloud was well established and accepted as the future by almost all business leaders.
It was my third investment in mid-2017 that was more uncertain. In response to my disgust with a dying energy industry, I invested a third of my net worth in Tesla. At the time, Tesla had announced the model 3 and the stock price had run up considerably. But shortly after my investment, Tesla started to run into familiar headwinds Amazon had faced, years ago.
Analysts were generally very critical of Tesla and Elon Musk. CNBC’s coverage was also very negative and by 2019, the consensus seemed to be Tesla would soon be bankrupt. Tesla had long been plagued by short-sellers but as the negative news mounted, so did the short selling.
Honestly, I was a little scared. The allegations and accusations were frightening and the prospects of losing so much money was gut-wrenching. Nevertheless, I continued buying Tesla as it lost value by dollar-cost-averaging profits I’d made from Microsoft.
Two things kept me from selling out Tesla. How familiar the attacks on Tesla felt and the positive feedback from Tesla customers.
How familiar the attacks on Tesla felt
It was like I was watching a replay of the attacks on Amazon, years earlier. It‘s no secret Tesla has plowed virtually all profits back into expanding its various lines of business as quickly as possible. Yet, like Amazon, both analysts and TV pundits heavily criticized this extreme growth model.
The feedback from Tesla customers
Today if we want to know something, we google it. However, that behavior did not appear overnight. It personally took me YEARS before I would automatically open a web browser to search for an address, phone number or service. It took me even longer to consistently browse and buy products on Amazon from the comfort of my living room. It was the consistent positive feedback from friends, family, and peers that eventually changed my habits over time.
Disruptive technology adoption can take a long time before it becomes ‘normal’, but if the technology is consistently blowing away the competition, over a long period of time, sooner or later, the rest of the world is going to notice.
Even with all the bad publicity Tesla was receiving, the satisfaction level of Tesla customers was very hard to ignore. The number of positive reviews and the ever growing number of YouTube channels created by Tesla owners demonstrated Tesla was not only able to win over new customers, they were turning customers into advocates for the brand. These rapidly growing channels demonstrated Tesla’s early adopters were successfully converting the masses to this new disruptive technology.
I think the jury is still out, but there are a lot of reasons that make Bitcoin a compelling case.
- The media turned against Bitcoin as soon as the community experienced its first serious setback.
- Although there are detractors that think other cryptocurrencies are technically superior to Bitcoin, it’s hard to argue with the product. It’s completely de-centralized (a must for most Bitcoin backers) and because of its first-to-market position, Bitcoin has millions of passionate supporters from all over the world.
- Like all disruptive technologies, Bitcoin is nearly impossible to fairly price. Bitcoin isn’t even a business. Increasing value is driven simply by the slowing mining of new coins, the unintentional loss of coins, and by the number of people wanting to own bitcoin surpassing the number of people wanting to sell. In other words, value is driven completely by scarcity. Over the long-term, Bitcoin supporters believe this scarcity will put serious, positive pressure on bitcoin prices.
- Governments hate Bitcoin, so it gets a lot of hate in from governments and the ‘establishment’ in general who don’t want their stranglehold on power to be diminished in any way.
- Like almost all disruptive technologies, I think there are two, almost contradictory, risks to investors — first, will the price of bitcoin go as high as the fans of Bitcoin predict and second, will I have enough time to acquire enough Bitcoin before the price becomes unaffordable?
Although I don’t currently own any bitcoin, I’m seriously considering accumulating a few coins in case the price takes off the way true Bitcoin fans predict it will.
- Concentrate more on the business opportunity and less on the stock price. If you have good reason to believe the technology will be adopted by a lot more people in the future, then the value of the business should also eventually appreciate as revenue increases.
- Remember, timing the purchase of disruptive technology businesses is notoriously difficult. Don’t beat yourself up if you get the timing wrong. If you believe in the technology, stick with your investment and avoid the temptation to sell out too early. If you don’t have a lot of money, try dollar-cost-averaging smaller purchases on a regular basis. This strategy will give you the best average price, particularly if the price of your investment starts falling.
- Do your best to ignore the media. Instead, concentrate on the feedback of customers. If customers are passionate, its a very good sign the technology will continue moving toward mass adoption.
- Give yourself a long time horizon. Don’t invest money you think you need next year. Only invest money you won’t need to touch for years.
- Don’t invest more than you are prepared to lose. Look yourself in the mirror and ask yourself honestly, ‘If this investment goes to $0, will I still be OK?’
I’m Edward Iftody — If you’d like to read more about cryptocurrency and blockchain, you can learn more at www.blockchainin.asia
Published at Wed, 05 Feb 2020 05:53:02 +0000
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