Recent thoughts on investment (28)

Recent thoughts on investments

Are we all clear? Certainly not! But investors are more and more choosing to look beyond

S&P500 almost backed to its pre-virus level, which is amazing considering we are not even close to out of woods yet and the global economy still suffers a lot from the crisis. In short, the reason for that is investors are more and more choosing to look beyond by forgetting about the miserable 2020 and expecting a strong rebound in 2021, still questionable but hopeful.

Many influential institutes also agreed on this hypothesis mainly due to the government massive bail out programs. For example, per Goldman Sachs’s projection: an only 3.3% decline in worker income in 2020 relative to the pre-virus level, with an 11.7pp hit from private income offset by an 8.4pp boost from unemployment benefits. 

GS also projected that the fiscal aid mostly but not entirely offsets the decline in total corporate income. GS cautioned that these figures are for the corporate sector as a whole; while the PPP offers generous aid to small businesses, large businesses will benefit much less. 

Thanks to the free money, the residents saving rate also jumped to a record level of 33%, a number certainly would be helpful for future recovery once consumers feel comfortable enough to spend money again.

How much of the recovery expectation is already in the price is a question nobody knows, and only time can tell. Nonetheless, given the current price level and valuation, I would say investors has already factored in the road to normal, as the fear of virus fading away, even though the current statistics still inching up. 

Polarization and too many momentums 

We have seen quite a lot polarization and momentum in the market, as investors scrambled into those highly convicted beneficial targets the market picked, for example tech in American, luxury in European, consumers in Chinese market. Probably until the last week of May, we have seen some rewinding, god knows whether it can sustain. We are not interested investing, or gambling, more precisely put, into these trades, as these polarization and momentum can indeed make some of the best companies less attractive valuation wise.

The worry of fast-growing market and free money

It seems a natural react that investors view fast-growing and cheap money as beneficial for companies. However, those aspects would not automatically translate into company’s long-term earning power, as long as they are also favorable for its competitors.

Unfortunately, a little counter-intuitive that fast-growing market and free money combo is the boon for upstarts rather than the incumbents. Especially today, investors are eager to pay huge for those top line, sometimes even the fraud one, fast growing but bottom-line bleeding new hopes. Yet, as history always repeat somehow itself, a lot of the fast-growing story would turn out to be false or fraud and investors and speculators lose a ton. Nevertheless, until the mirage become clear and the money stop pouring in, the incumbents might suffer for some time due to constant competitions, as we have seen the examples in Starbuck vs Luckin, BABA vs PDD, etc.

The dream vs reality

As a value investor, BEDROCK sees no difference between so called value and growth investors, as both are looking into the future and try to figure out what’s the real valuation should be. We understand the reason why the market always keeps them distinct from each other is mostly for simplicity reasons (human nature always seeks for shortcut and simplicity). As their definition: value investors are more weighing in the current value whereas the growth investors are more weighing in the future, sometimes dream, value.

If some of the growth investors are betting too further into the future, there would create a great discrepancy between the dream vs reality valuation. And that’s what happened in some places of the market. It is true that if you dream too big of the future and assume the current hype growth would be sustainable in the far away future, like 10 or 20 years, any ridiculous valuation would be reasonable. However, history tells us, the further future we try to predict, the lesser success rate would be, and most of time becoming pure guessing work, otherwise we would see VC, they only bet on dreams, would be most easy and rewarding investment job in the world.

Because of the discrepancy between market viewed growth and value, when a business becomes more and more mature, meaning growth rate gradually peter out, there is a great de-valuation risk for investors. If the near mature company still has not got ready to provide value propositions, for example healthy balance sheet, profitable margins, strong cash flow, and a more reasonable valuation, etc., the company and its shareholders would be eager to do anything to maintain its growth outlook to the ease the market concerns, for example M & A，more products launch or storytelling to beat up TAM, and to attract value investors, for instance starting to buy back shares, give out dividends, etc. Even so, because the value investors would be much more critical on the earning power potential instead of its topline growth, a near mature company with still not satisfactory profits would have to face a plummeting valuation risk.

That’s what we see and contemplate some tech companies are now gradually losing their rosy images and have to face a crueler value check.

In the long run, however, we believe there still has a long way to run in tech

Even with some wildness and craziness in recent technology stocks rally, BEDROCK still believes there are plenty of great companies in tech sector have a long way to run, as their disruptive nature is totally changing the world. And more importantly for value investing is that many new techs help forming business models have different cost structure then traditional ones, they are more stable, more like monopolies, have stronger earning power, and can probably last longer. Examples are abundant in internet, ecommerce, cloud-computing, software, semiconductor sectors as winners take all and are far more stable and powerful than investors initially thought.

As technologies emerge and transform entire industries, investors in traditional benchmarks may face more risk than historically has been the case. People still need time to digest all these, as people tend to overestimate eminent changes and underestimate something long and more structural changes.

Democratize the e-commerce? 

As the virus are still raging the world, how to get connected with customers becomes more than crucial these days, and e-commerce as a way of going digital becomes more and more essential, if not lifesaving. Apart from the more centralized way of e-commerce, as Amazon practices and dominates in this area, there seems a trend of going direct to customers using a more democratized way recently going parabolic.

Reaching roughly a third of the world’s population daily, Facebook’s family of apps now wants to sell goods and services to them. Facebook and Instagram already support limited e-commerce activity, but neither has an end-to-end solution. We believe Facebook’s new e-commerce tool, ‘Facebook Shops’, solves that problem.

Social commerce combines the stickiness of online shopping with the network effects of social media and can be a powerful growth driver. In China, for example, PDD offers steep discounts to encourage a user’s friends and family to buy products and services. Founded only five years ago, PDD is now the second-largest e-commerce company in China, with 600 million annual active buyers.

Based on ARK’s research, now that Facebook and others are making aggressive moves, social commerce is likely to scale from roughly 5% of the $4.5 trillion global e-commerce market last year to 19% of a roughly $15 trillion market in 2025. In other words, if ARK is right, it will increase nearly 15-fold from $200 billion to $2.8 trillion during the next five years.

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欢迎阅读往期内容：

1. 投资思考随笔21-疫情对投资的影响推演和思考