On the overall tech industry from an investment perspective

In this blog, I will focus on some of the recent trends in the tech industry and where I think it is headed to in the future.

  • Prospective future growth: there is still a lot of inefficiencies in different industries. For instance, the media industries, with bundled products, will face increasing challenges from pay-per-view medias. Internet will be applied to more and more company. We can save people a lot of time. Another area filled with inefficiencies is in healthcare; however, the risk in this category lies in government regulation.
  • The current tech boom: One key reason for the current boom is the result of Infrastructure costs have dramatically cut down. The bandwidth, processer, storage cost, down 25% each year. Fundamentally deflationary trend over time.
  • The competitive landscape: More competitor. The business models have all been working, unlike 1999, when so many business models do not work at all. Management team and competitive risks will be the most important as we go forward and analyze a company. This is also in part due to the lessening of the costs over time.
  • Buzzword of 2015, a “unicorn bubble”. Unicorns are defined as private companies valued at over $1 billion, and currently there are over 150 such companies in existence. The market has been generating tons of free cash flows.

 

Money generating models:

  • Ad, subscription, and retail models
    • The models are very important:

Who are the winners over the past few years?

  • The “FANGs” – Facebook , Amazon, Netflix, and Google

Who might be prospective buys in the future?

  • Top picks: Amazon, LinkedIn, Priceline , Expedia, Google
  • Negative outlooks: Twitter, Groupon, Yahoo

How to identify great value?

Successes:

  • Google and Facebook accounts for over 50% of all online advertising revenues around the world. Adverting model can be declining due to saturation. Can you come with a great advertising proposition for the company?
  • You have to catch the trend right. Google is like a tax on all internet usage, since searches are powered by Google. They need to get everything and anything they can put it online.
    • Strategic acquisitions and developments are important. Even though Motorola seemed odd, but it actually give Google significant patent protection. Google’s android development is great.
  • As identified before, we need to look at: advertising, retail, travel (revenue generating model).
  • Companies need to be willing to make long-term bets. Yahoo failed to make a long term bet while Google did. For instance, Yahoo did not jump on the train for mobile software, for social media, and a number of other things.
  • Study in failure: Ebay did not significantly innovate instead. Ebay, the only reason that the stock prices are staying high is because they are buying back shares and using other accounting tricks to boost their earnings (of course, this cannot last). Look at the company’s acquisition, Ebay made a certain number of acquisitions that are not related to its core business (they were owners of Skype at one point, what does Skype have to do with selling things online).
  • Amazon has super thin margins, but it is able to consistently generate growth to make itself bigger and more important. For Amazon, market share is key.

 

On Tesla specifically:

The unknowns about what a stock like tesla can do is enormous, and what the firm’s potentials are somewhat questionable. It generates a lot of optional value in the sense that we aren’t sure what they are doing. High volatility expected.

 

Companies that are not yet public but have interesting prospects:

  • Snapchat: key question is in how to expand snapchat, user base?
  • Airbnb: we are still looking at broad range of model.

 

Analyzing a company using the 4M framework:

  • Management team, (have to meet them face to face).
  • Business Model (social media is beautiful business model, 90% margin business).
  • Moats can also change over time (Ebay, competitive advantages are not very sustainable for too long, because they miss the next coming trend). Yahoo missed a lot of these new trends (video, social media). A lot of moats are based on the network effect. Network businesses can be undermined, but they can create a good moat for a couple of years. Are they global moats or are they local moats? Important to determine if they can be undermined.
  • Market opportunity. The greater the end opportunity the better it is. Google generated a large amount of TAMs (total addressable market). The market that Google enters contains huge amounts of end values.

 

Some specific things to be aware of when looking at these stocks:

  • Remember that each publication may have some sort of bias to them; for instance. Barron’s has more of a value bend to the articles they write, so they might exhibit bias against high growth tech companies.
  • Financial practices of companies: The management teams increasingly make up their own Adjusted Ebitda, rather than using standard GAAP measures
  • Specific example of a risk: Alibaba, it is possible that they are over-stating their numbers? Can we trust the financials? The average Alibaba user spends more with Alibaba than with the Amazon user spends with Amazon, even though incomes per person in China is about 1/3 of the US. Perhaps this goes back to the idea of the inefficiency in China? Perhaps there are simply no other choices (brick and mortar stores simply aren’t on par with online products)
  • We must also look at the industry in more detail as well:
    • Why is music a much more lousy business? There are only like 4 major labels, power is with the record labels. For instance, Pandora have gross margins of around 17%. Not much room to spend in r and d really.
    • Contrast this to the Netflix. Netflix faces significantly more players in the movie making landscape.

 

 

 

 

The Importance of 1979 in World History

When we think of the most important events of the past 100 year, certain years are particularly crucial in determining the course of history. Among the most important are those that marked the end of a period of conflict and the beginning of a new era of peace, namely: 1918/19 (End of WWI, Peace of Versailles), 1945 (End of WWII, beginning of the United Nations), and 1989 (end of the Cold War and the new era of globalization). However, for this blog, I would like to point to one lesser known year that marked not only the end of a period of conflict or start of peace, but also the beginning of a new period of global interactions, which, for better or worse, still shape the world we live in today.

Why 1979?

In the year 1979, several major events occurred around the world. I will list them by geographic region (East Asia, the Americas, and the Greater Middle East, in no particular orders of importance), and then discuss the impact of each of these events.

In East Asia:

The events in East Asia revolved largely around what China had done during that year. Two important event occurred:

  • China’s economic reform and opening up: In December 1978, during the 3rd Plenary Session of the 11th Central Committee of the Communist Party of China, a national meeting of China’s policy-makers, a new national political and economic policy was implemented. First, the meeting confirmed the role of Deng Xiaoping as the undisputed leader (or “Paramount leader”) of China. Deng had been well known as a reformer who wanted to implement changes to China’s bureaucracy and the way the economy was run. Secondly, in part due to the first, a new national economic policy was set whereby a new model of economic organization was first introduced in the countryside (the Household Responsibility System), and leading to a dramatic increase in agricultural productivity and output. These reforms marked the first stages in the transformation of China from an economic backwater into one of the fastest growing economic entity of the past 35 years.china's reform and opening up
  • China and Vietnam fought a brief border war: The Sino-Vietnamese war of 1979 (or the Third Indochina War) was nominally fought over the Vietnamese invasion of Cambodia, whose Khmer Rouge government was supported by China, and at least launched in part by China to test Soviet resolve in defending its Vietnamese ally. However, the real significance of the war was not in the conduct of the war itself, but rather what the war represents. First, the conflict was the last conventional war in East and Southeast Asia. After a series of on-and-off conflict among East Asian nations from 1931 (when Japanese forces first invaded China) to 1979, the nations of East Asia is finally at peace with one another. During this period, the clashes of a variety of ideologies such as militarism, colonialism and anti-colonialism, national and ethnic nationalism, and finally communism all served to fuel a state of continuous conflict in the region. The end of the conflict also marked the beginning of a period of rapid economic growth for not only China, but also for other nations of Southeast Asia. The trajectory of East Asian history was forever altered after 1979.china-vietnam-war

The Americas:

The role of the United States during this time period cannot be exaggerated. It was the world’s foremost economic power; and by most measures, the world’ leading military power as well. The economic difficulties experienced by the United States during the latter half of the 1970s can be explained as an economy in transition from an export-oriented industrial economy to one based on services and high-tech information, along with a significant rise in imports for manufacturing goods. Nevertheless, the United States faced two difficulties as its economic output continues to grow, all with respect to energy:

  • The Second Oil Shock: In 1973, the United States experienced what is later termed the First Oil Shock, whereby, due to a confluence of factors such as a tightening of the oil market (where supply is barely keeping up with demand), instability in the oil producing regions, and finally an outright embargo on the part of the OPEC (Organization of Petroleum Exporting Countries) against the United States for its role in supporting Israel, led to a massive increase in the price of oil. However, this Second Shock of 1979 was due to quite different causes. The Iranian Revolution (to be discussed below) led to a sudden increase in the price of oil as several million barrels of oil were removed from the market. This event helped to trigger a recession in the United States, along with significant political fallouts for President Carter and the Democratic Party, and marked the rise of conservative, neoliberal thinkers in economic circles (The Chicago School of Economics, mot vocally represented by Milton Freidman). Moreover, the Oil Shock leads to increasing financial instability in the US and Europe, and helped to make an already fragile economic situation even worse by introducing an element of inflation along with economic stagnation into the economy.oil shock
  • The nuclear meltdown of Three Mile Island: The nuclear accident at Three Mile Island (a partial meltdown) was another significant event in the energy landscape of the United States in 1979. The accident, while not particularly significant in terms of destruction or radioactive materials released, did lead to a change in perceptions in the public eyes on the issues of nuclear power. This event helped to energize the environmental movement on the issue of nuclear power, and eventually this led to a freeze on all new nuclear power plant construction in the United States. Nuclear energy, which had seemed so promising to many Americans as a reliable source of energy, had now been relegated to the fringe. Another consequence of this event is the increasing dependence of the United States on petroleum as an energy source. Increasingly, the United States began to intervene on a larger scale in oil-exporting regions to ensure that a reliable source of energy supply does not become a problem for the United States.Three Mile Island

Greater Middle East:

  • Soviets invaded Afghanistan. The Soviet Union, through the invasion of Afghanistan in support of the Afghan communist government, in effect launched a series of chain reactions that had the most profound consequences today. First and foremost, the Soviets hastened its own collapse by expending an extraordinary amount of resources (something that it cannot afford due to its fragile economic situation), in both manpower and money. In addition, the image of the Soviet Union as offering an alternative to the “imperialism” of the United States was destroyed, and its influence in the world stage declined drastically. More importantly for the trajectory of world history, the conflict generated a huge response across the Islamic World, in both fighters and money, in support of the “holy war” conducted by the resistance fighters (known as the mujahedeen) to the Soviet Union. Over time, the conflict takes on an increasingly religious nature, where it is seen by many Muslims as a conflict to end the oppression of the Afghan people. Thus, Political Islam in its modern form was born. Another event also took place during the latter half of the conflict which have strong ramifications today. Among the thousands of young foreign Jihadists was a young man by the name of Osama Bin Laden. Indeed, it is in Afghanistan that Al-Qaeda first started. It is important to note the name Al-Qaeda translates as “The Base”, the base by which Islamists in Afghanistan organized themselves and fought against Soviet aggression.Soviet invasion of Afghanistan
  • Islamic extremists took control of the Grand Mosque of Mecca: In late 1979, religious militants took over the Grand Mosque of Mecca and openly challenged the Saudi family’s religious authority. (The Sauds have claimed in their title that they the “Custodian of the Two Holy Mosques.) Later, Saudi security forces moved in and forcibly cleared out the insurgents, resulting in hundreds of causalities. The event, played out on televisions in the Arab World, shocked many who watched it. At the time, many in the Islamic world, from Philippines to Turkey to Pakistan, blamed the United States and Israel for this attack, which in turn led to massive demonstrations, including the burning of US embassy in Pakistan and Libya. The perpetrators were dealt with harshly, and all 68 rebels were captured and beheaded. However, what is truly significant about this event was that the role of religious authority in Saudi Arabia did not diminish after this attack. Instead, the religious conservatives were given more power. In order to appease the religious scholars and social conservatives, the Saudi government turned toward religion to uphold their own legitimacy. Religious schools became more prevalent; the social roles of women were cut back, and in some cases were removed from public altogether. After 1979, Saudi Arabia increasingly became a religious theocracy, with profound influence on the rise of Political Islam.Saudi Mosque seizure
  • Iran’s Islamic Revolution: The final event in the Middle East that is crucial to our understanding of the year 1979 was the conservative Islamic revolution in Iran. By the end of 1978, the government of the Shah of Iran was in its last throbs. The question facing many Iranians was not whether or not the Shah should go, but rather, what sort of government should replace it. The solutions were far ranging, from the Tudeh Party (Communist Party of Iran) to religious ultra-conservatives. While the average Iranian was debating and fighting among those alternatives, the Shah suddenly left the country and left a large power vacuum in a country where the heavy hand of the state had been ever present. Into this power vacuum, an exiled religious teacher – Ayatollah Ruhollah Khomeini – made a landing in Iran. The masses suddenly found a leader that they can unite themselves around, and within weeks, a religious theocracy, as though something coming out of the Middle Ages, was born. The Ayatollah possessed hatreds towards many groups around the world – communists (both inside and outside the country), Israel and the Zionists, and above all, the “Great Satan” in the form of the United States. This hatred only increased over time as he gained more political power. The impact of the Revolution can be seen immediately, from the Iranian Hostage Crisis with the United States to the inauguration of the decade long war with Iraq, all stemming from this watershed event of the Middle East.Islamic revolution in Iran

Now that we have come to the end of our list of major events of 1979, I would like to make note of a few more things:

First, even though in this article I have treated world events as separate in their geographic scope, in reality, all of these events are intimately connected and one often feeds off the other. For instance, American dependence on foreign oil increased just at the same time as Iran’s Islamic Revolution, which removed several million barrels/day from the world market; the fuel crisis of 1979 was certainly worsened by the conflicts in the Middle East. No event in the world took place in isolation, and each one influenced and shaped the outcome of the other.

Secondly, due the scope of this article, I am unable to discuss many of the important events in detail, but they are often important in their own right. 1979 was a year of many changes, yet it has frequently been ignored by many who are not as familiar with world history. I hope that through this article, I can at least spark some interests among my blog readers in the world around us, and view current events through a historical lens.

Finally, the history of the world since 1979, the fall of the Berlin Wall, the War on Terror since the early 2000s, the economic rise of China and increasingly East Asia as a whole, the challenges and benefits of globalization, all directly or indirectly traced their root to the tumultuous year of 1979. In many ways, the events of 1979 is still influencing the world around us, and we are still living in its shadows. 1989 Fall of the Berlin Wall