Category: General Investing

Howard Marks is the co-founder of Oaktree Capital, an investment firm with a phenomenal long-term track record of investing in distressed debt, and an investor I deeply respect. He once shared a story (likely fictional) that is important for understanding risk when investing:

“I tell my father’s story of the gambler who one day hears about a race with only one horse in it, so he bet the rent money. Halfway around the track the horse jumped over the fence and ran away.”

The gambler would never have even considered that the horse he betted on could escape the track. But this is why it’s such an important story about investing risk. As financial advisor Carl Richards once said, “risk is what’s left over after you think you’ve thought of everything.”

I recently learnt of a real-life example of the horse-escaping-the-track story. It comes from Joel Greenblatt, another of the all-time greats in the investing world. It has become my favourite story about investing risk. During a recent episode of The Investor’s Podcast Network family of podcasts, Greenblatt recounted his own experience investing in a company when he was interviewed by William Green (emphases are mine):

“Well, the interesting thing, a Harcourt Brace Jovanovich, which was a publisher, but also owned amusement parks in Florida, believe it or not, went to buy a very small company called Florida Cypress Gardens, which I remembered as a kid going to, and they had water skiing Santa Claus, during Christmas time, and all kinds of water shows and beautiful gardens. It was a very unique, interesting, and very memorable place to visit when you’re five or six years old.

When I saw they were getting taken over, and this was literally in the first month I went into business for myself. I was pretty nervous. I was 27 and I had gotten money from a very famous guy and I want to do a good job. I saw this opportunity where Florida Cypress Gardens was being taken over, and there was a nice spread in that deal where I could make a lot of money if it went through. I thought the deal made a lot of sense at the time. I was able to have a big smile on my face and buy Florida Cypress Gardens as one of the first investments I made when I went out on my own.

A few weeks before the deal was supposed to close, unfortunately, Florida Cypress Gardens fell into what’s called a sinkhole, meaning the main pavilions of Florida Cypress Gardens literally fell into a hole that appeared out of nowhere. Apparently that happens a lot in Florida, I wasn’t that familiar with it, and thank God I wasn’t at Florida Cypress Gardens when it happened, but the Wall Street Journal wrote a real humorous story about it. I was like, “Why is this funny? I’m about to lose my business. I had taken a pretty decent sized bet in the deal.”

It just tells you, things can happen that you don’t anticipate, that it’s not really your fault. I’d never even heard of a sinkhole before I read about this happening, so it’s a risk that I… When you’re doing a merger deal, you’re not really saying risk of sinkhole is in your checklist of things to look for, so stuff happens, less kind words for that. It’s a good lesson to learn, especially out of the box. I was sweating pretty good. They ended up re-cutting the deal at a lower price and I lost money, but not that terrible.”

A sinkhole that appeared spontaneously – something Greenblatt did not even think of – nearly derailed his investment in the amusement park company Florida Cypress Gardens. I don’t think anyone who’s investing in a real estate-related company would contemplate that the company’s assets could be harmed by a sinkhole. This goes to show that our investments can be damaged by things we cannot even imagine of. I am a big proponent of diversification when investing. I do so for many reasons, and one of them is to prevent sudden sinkholes or horses escaping a race from causing my entire portfolio to crumble.

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Disclaimer: The Good Investors is the personal investing blog of two simple guys who are passionate about educating Singaporeans about stock market investing. By using this Site, you specifically agree that none of the information provided constitutes financial, investment, or other professional advice. It is only intended to provide education. Speak with a professional before making important decisions about your money, your professional life, or even your personal life. I do not have a vested interest in any company mentioned. Holdings are subject to change at any time 

Investors who have had a vested interest in high-growth stocks in the past year, myself included, have (to put it mildly) experienced steep drawdowns.

This begs the question, did we overpay for these companies? 

Many high-growth stocks in early 2021 were trading at high valuations and it was not uncommon to find such stocks trading at price-to-sales (P/S) multiples of more than 30. Their P/S multiples have since collapsed. Was that just too expensive or are multiples too cheap now?

Mapping the future

To answer this question, we need to make certain assumptions about the future. Let’s make the following conservative assumptions.

First, in 10 years’ time, a company’s valuation multiple will contract and will then trade between 25 to 40 times free cash flow. Second let’s assume the business in question can have a 20% free cash flow margin by then.

The table below shows a scenario of a company that initially had a P/S multiple of 50 and managed to grow revenue by 40% per year for the subsequent 10 years.

Without diving too much into the details, in the above scenario, I worked out that investors who paid 50 times revenue for the company would still enjoy a nice gain on the investment in 10 years of between 60% and 180%(depending on the free cash flow multiple it trades at in the future).

To be clear, I also included a 3% annual increase in share count to account for stock-based compensation which is commonplace for high-growth companies.

Looking at the table above, we can see that just because a company traded at a high multiple, does not mean it is doomed to provide poor returns. If the company can keep growing revenue at relatively high rates while eventually producing a healthy free cash flow margin, investors can still make a respectable return.

Bear in mind, many of the companies that were trading at 30 times revenue or higher in 2020 actually achieved faster growth rates than 40% in 2020 and 2021. This means their future revenue growth rates can fall below 40% for investors to still achieve fine returns.

It is also worth pointing out that many companies that were trading at high multiples also command high gross margins and have the potential for higher free cash flow margins than 20% (which was my assumption in the example above) at a mature phase. This means that even if the company grows revenue at a slower annual pace than 40%, investors could still make a handsome return.

Sieving the wheat from the chaff

Although the above calculations give me confidence that paying up for a company can provide good returns, not all companies have such durable growth potential.

During the bull run of 2020, there was likely too much optimism around mediocre companies. These companies don’t actually have the addressable market or the competitive advantage for them to keep growing to justify their high valuation multiples. These companies will likely never be able to return to their peaks.

When paying a high price for a company, we need to assess if the company has a high probability of growing into its valuation or if it is simply overpriced.  

Final thoughts

Just because stock prices are down now doesn’t mean those who paid a high price would not eventually yield good results. Zoom-out and look at the long-term picture. If a company can keep growing its business, then a high stock price may be warranted and still provide very respectable long term returns.

But at the same time, be mindful that not all companies will exhibit such durable growth. Make sure to assess if your companies are the real deal or just pretenders.

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Disclaimer: The Good Investors is the personal investing blog of two simple guys who are passionate about educating Singaporeans about stock market investing. By using this Site, you specifically agree that none of the information provided constitutes financial, investment, or other professional advice. It is only intended to provide education. Speak with a professional before making important decisions about your money, your professional life, or even your personal life. I do not have a vested interest in any companies mentioned. Holdings are subject to change at any time

A few weeks ago, I finished reading China’s Crisis of Success. The book, authored by Willam Overholt and published in 2018, contained many thought-provoking ideas on China’s past economic successes and future economic development. I summarised the lessons from the book in an article I published on 28 February 2022 titled Lessons From “China’s Crisis Of Success”. From here on, Lessons From “China’s Crisis of Success” will be termed Article 1.  

While writing Article 1, I was also reminded of a piece I published on 4 March 2020 titled China’s Future: Thoughts From Li Lu, A China Super Investor. This article, hereby termed Article 2, is an English translation of investor Li Lu’s review and thoughts in Mandarin on the 2018 book The Other Half of Macroeconomics and the Fate of Globalization written by economist Richard C. Koo.

As I wrote Article 1, I noticed a similar thread in Article 2. In both articles, an important element is that the pace of China’s future economic growth depends heavily on the Chinese government’s willingness and ability to relinquish central-control of the country’s economy.

Here’s the relevant section from Article 1: 

“Xi’s administration [referring to the administration of Xi Jinping, China’s current president]  has a well thought-out plan for economic reform that emphasises market allocation of resources, but there’s still a really strong element of central-control. On political liberalisation, there does not seem to be much signs that Xi’s administration is loosening its grip. How Xi’s administration reacts to China’s need for both political and economic liberalisation will have a heavy influence on how bright or dim China’s future is.”

The relevant passages from Article 2 are:

“In the Golden Era, the crucial players are entrepreneurs and individual consumers. The focus and starting point for all policies should be on the following: (1) strengthening the confidence of entrepreneurs; (2) establishing market rules that are cleaner, fairer, and more standardised; (3) reducing the control that the government has over the economy; and (4) lowering taxes and economic burdens. Monetary policy will play a crucial role at this juncture, based on the experiences of many other developed countries during their respective Golden Eras.

During the first stage of development, China’s main financial policy system was based on an indirect financing model. It’s almost a form of forced savings on a large scale, and relied on government-controlled banks to distribute capital (also at a large scale) at low interest rates to manufacturing, infrastructure, exports and other industries that were important to China’s national interests. This financial policy was successful in helping China to industrialise rapidly. 

At the second stage of development, the main focus should be this: How can society’s financing direction and methods be changed from one of indirect financing in the first stage to one of direct financing, so that entrepreneurs and individual consumers have the chance to play the key borrower role?”

Unfortunately, as I mentioned in Article 1, China’s government appears to have tightened its grip on the country’s economy in recent years:

“Since the publication of China’s Crisis of Success, there are signs that Xi’s administration has moved in the opposite direction of allowing the market to allocate resources. A good example, in my view, would be the well-documented crackdowns on the Chinese technology sector seen over the past year or so.”

Using the frameworks presented in Article 1 and Article 2, the future of China’s economy could be a lot brighter if the government embarks on effective economic liberalisation. But right now, the government appears to be doing the opposite. 

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Disclaimer: The Good Investors is the personal investing blog of two simple guys who are passionate about educating Singaporeans about stock market investing. By using this Site, you specifically agree that none of the information provided constitutes financial, investment, or other professional advice. It is only intended to provide education. Speak with a professional before making important decisions about your money, your professional life, or even your personal life. I do not have a vested interest in any companies mentioned. Holdings are subject to change at any time. 

A few months ago, a friend of mine, who’s an impressive investor working in a multi-billion-dollar fund management company, introduced me to the book, China’s Crisis of Success. The book, published in 2018, is written by William Overholt, Senior Research Fellow at Harvard University. 

Overholt correctly foresaw the rise of China over the past two-plus decades in his aptly-titled 1993 book, The Rise of China. I have investments in a number of Chinese companies, so I was curious to know what I can learn about the potential future of China from Overholt’s 2018 book. Below are the key takeaways I have from his work:

• There are a number of Asian countries – including South Korea, Taiwan, and a few others – that experienced decades of remarkable economic growth beginning in the 1960s. This growth helped to lift large swathes of their populations from poverty and made the countries prosperous. 
• These countries, collectively termed the “Asia Miracles” by Overholt, all had a number of similar traits near the start of their growth spurt. Their respective governments: (a) ruled with an iron fist, with an emphasis on tough implementations of radical economic and social reforms; (b) deeply feared their country’s collapse, a fear shared by their citizens who also harboured a strong sense of shared national identity; and (c) partook in strong central planning of their respective economies.
• As the economies of the Asia Miracles grew over the years, the countries reached an inflection point. The collective fear of societal collapse that gripped their citizenry dissipated. The citizens, now wealthier, more knowledgeable, and more confident of their country’s future, also grew increasingly frustrated with the “rule with an iron fist” approach by their respective governments. The economies meanwhile, became too complex for the governments to control via central planning. 
• Upon reaching their inflection points, the Asia Miracles started liberalising, both politically and economically. Not liberalising would have been a major risk to the Asia Miracles’ future prosperity and continued development. Within the Asia Miracles, a style of governance with much stronger democratic elements emerged, while their economies were increasingly allowed to develop from the bottom-up through the private sector.
• Beginning from Deng Xiaoping’s regime that started in the late 1970s, China embarked on a path of economic and political development that was similar to the Asia Miracles at the start of their growth spurts. As a result, a significant majority of China’s citizens were elevated from the sufferings of poverty in the next few subsequent decades, and the country’s economy grew to become a global behemoth.
• But as China grew over the years, it started reaching its inflection point around a decade or so ago, coinciding with Xi Jinping’s ascension to the foremost political leadership role in the country. Xi’s administration has a well thought-out plan for economic reform that emphasises market allocation of resources, but there’s still a really strong element of central-control. On political liberalisation, there does not seem to be much signs that Xi’s administration is loosening its grip. How Xi’s administration reacts to China’s need for both political and economic liberalisation will have a heavy influence on how bright or dim China’s future is.

I’m not taking China’s Crisis of Success as the authoritative framework for analysing China’s past successes and future growth. The framework may well turn out to be inaccurate. But I think it is a well-written book with thought-provoking ideas that I find to be logical. 

Since the publication of China’s Crisis of Success, there are signs that Xi’s administration has moved in the opposite direction of allowing the market to allocate resources. A good example, in my view, would be the well-documented crackdowns on the Chinese technology sector seen over the past year or so. Meanwhile, on the political front, Xi’s administration does not seem to have introduced any substantial measures to enable a relatively less-repressive political environment to develop (do note: I am far from being well-informed on politics!). Using the framework presented in China’s Crisis of Success and the developments in China that I just mentioned, the country’s long run future seems less bright to me than before I had read the book.

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Disclaimer: The Good Investors is the personal investing blog of two simple guys who are passionate about educating Singaporeans about stock market investing. By using this Site, you specifically agree that none of the information provided constitutes financial, investment, or other professional advice. It is only intended to provide education. Speak with a professional before making important decisions about your money, your professional life, or even your personal life. I do not have a vested interest in any companies mentioned. Holdings are subject to change at any time.

What if I told you that you could invest in a stock at a $90 price today and sell it for more than $3000 in 22 years time? You’d probably bite my hand off for such a deal.

That’s exactly what you could have achieved if you invested in Amazon.com 22 years ago in late-1999 and held the stock till today.

A $1000 investment back then would have turned into more than $33,000 today. The chart above shows the trajectory of Amazon’s stock price over that 22 year period. 

It looks like a pretty clean upwards trajectory but the stock price performance was actually anything but smooth. The chart below shows Amazon’s stock price from late-1999 to 2002 just after the dot com bubble burst.

Amazon’s stock price tumbled from more than US$90 to around US$12. Although this was the steepest drawdown, Amazon’s stock price experienced numerous other steep drawdowns over the past 22 years. The chart below shows how far Amazon’s stock was below its all-time high over the past 22 years.

Amazon took close to 10 years to regain its 1999 peak. And even after breaching that peak, Amazon still experienced numerous drawdowns from those peaks, with those drawdowns frequently reaching close to 30%.

This is the harsh reality of the stock market. Stock price rise and fall all the time and even the best companies can experience significant stock price declines along the way.

However, investors who bought Amazon at the highs of 1999, and maintained their long-term focus even after that massive subsequent drawdown in 2000-2002, would still have come out with excellent returns.

Today in 2022, with some stocks experiencing similarly steep drawdowns from their all-time highs, Amazon is a good reminder of how long-term investing pays off.

Instead of focusing on prices today, think about where the stock’s business can be in 10 or 20 years’ time. If you think the business will be stronger and the company will be worth much more, then ignore the prices today and focus on the future.

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Disclaimer: The Good Investors is the personal investing blog of two simple guys who are passionate about educating Singaporeans about stock market investing. By using this Site, you specifically agree that none of the information provided constitutes financial, investment, or other professional advice. It is only intended to provide education. Speak with a professional before making important decisions about your money, your professional life, or even your personal life. I have a vested interest in Amazon Inc. Holdings are subject to change at any time.

It’s a scary time to be an investor in stocks now. The US government has warned the world that Russia could launch a large-scale invasion of Ukraine at any moment. With the historically frosty relationship between the USA and Russia, any use of military force by Russia against Ukraine could result in the USA stepping in.

War between countries is a painful tragedy, not just for the citizens involved, but for humanity as a whole. Without downplaying the horrors of war, how should stock market investors approach the current tense situation between the USA and Russia?

Thankfully, there’s one classic investing book, Common Stocks and Uncommon Profits, first published in the late 1950s in the USA, that provides a useful framework for thinking about this. The book is written by Phillip Fisher, who’s an excellent investor in his own right, but is perhaps most famous for being an influential figure in Warren Buffett’s own evolution as an investor. Buffett has said that his investing style is 85% Graham and 15% Fisher.

With the current backdrop of Russia’s potential invasion of Ukraine – and the USA’s possible involvement – I thought it would be useful to share Fisher’s passages in Common Stocks and Uncommon Profits that discuss why investors should not fear buying stocks during a war scare. They are found between the two horizontal grey lines below (highlights are mine):

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Common stocks are usually of greatest interest to people with imagination. Our imagination is staggered by the utter horror of modern war. The result is that every time the international stresses of our world produce either a war scare or an actual war, common stocks reflect it. This is a psychological phenomenon which makes little sense financially. 

Any decent human being becomes appalled at the slaughter and suffering caused by the mass killings of war. In today’s atomic age, there is added a deep personal fear for the safety of those closest to us and for ourselves. This worry, fear, and distaste for what lies ahead can often distort any appraisal of purely economic factors. The fears of mass destruction of property, almost confiscatory higher taxes, and government interference with business dominate what thinking we try to do on financial matters. People operating in such a mental climate are inclined to overlook some even more fundamental economic influences.

The results are always the same. Through the entire twentieth century, with a single exception, every time major war has broken out anywhere in the world or whenever American forces have become involved in any fighting whatever, the American stock market has always plunged sharply downward. This one exception was the outbreak of World War II in September 1939. At that time, after an abortive rally on thoughts of fat war contracts to a neutral nation, the market soon was following the typical downward course, a course which some months later resembled panic as news of German victories began piling up. Nevertheless, at the conclusion of all actual fighting – regardless of whether it was World War I, World War II, or Korea – most stocks were selling at levels vastly higher than prevailed before there was any thought of war at all. Furthermore, at least ten times in the last twenty-two years, news has come of other international crises which gave threat of major war. In every instance, stocks dipped sharply on the fear of war and rebounded sharply as the war scare subsided. 

What do investors overlook that causes them to dump stocks both on the fear of war and on the arrival of war itself, even though by the end of the war stocks have always gone much higher than lower? They forget that stock prices are quotations expressed in money. Modern war always causes governments to spend far more than they can possibly collect from their taxpayers while the war is being waged. This causes a vast increase in the amount of money, so that each individual unit of money, such as a dollar, becomes worth less than it was before. It takes lots more dollars to buy the same number of shares in stock. This, of course, is the classic form of inflation. 

In other words, war is always bearish on money. To sell stock at the threatened or actual outbreak of hostilities so as to get into cash is extreme financial lunacy. Actually just the opposite should be done. If an investor has about decided to buy a particular common stock and the arrival of a full-blown war scare starts knocking down the price, he should ignore the scare psychology of the moment and definitely begin buying. This is the time when having surplus cash for investment becomes least, not most, desirable. However, here a problem presents itself. How fast should he buy? How far down will the stock go? As long as the downward influence is a war scare and not war, there is no way of knowing. If actual hostilities break out, the price would undoubtedly go still lower, perhaps a lot lower. Therefore, the thing to do is to buy but buy slowly and at a scale-down on just a threat of war. If war occurs, then increase the tempo of buying significantly. Just be sure to buy into companies either with products or services the demand for which will continue in wartime, or which can convert their facilities to wartime operations. The great majority of companies can so qualify under today’s conditions of total war and manufacturing flexibility.

Do stocks actually become more valuable in war time, or is it just money which declines in value? That depends on circumstances. By the grace of God, our country has never been defeated in any war in which it has engaged. In war, particularly modern war, the money of the defeated side is likely to become completely or almost worthless, any common stocks would lose most of their value. Certainly, if the United States were to be defeated by Communist Russia, both our money and our stocks would become valueless. It would then make little difference what investors might have done. 

On the other hand, if a war is won or stalemated, what happens to the real value of stocks will vary with the individual war and the individual stock. In World War I, when the enormous prewar savings of England and France were pouring into this country, most stocks probably increased their real worth even more than might have been the case if the same years had been a period of peace. This, however, was a one-time condition that will not be repeated. Expressed in constant dollars – that is, in real value – American stocks in both World War II and the Korean period undoubtedly did fare less well than if the same period had been one of peace. Aside from the crushing taxes, there was too great a diversion of effort from the more profitable peace-time lines to abnormally narrow-margin defense work. If the magnificent research effort spent on these narrow-margin defense projects could have been channelled to normal peace-time lines, stockholders’ profits would have been far greater – assuming, of course, that there would still have been a free america in which any profits could have been enjoyed at all. The reason for buying stocks on war or fear of war is not that war, in itself, is ever again likely to be profitable to American stockholders. It is just that money becomes even less desirable, so that stock prices, which are expressed in units of money, always go up. 

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Disclaimer: The Good Investors is the personal investing blog of two simple guys who are passionate about educating Singaporeans about stock market investing. By using this Site, you specifically agree that none of the information provided constitutes financial, investment, or other professional advice. It is only intended to provide education. Speak with a professional before making important decisions about your money, your professional life, or even your personal life. I do not have a vested interest in any companies mentioned. Holdings are subject to change at any time.

What is the right amount of stocks an investor should have in his/her portfolio to achieve diversification? Is it 10? Is it 20? Is it 100?

I currently believe that the right level of diversification is different for each investor. Some investors have an investment process and psyche that suits a highly concentrated portfolio, say, of 10 companies or less. I know I do not belong in this group. I am well-suited for a portfolio that has significantly more companies.

When I was investing for my family, the portfolio had slightly more than 50 companies by the time I liquidated most of its stocks in June 2020 so that the capital could be invested in an investment fund I’m currently running with Jeremy. I was comfortable managing around 50 companies and I could sleep soundly at night. 

Why do I say that the right level of diversification is different for each investor? Let’s consider the case of three legendary US-based investors. 

First there’s Peter Lynch, the manager of the Fidelity Magellan Fund from 1977 to 1990. During his tenure, he produced a jaw-dropping annual return of 29%, nearly double what the S&P 500 did. Toward the end of Lynch’s stint, the Magellan Fund owned more than 1,400 stocks in its portfolio.

Then there’s Walter Schloss, who produced an astonishing return of 15.3% per year from 1956 to 2000; in comparison, the S&P 500’s annualised gain was a little below 11.5%. Schloss typically held around 100 stocks in his portfolio at any given time.

The third investor is Charlie Munger, who achieved an annual return of 13.7% per year when he was managing an investment fund from 1962 to 1975. Over the same period, the Dow was up by just 5.0% per year. At any point in time, Munger’s portfolio would only have a handful of stocks.

Lynch, Schloss, and Munger are all stock market investors with incredible long-term track records (and I consider all of them as my investment heroes!). But their levels of diversification are so different. I think this is the best example of how there’s no magic number when it comes to diversification. You have to first understand your own temperament before you can know what’s the right level of diversification, for you.

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Disclaimer: The Good Investors is the personal investing blog of two simple guys who are passionate about educating Singaporeans about stock market investing. By using this Site, you specifically agree that none of the information provided constitutes financial, investment, or other professional advice. It is only intended to provide education. Speak with a professional before making important decisions about your money, your professional life, or even your personal life. I do not have a vested interest in any companies mentioned. Holdings are subject to change at any time.

*Quotes may be lightly edited for reading purposes

ASML: Semiconductor Industry experiencing strong growth

Question: To close off, do you expect strong demand to continue beyond 2022? 

ASML CEO Peter Wennick: Absolutely. I said it before, we are looking at the secular growth trend and we talked about this extensively during our Capital Markets day at the end of last year. The growth profile of this industry is impressive. The semiconductor industry is planned to double in size to a trillion dollars by the end of this decade. And of course, this will also have an effect on our business. So what do we do? And I have to admit, we as an industry, us and our customers and their customers, we have underestimated the long-term growth profile of the company. So we need to catch up. How do we do that? We build capacity. And that is what we are very much focusing on. Building capacity at ASML, but also in the supply chain. To make sure that we can significantly increase our output both for DUV and for EUV and for our metrology and measurement systems – basically across our entire product line. So, bearing that in mind, I’m even more optimistic about the long-term growth profile of this company. 

WISE plc: Cross border transaction volume growing and prices decreasing

WISE Trading update: Revenue grew by 34% YoY and 13% QoQ to £149.8 million, broadly in line with the rate of growth in volume. Our continuing efforts to engineer and optimise away costs to support sustainably lower prices for customers resulted in a lower take rate as expected, reducing to 0.73%, down 2bps YoY and 1bp QoQ. This reflects the price drops which are partially offset by incremental revenue from other sources beyond cross-border transactions.

Looking ahead, we continue to expect the take rate to be slightly lower in the second half of FY2022 (WISE’s financial year-end is 30 June) compared to the first half as a result of price reductions. This is expected to be more than offset by higher volumes as we now anticipate revenue growth of c. 30% for FY2022 over FY2021. We continue to expect gross margin for FY2022 to be c.65-67%, subject to foreign exchange related costs continuing to remain broadly stable.

Intuitive Surgical: Number of robot-assisted surgery grows in 2021

Gary Guthhart (CEO): Putting 2021 in context, demand for our robotically assisted interventions has been resilient during COVID. While these interventions get delayed during COVID peaks, the return when COVID wanes, and that is encouraging. Pandemic stresses on healthcare systems emphasize the need for the kind of high-quality, minimally invasive interventions or products enable. MIS (minimally invasive surgical) procedures allow greater use of ambulatory surgery, free up resources and ORs relative to other approaches, and often enable faster patient return to home and overall recovery.

In 2021, da Vinci procedures grew 28% compared to full-year 2020, reflecting a partial recovery in surgery after the first wave of the pandemic. Over the two-year period, 2020 and 2021, the compound annual growth rate in procedures was 14%. 

Netflix: Low member add guidance for Q1 2022 due to combination of factors but business still structurally unchanged

Spencer Neumann (CFO): No structural change in the business that we see. We guided to 2.5 million paid net adds in Q1. And what’s reflected there is pretty much the same trends we saw in Q4: so healthy retention with churn down, healthy viewing and engagement with viewing up and acquisition growing but a bit slower than pre-COVID levels, just hasn’t fully recovered.

And we’re trying to pinpoint why that is. It’s tough to say exactly why our acquisition hasn’t recovered to pre-COVID levels. It’s probably a bit of just overall COVID overhang that’s still happening after two years of a global pandemic that we’re still unfortunately not fully out of, some macroeconomic strain in some parts of the world like Latin America in particular. While we can’t pinpoint or point a straight line using — when we look at the data on a competitive impact, there may be on the marginal side of our growth, some impact from competition but which, again, we just don’t see it specifically.

So overall, that’s what’s reflected in the guide. I’d say our big titles are also landing, at least our known big titles, a little bit later in the quarter with Season 2 of “Bridgerton” in March, “The Adam Project” also in March. As you know, we are also changing prices in some countries in Q1 of this year and it happens to be our largest country, as we announced last week, actually our largest region with Canada as well. So that’s probably a little bit more impact than a typical quarter.

Microsoft: Broad-based growth and optimism from management

Amy Hood (CFO): And finally, for FY22, given our strong performance in the first half of the fiscal year and our current H2 outlook, full-year operating margins should be slightly up year-over-year even with the impact of changes in accounting estimates noted earlier and the significant strategic investments we are making to capture the tremendous opportunities ahead of us.

In closing, digital technologies are increasingly essential to empowering every person and organization on the planet to achieve more and we are well-positioned with innovative, high-value products. Our diverse, yet connected portfolio of solutions span end markets, customer sizes, and business models uniquely enabling us to deliver long-term revenue and profit growth. 

Tesla: Steady growth and FSD software will become financially important

Elon Musk (CEO): In 2022, supply chain will continue to be the fundamental limiter of output across all factories. So the chip shortage, while better than last year, is still an issue. There are multiple supply chain challenges. And last year was difficult to predict, and hopefully, this year will be smooth sailing, but I’m not sure what you do for an encore to 2021, 2020.

Nonetheless, we do expect significant growth in 2022 over 2021, comfortably above 50% growth in 2022. Full self-driving. So, over time, we think full self-driving will become the most important source of profitability for Tesla. Actually, if you run the numbers on robotaxis, it’s kind of nutty — it’s nutty good from a financial standpoint.

And I think we are completely confident at this point that it will be achieved. And my personal guess is that we’ll achieve full self-driving this year with a data safety level significantly greater than the present. So it’s the cars in the fleet essentially becoming self-driving by a software update, I think, might end up being the biggest increase in asset value of any asset class in history. 

Mastercard: Cross border transactions growing, Omicron only expected to have temporary impact

Michael Miebach (CEO): Looking at Mastercard’s spending trends, switch volume growth continued to improve quarter over quarter. Both consumer credit and debit continued to grow well. 

Turning to cross-border. The recovery has continued with overall Quarter 4 cross-border levels now higher than those in 2019. Cross-border travel continued to show improvement relative to Quarter 3 levels, aided by border openings in the U.S., U.K. and Canada. 

While Omicron has had some recent impact on cross-border travel, we continue to believe that cross-border travel will return to 2019 levels by the end of this year. Cross-border card-not-present spending ex travel continued to hold up well in the quarter. So overall, the spending trends are moving in the right direction with some near-term travel-related headwinds as a result of the variant.

Visa: Long growth runway ahead

Vasant Prabhu (Vice-Chair and CFO): FY ’22 is off to an excellent start. We expect our growth this year will be well above the pre-COVID rate as cross-border recovers. This will likely continue into fiscal year ’23. 

Beyond that, we are confident the business can sustain a revenue growth rate above pre-COVID levels for three reasons: first, an acceleration away from cash and check for merchant payments, both domestic and cross-border, as digitization becomes pervasive across consumers and businesses globally; second, acceleration of cash, check and wire transfer displacement as our new flows initiatives penetrate a broad range of new use cases with very large total addressable markets; third, sustainable high-teens growth across our value-added services, both from existing services and new offerings. As new flows and value-added services become a larger part of our revenue mix, growing faster than consumer payments, the sustainable growth rate will continue to rise. We are and will continue to invest in the capabilities required to capture the extraordinary growth opportunity ahead of us.

Apple: Strong quarter with broad-based growth

Tim Cook (CEO): Today, we are proud to announce Apple’s biggest quarter ever. Through the busy holiday season, we set an all-time revenue record of nearly $124 billion, up 11% from last year and better than we had expected at the beginning of the quarter. And we are pleased to see that our active installed base of devices is now at a new record with more than 1.8 billion devices.

We set all-time records for both developed and emerging markets and saw revenue growth across all of our product categories, except for iPad, which we said would be supply-constrained.

Disclaimer: The Good Investors is the personal investing blog of two simple guys who are passionate about educating Singaporeans about stock market investing. By using this Site, you specifically agree that none of the information provided constitutes financial, investment, or other professional advice. It is only intended to provide education. Speak with a professional before making important decisions about your money, your professional life, or even your personal life. Of all the companies mentioned, I currently have a vested interest in Apple, Mastercard, Visa, ASML, Microsoft, Netflix, Wise, Intuitive Surgical, and Tesla. Holdings are subject to change at any time.

During bouts of short-term underperformance and/or significant volatility in stock prices, it’s easy to throw in the towel and get out of them to relieve the psychological stresses that result. I believe that this is the worst thing an investor can do because doing so will cause temporary underperformance and/or losses to become permanent ones. It is difficult to stay the course – I get that. But it is crucial to do so because even the best long-term winners in the stock market can make our stomachs churn in the short run.

Don’t believe me? I’ll show you through a game. All you have to do is to answer two questions that involve two groups of real-life companies. Please note your answers for easy reference when you see the questions (it’ll be fun, trust me!).

Figure 1 below is a chart showing the declines from a recent-high for the S&P 500 and the stock prices of the first group of companies (Company A, Company B, and Company C) from the start of 2010 to the end of 2021. The chart looks brutally rough for the three companies. All of them have seen stock price declines of 20% or more on multiple occasions in that time frame. Moreover, their stock prices were much more volatile than the S&P 500 – the index experienced a decline of 20% or more from a recent high just once (in early 2020). So the first question is, after seeing Figure 1, would you want to own shares of the first group of companies if you could go back in time to the start of 2010?

Table 1 below illustrates the stock price and revenue growth for the second group of companies (Company D, Company E, and Company F) from the start of 2010 to the end of 2021, along with the S&P 500’s gain. The second trio of companies have generated tremendous wealth for their investors, far in excess of the S&P 500’s return, because of years of rapid business growth. The second question: If you could travel to the start of 2010, would you want to own shares of the companies in the second group?

My guess for the majority of responses for the first and second questions would be “No” and “Yes”, respectively. But what’s interesting here is that both groups refer to the same companies! Company A and Company D are Amazon; B and E refer to MercadoLibre, and C and F are Netflix. There’s more to the returns of the three companies from 2010 to 2021. Table 2 below shows that the trio have each: (a) underperformed the S&P 500 in a few calendar years, sometimes significantly; and (b) seen their stock prices and business move in completely opposite directions in some years.

There are two other interesting things about the stock price movements of Amazon, MercadoLibre, and Netflix. 

First, in every single time-frame between the start of 2010 and the end of 2021 that has a five-year or longer holding period (with each time-frame having 31 December 2021 as the end point), there is not a single time-frame where the annualised return for each of the three companies is negative or lower than the S&P 500’s. For perspective, the minimum and maximum annualised returns for the trio and the S&P 500 are given in Table 3. If you had invested in the three companies at any time between 1 January 2010 and 31 December 2016, and held onto them through to 31 December 2021, you would have not only significantly beaten the S&P 500 for any start-date, you would also have earned high annual returns.

Second, the returns for Amazon, MercadoLibre, and Netflix for all the same start-dates as in the data shown in Table 3, but this time for shorter holding periods of 1 year and 2 years, have been all over the place. This is displayed in Table 4. Notice the common occurrence of negative as well as market-losing returns for the three companies for both 1-year and 2-year holding periods.

After sweeping up all the data shown in Figure 1 and Tables 1, 2, 3, and 4, the critical highlights are these:

• By looking at just the long-term returns that Amazon, MercadoLibre, and Netflix have produced, it’s difficult to imagine that their stock prices had to traverse brutally rough terrains to reach their incredible summits. But this is the reality that comes with even the best long-term winners. It’s common for them to have negative and/or market-losing returns over the short-term even as they’re on the path toward fabulous long-term gains. For example, an investor who invested in Amazon on 9 December 2013 would be sitting on a loss of 20.4% one year later while the S&P 500 was up by 16.3%. But someone who invested in Amazon on 9 December 2013, and held on till 31 December 2021, would have earned an annualised gain of 30.7%, way ahead of the S&P 500’s annual return of 15.0% over the same period. In another instance, MercadoLibre’s stock price fell by 20.6% one year after 29 September 2014, even though the S&P 500 inched down by just 2.7%; on 31 December 2021, the compounded returns from 29 September 2014 for MercadoLibre and the S&P 500 were 41.4% and 15.1%, respectively. Meanwhile, an investor buying Netflix’s shares on 3 August 2011 would be facing a massive loss of 79.3% one year later, even as the S&P 500 had gained 10.7%. But Netflix’s annualised return from 3 August 2011 to 31 December 2021 was an impressive 30.7%, nearly twice the 15.9% annual gain seen in the S&P 500. 
• A company’s stock price can exhibit stomach-churning short-term volatility even when its underlying business is performing well. For example, Amazon’s robust 19.5% revenue growth in 2014 came with a 22.2% stock price decline, MercadoLibre’s stock price was down by 10.4% in 2015 despite revenue growth of 17.1%, and Netflix’s 48.2% revenue growth in 2011 was accompanied by a 60.6% collapse in its stock price. Significant short-term deviations between a company’s business performance and stock price is simply a feature of the stock market, and not a bug. 
• Having to suffer through an arduous journey is the price we have to pay (the fee for admission!) to reach the top of the mountain, but it’s a journey that is worth being on. 

Accepting that volatility is a feature of stocks can lead to a healthy change in our mindset toward investing. Instead of seeing short-term volatility as a fine, we can start seeing it as a fee – the price of admission, if you will – for great long-term returns. This is an idea that venture capitalist Morgan Housel (who also happens to be one of my favourite finance writers) once described in a fantastic article of his titled Fees vs. Fines.

Seeing volatility as a fee can also help all of us develop a crucial character trait when dealing with the inevitable ups and downs in the financial markets: Equanimity. Being able to remain calm when stock prices are roiling is important because it prevents us from making emotionally-driven mistakes. Another thing that can help strengthen the equanimity-fibre in our psyche is to focus on business results. Stock prices and business growth converge in the long run. But over the short run, anything can happen. 

It’s never fun to deal with falling stock prices. But as Josh Brown, CEO of Ritholtz Wealth Management and one of my favourite market commentators, wrote in a recent blog post: “Returns only come to those who are willing to bear that volatility when others won’t. The volatility is the point.”

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 Disclaimer: The Good Investors is the personal investing blog of two simple guys who are passionate about educating Singaporeans about stock market investing. By using this Site, you specifically agree that none of the information provided constitutes financial, investment, or other professional advice. It is only intended to provide education. Speak with a professional before making important decisions about your money, your professional life, or even your personal life. Of all the companies mentioned, I currently have a vested interest in Amazon, MercadoLibre, and Netflix. Holdings are subject to change at any time.