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Discussion Starter #1
I've seen in a few posts that many of you have invested in Energy, Financials, etc. But not much into Tech or tech-related? Is it because you lived the 2000 dot-com bubble? I totally agree that living that bubble certainly did a big scar. I'm trying to understand the sentiment for tech from people who invested over the last decade or more, where it seems like tech was the place to be.

I think tech is pretty safe and it's thriving big. The last 10 years certainly made a few millionaires for tech investors. Tech is the main factor when differentiating how we lived a century ago compared to now. The growth of most sectors also depend on new technologies.

Elon Musk now has a net worth higher than Buffet. There are a lot of multi-billionaires out there who got their net worth from tech-related industries and most are 50 years old or less and already have a net worth higher than 90-year-old Buffet. This is not discriminating Buffet, don't get me wrong. You should also know that Buffet also invested about 50% of its holdings in... AAPL, a single tech stock. With Zuckerberg at 90B$ at only 36 and Bezos at 190B$ at only 56 including his >30B$ divorce cost last year, that's just crazy. He's just a few years away from becoming the world's first... trillionaire! In the top 10 of the world's richest people, only 3 are not tech-related. Real Time Billionaires
 

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I started investing right around 2000 (the previous tech bubble peak) and this "trained" me to dislike the tech sector. Tech also looked horrible in back tests, which is why my 5-pack does not include it. At the time I created my 5 pack, there was no good reason to include tech.

I often ask myself if I have too little in tech, but I decided that I'm OK. The reason is that I have a lot in the S&P 500 and tech is a huge component of this index. So I'm not missing out. Tech drives the S&P 500.

I also hold a smallish growth portfolio, about 3% of my overall investments. In this portfolio I do hold some tech stocks (CSU and DSG). This won't make a big difference overall, though, since the portfolio is small.

Additionally, I work in tech myself so I have plenty of exposure through employment and my small business. I think it would be a mistake for me to seek extra exposure beyond this.
 

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Discussion Starter #3
I started investing right around 2000 (the previous tech bubble peak)
You said the "previous" tech bubble peak because you believe we are currently in another tech bubble which is going to burst?
 

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You said the "previous" tech bubble peak because you believe we are currently in another tech bubble which is going to burst?
Yes I think this is a bubble, but that's just a guess (and I could be wrong). Even if it's a bubble, it could be 5 or 10 years from bursting.

At the end of the day, I can't really predict these things, so I stick with my asset allocation and don't try strategically trading.
 

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I think tech is currently way over valued. In the past I have not purchased it for a similar reason. A few years ago I tried to buy MSFT and APPL but once again my target price never was filled and alas I missed out. I have long thought Amazon was an amazing company and would change not only retail but other areas of our lives. I thought they would make a mistake at some point and the stock would take a dive. That hasn't happened. In March I expected tech to fall with the rest of the market and I would be able to make a few purchases. Again to no avail.
 

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Tech is insanely overvalued. It will come back. I retain exposure through the S&P 500, in a not-insubstantial way. But most of it is untouchable directly.

I don't know when the bubble will end, but I know how it ends. Usually in tears and people never investing again.

There is a difference with the 2000 tech bubble - it is obvious that most of these companies have sustainable businesses. It is just the valuation. It will take decades of unrestrained growth, zero execution faults, zero new competition, zero unexpected changes in consumer behaviour, and zero technological advances that cause disruption.

The 1970's is a good comparison, where blue chips hit P/Es north of 50. It took 15-20 years before investors would see gains from those highs.
 

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Tech is insanely overvalued. It will come back. I retain exposure through the S&P 500, in a not-insubstantial way. But most of it is untouchable directly.

I don't know when the bubble will end, but I know how it ends. Usually in tears and people never investing again.
SHOP being 20% larger than RY's market cap is also an indication that something funny is up.

Of course, we could be in the early stages of a mania or bubble. SHOP might end up with double RY's market cap. XIT could triple in price, and TQQQ could quadruple from here... but you will never know when the wipeout is coming.
 

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Discussion Starter #8 (Edited)
But how are they overvalued with a P/S around 5 or less? I know you are going to tell me a true good valuation is a P/S below 2, but some big names in the tech stocks have gone through the dot-com and yet they are happy with a P/S around 5 as a valuation. I agree though that it's getting overvalued as their P/S history is more around 3, which means they could drop 40%... Unless their revenue growth fits their price growth (or it becomes the new standard). Look at FB, its P/S is about 10, but its revenue is growing faster than its price, so its P/S is slowly decreasing while providing 33% CAGR in the last decade. Meanwhile, people are investing in AAPL when its revenue growth doesn't match its price growth...

SHOP is overvalued, I agree with that, it has a P/S over 60 and that's why I won't touch it. Even though they had huge revenue growth, it's not enough.

And what about non-tech stocks like V and MA who had great growth in the last decade with a P/S of 15? You think Visa and Mastercard are going to drop hard?

But if I want great growth for the value, then I'll go on the US side and buy non-tech stocks like ROST who has a P/S of 2 while having about the same growth as AAPL in the last 30 years. Or I'll buy COST with a 10-year return of 20% and P/S below 1. Or PGR. Or TJX.

Or stocks like TPL because even though it has a P/S of 11, it had a 5-year revenue growth much faster than its price growth. Now that's a gem! Unfortunately, its price growth has been slowing in the last 2 years.

Unfortunately, no CDN stocks stands out of my screening... I guess I'll go on the USD side! Maybe ATD-B.TO, but its last 5 years weren't that good.
 

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I have 3 long-term holds: AAPL, CSCO and IBM. they have done well and all pay dividends. I have stayed away from anything that does not have good earnings. The USD has helped. I missed MS and have stayed away from Alphabet, Amazon and Facebook so far to my lost opportunity. I have licked FOMO.
 

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I wouldn't normally listen to Cramer, but he has a point here. There have been giant rallies in mega cap stocks, and that's never been seen before.

AAPL is worth $1.7 TRILLION. It's up 94% over the last year.
AMZN is worth $1.6 TRILLION. It's up 60% over the last year.
... while the S&P 500 is up 12% in the same period.

These aren't small or mid caps rallying like mad. It's just worth noting that historically speaking, this is very atypical, and I share Cramer's worry.

 

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Discussion Starter #11 (Edited)
I wouldn't normally listen to Cramer, but he has a point here. There have been giant rallies in mega cap stocks, and that's never been seen before.

AAPL is worth $1.7 TRILLION. It's up 94% over the last year.
AMZN is worth $1.6 TRILLION. It's up 60% over the last year.
... while the S&P 500 is up 12% in the same period.

These aren't small or mid caps rallying like mad. It's just worth noting that historically speaking, this is very atypical, and I share Cramer's worry.

I agree about AAPL. But that's not true for all stocks.

AAPL is worth >1T$ because of its investors, because of its shares price, not because of its revenue. It comes to the same point about my observation on its P/S.

Its worth doubled means its market cap doubled means its shares price doubled (considering the same number of outstanding shares).

Meanwhile, did its revenue double? No. On September 2019, AAPL's revenue was 260B$. On September 2018, AAPL's revenue was 265B$.

The current market cap (worth) of 1.67T$ divided by the current ttm revenue of 268M$ gives us our P/S of 6.23. Which means investors are spending more for 1$ of AAPL's sales. And since AAPL's sales growth is not as fast as AAPL's price growth, its P/S is increasing, which means its becoming overvalued. At a P/S of 6 it seems still safe, but that's why I'm not buying SHOP at 60 of P/S.

See how AAPL went from a steady P/S of 3 to a suddenly P/S of 6? Investors are valuating AAPL twice of what it was in its recent history.

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Compare this to FB. Facebook's revenue grow faster than its share price. That seems healthier. Though, its P/S is still higher than AAPL's.
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Facebook could keep up with its share price growth because it had a revenue growth. In 2012, FB had 5B$ revenue. Now it has 70B$ revenue has of 2019. That's an average of 45% revenue increase per year during 7 years. Meanwhile, its share price increased from about 30 to 200, which is an average of 30% per year during 7 years. See how the revenue is growing faster than the share price?

Now Apple. Its revenue in 2012 was 156B$. Its revenue in 2019 was 260B$. That's an average of 8% revenue increase per year during 7 years. Meanwhile, its share price increased from about 70 to 300, which is an average of 23% per year during 7 years. See how the revenue is growing SLOWER than the share price?

I'm definitely not an expert, but from my understanding, AAPL's growth situation is unhealthy while FB's growth situation is healthy.

Now, the mystery is... tell me why Buffet has 35-50% of its BRK portfolio in AAPL? Simply because its P/S is still much lower than FB? Give it a few years and they'll cross. Why not choosing GOOGL then? Its revenue growth matches its price growth and its P/S is comparable to AAPL.
 

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Apple's share price in the past was much cheaper. They were trading at a P/E of close to 10. The price tripled, profits remain steady, P/E is 30. I doubt Warren Buffet would be buying $90B of Apple stock today. It is definitely expensive. It's business prospects are no better or worse than 5 years ago when the P/E was < 15. Apple is such a high % of BRK's portfolio because it tripled, not because he invested that much in it. Future returns are likely to be much less. Wouldn't be surprised to see BRK selling those shares down.

FB is perhaps the fairest valued of big tech. However, you also have to consider their business is evolving. They have to spend more to monitor content. It may reduce earnings moving forward.

Google has been fairly valued, but at a P/E > 30 now it is very expensive for its growth, which is closer to 10-15% a year.

Earnings are more important than P/S. Increasing revenue is important, but earnings are what grow a company. If both revenue and earnings are increasing, that is good though. If a company can improve its margins, it can grow earnings faster than revenue. And it has more profits to reinvest or return to shareholders. Revenue doesn't get reinvested or returned to shareholders.
 

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Right, just because Berkshire owns AAPL doesn't mean they would buy it at this price. They bought it some time ago, and I'm sure they are happy with how it's performing. Holding their existing positions is the natural thing to do.

AAPL doubled in in the last year. I still think that's crazy. Yahoo Finance says that the forward P/E a year ago was 16x, and today is 26x. That means the share price increase is nearly entirely multiple expansion.

GOOGL using Yahoo Finance, shows forward P/E a year ago was 23x and today is 37x. Again the rally in the stock price is entirely multiple expansion, not earnings.

Multiple expansion can come from many things: there's more liquidity in the system (central bank manipulation of the market), people are in a more optimistic mood, people are being greedy, there's a bubble mania, or people feel like we're in a growing economy. So the fact that the multiples are expanding is not necessarily a bad sign on its own, but one has to acknowledge that it's multiple growth and not earnings growth.

Some analysts believe that due to very aggressive central bank money-printing, the liquidity in the system could drive multiples far higher than we're used to seeing. In that scenario, we don't need to have a good economy in order to get much higher stock prices.
 

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Discussion Starter #14 (Edited)
Apple is such a high % of BRK's portfolio because it tripled, not because he invested that much in it. Future returns are likely to be much less. Wouldn't be surprised to see BRK selling those shares down.
Yes, that's what I was going to ask, why didn't Buffet sell yet? I mean, we do rebalancing every year and even more and yet BRK has not rebalanced AAPL at its current 35-50% of the portfolio? Why? I understand that holding it while its still moving up is good, but at some point it's overwhelming all other investments in the portfolio and it's increasing the risk.

Earnings are more important than P/S. Increasing revenue is important, but earnings are what grow a company. If both revenue and earnings are increasing, that is good though. If a company can improve its margins, it can grow earnings faster than revenue. And it has more profits to reinvest or return to shareholders. Revenue doesn't get reinvested or returned to shareholders.
Well, there's a debate on this. Personally, from my understanding, I'd look primarily for a great P/E situation if I'd be looking for dividend stocks, but I'll be looking for a great P/S situation when I'll be looking for great growth stocks.


SHOP doesn't have P/E and is now worth over 100B$. But back in 2016 SHOP's P/S was around 10 which was quite decent considering all the high P/S of tech stocks. For companies that grow fast, their earnings comes after and are most likely not stable. I bought KXS at about 12 P/S while its P/E was more than 100, but at least it had earnings and KXS did quite a good run. I had +60% in a matter of less than 3 months.

Or take our big tech name CSU which P/S has been steadily increasing from about 2 to 6 in a matter of a decade, slowly becoming overvalued. Meanwhile, its P/E went 25, 9, 27, 49, 59, 85, 46, 60, 49, etc. How can one take a decision with that fluctuating P/E? (Or simply, how can one set a threshold for screening that parameter?)

Or take a non-tech stock like BYD which P/S has always been below 2, meanwhile its P/E went 4, 7, 29, N/A, N/A, N/A, 99, 50, 30, 50, etc. But BYD had an eye-popping 45% CAGR over a decade from 2010 to 2019.

I'm not saying that P/S is sufficient, but personally I prefer it over P/E when screening for growth stocks, then I combine it with other indicators.

The P/E will be worth looking at for dividend paying stocks because it drives its EPS (EPS = SP / PE) which drives its payout ratio (DIV / EPS). A healthy EPS growth means a healthy dividend growth.
 

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Buffett doesn't manage these stock picks and hasn't for a while. There's someone else who deals with their equity portfolio.

Berkshire Hathaway is a group of fully owned companies and the stock portfolio is a pretty minor part of BRK.
 

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Discussion Starter #16
True, but still, why would BRK (instead of saying Buffet) would keep 35-50% holdings on AAPL? I'd never buy an ETF with that much in a single stock.
 

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Yes, that's what I was going to ask, why didn't Buffet sell yet? I mean, we do rebalancing every year and even more and yet BRK has not rebalanced AAPL at its current 35-50% of the portfolio? Why? I understand that holding it while its still moving up is good, but at some point it's overwhelming all other investments in the portfolio and it's increasing the risk....
BRK did exactly that in 1Q this year:
Berkshire Hathaway, Warren Buffett's investment fund, has reduced its holdings in Apple over the last quarter, offloading in excess of $800 million worth of Apple stock over a three-month period, but it still maintains its position as the iPhone maker's biggest shareholder.
 

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Discussion Starter #18 (Edited)
BRK did exactly that in 1Q this year:
Well, they're not offloading enough... or fast enough? What's selling 800M$ when you hold 90B$? It's not even 1%.

For example, reducing a 50% hold by 1% of its worth only means reducing it to a 49.5% hold. Meanwhile, the price will increase faster than that.

In fact, someone who holds 90B$ and wants to reduce that amount to 45B$ (half) in a 1-year time frame for a stock growing at a 30% CAGR pace should sell as much as 1.2B$ worth of stocks every week during 52 weeks.

 

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MrBlackHill, I had a random thought today while hiking around some fjords

You're just starting out investing, right? I know you are a very analytical person and you work with analytical software as well. All great things... and I know you're very excited about doing the analysis for your own securities selection.

but investing is such an emotional game that hinges on human behaviour. This is never captured by all the software, statistics, etc. Even the experts and analysts barely talk about this side of it, but in my experience, the behavioural side is * the * key to investing success.

Many of my friends are engineers and data analysts, yet many of them have had a lot of trouble with investing in practice. And it comes down to more behavioural things. Their selections weren't bad, but they got themselves into situations that either became too stressful, or weren't a good fit for their emotional styles, or they had trouble sticking with one specific plan (that's the most common mistake I've seen)

I write all this to say, maybe you are approaching this a little bit too analytically for your first shot at investing? Based on my own experience (and struggles) with all of this, I would suggest separating your investment money into two pots.

In one pot, maybe do a really dumb couch potato / ETF type of approach. Maybe something as dumb as XBAL, or a really simple XIC-XAW-XBB mix, together with a firm plan to always stick with it (no matter what). The second part is the key.

In the second pot, continue doing what you are doing, as I agree it's fun and very interesting.

I wish I had done something like this. The first pot, for me, would have given superior long term overall results, even though it's dumb and lazy. Why? It's because the more "intelligent" techniques are hard to stick with and commit to over 5, 10, 15, 20 years. You get one idea, then you get another. Or you notice a flaw in your plan. Or you find a better way.

All the ideas and methods we have discussed have one flaw or another. As an intelligent person you are going to face some big challenges going forward. No matter what you choose to do, you are going to eventually find flaws with it. This can psych you out and make you abandon your strategies. Heavy in stocks? Well oops, it turns out that we only have about 50 years of reliable stock performance data and all indexes have a hindsight bias going further back (actually true, sorry to say). Heavy in bonds? Well oops, turns out that they can perform badly during high inflation, perhaps for decades on end. etc, etc, etc

This constant re-analysis and being too smart (even though the ideas are all valid) can really disrupt the overall return.

Again this is just based on personal experience. I had been doing all the "intelligent" stuff, going down many of the roads you are talking about now. But here's the funny part ... long ago, my dad had asked me to make a low fee index portfolio for him.

So I had set my dad up with XIU, XSP (today I would use ZSP) and a few other things. Really just a dumb old selection of a few index ETFs that I knew were solid. But we never touched it again. That was his demand, he said DON'T touch it, I don't want to deal with it.

Want to guess which actually performed better over 15 years? The answer... it was the dumb ETF portfolio, not my more advanced techniques.
 

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And sorry I did not mean to sound discouraging. I find all of this stuff very fun, I'm just saying that there is a very counterintuitive thing that happens when investing: the fewer actions you take, the better you'll do.

That's assuming you start with reasonably solid investments. Even a low fee balanced mutual fund will give better long term results than what most investors achieve, even some very intelligent investors.

And hedge funds, which make a lot of active decisions, great analysis, and the best models on earth, often don't outperform.
 
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