As part of our anniversary celebrations, we held a webinar, “The Magnificent 7: Tech Titans Shaping the Future of Tech” last week.
In our webinar, we covered the explosive potential of Generative Artificial Intelligence, and how the companies with the resources to harness it effectively stand to gain a massive advantage.
We were inundated with questions during the webinar, but here are three questions we received that we think you should not miss out on.
There are reports that the US stock market is overvalued. And yet, there appears to be an AI bull run happening (e.g. the Magnificent 7) at the same time.
Did you miss the boat?
So, here’s the thing: when it comes to individual stocks, there is no blanket answer for every stock out there.
Every Magnificent 7 business is different, operating at differing life cycles and valuations too. That is why we took time to present, during the webinar, the key areas to focus on for each of these seven companies.
Furthermore, there is no precedent to how much larger these companies can grow.
Amazon (NASDAQ: AMZN) CEO Andy Jassy said that Amazon Web Services or AWS is at a US$100 billion annualised revenue run rate.
And yet, 85% or more of the global IT spend remains on-premises and not on the cloud.
If we take a moment to confront our fears, we think that the real question being asked is whether you will get caught in a situation where you buy these stocks and suffer an immediate large decline in the stock price.
What we do suggest is to turn that worry into positive action.
Take time to read up, and do your homework. That way, you will be prepared, no matter what happens.
You can choose to buy a little today and wait for better value points. Or, if you choose to wait for a market decline, you will be prepared ahead of time on which stock you want to buy.
The NASDAQ has provided solid returns over the long term, so why don’t I just invest in index ETFs?
Index fund ETFs are a great vehicle for investors who want to be hands off.
But like any good idea, you shouldn’t take it too far.
The problem with ETFs, in our view, lies in mismatched expectations.
Firstly, index-fund ETFs are generally diversified. For instance, the NASDAQ Composite Index (INDEXNASDAQ: .IXIC) consists of over 3,000 stocks.
Here’s the twist: a diversified ETF is often deemed to be safer and less volatile. But it does not mean that the index will not exhibit major swings up or down.
You’re still investing in stocks, after all.
Let’s make it real: in 2022, the NASDAQ fell by 33% over a year. Hence, even if you had invested in an index-fund ETF, you would have seen your money cut by a third during this period.
Your behaviour matters above all.
Investing in index-fund ETFs requires you to keep investing no matter what is happening with the index. By investing monthly, you’re removing your emotions from the equation.
It’s harder than it looks.
Going back to the example above, that means that you should not stop investing halfway through 2022 out of fear of the NASDAQ falling further.
If you stopped, you would not have enjoyed the upturn in 2023.
Likewise, as the index rises, as it is happening today, you should not stop investing out of fear that the stock market is overvalued.
Again, the investor mode required here is passive.
If you intervene during downturns or upturns, you’ve become an active investor by choosing when you want to invest. Hence, your investing action will include your emotions and you are no longer a passive investor.
In short, it’s the investor who makes an investment passive, not the investment vehicle itself.
It’s the same way a safe vehicle can become dangerous in the hands of a reckless driver.
As an investor, you need to match your behaviour with the vehicle you are driving to make it work.
At the Smart All Stars Portfolio, we are active in choosing our stocks but are passive when it comes to holding these stocks for the long term.
Will the US go into a recession and tank US stocks?
Even if we predicted with perfect accuracy on when a market will go into recession, it may not align neatly with the rise or fall in the stock market.
For example, just ask the investors who sold in 2022 and were waiting for the US Federal Reserve to cut interest rates before they started investing again.
Those who shunned stocks in 2023, would have missed out on a stunning upturn in the NASDAQ.
Instead, we’ll take a leaf out of a lesser known Warren Buffett quote:
“Predicting the rain doesn’t count; building arks does.”
Back in January 2020, we shared the importance of building up an emergency fund, and only investing cash that you do not need in the next 5 years into stocks.
At the time, we didn’t know that the world was about to go into lockdown and the market was about to crash by a third within weeks.
In other words, do not put yourself in a position where you will be forced to sell your stocks in the future.
It always pays to be prepared. So, get your basics right before you start investing.
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Disclosure: Chin Hui Leong owns shares of Amazon.
