This week we give consideration to the structure of our model portfolio for next year. These are the companies we believe will achieve market-beating returns in 2022 and beyond. In this portfolio structure episode, we consider the megatrends that are likely to shape the world around us for the years ahead and decide what proportion of the portfolio to devote to each of them.
We’re on track for a woeful performance in 2021, along with the recent declines in all growth stocks, but we remain confident that in the long-term, the high-quality growth stocks in our model portfolio, and also in our own real-money investment portfolios, will prevail.
Post recording note that we completely forgot to discuss renewable energy on the pod! This megatrend is getting one extra slot, for a total of fifteen.
If you enjoyed this episode, please subscribe to the Telescope Investing podcast at Spotify, or on your podcast platform of choice
Transcript
Albert: Hi, this is Albert.
Luke: And this is Luke.
Albert: Today is Friday the 3rd of December.
Luke: Welcome to the Telescope Investing podcast.
Intro
Luke: Alb, year-end is approaching, and what that means is it’s nearly time to pick our new 2022 model portfolio.
Albert: Oh really Luke, it feels like just yesterday that we picked the one for 2021.
Luke: And I think we’ve made some good decisions for 2021, but also some woeful ones. So here’s a chance to learn and improve for next year, hopefully. And hopefully, our megatrends are going to have winds in their sails as opposed to some of the headwinds we faced for growth stocks this year.
Albert: I really do hope we make better choices this year because when I checked recently, our model portfolio for 2021 has just turned negative for the first time in 10 months.
Luke: And I think it’s about to turn even more negative with DocuSign’s woeful stock performance just overnight.
Albert: Yeah, I saw that. It dropped 30% after hours, didn’t it?
Luke: Pretty nuts. Feels like an overreaction. I’ve literally done no research on this yet. The initial news seems to be muted forecasts. Seems like an overreaction to drop so hard, but do need to do a bit of digging into what’s happened there.
Albert: Oh dear, that’s another stock in our model portfolio taking a big hit.
Luke: I think it’s worth saying that our own personal portfolios are still in the black. We’re both up a little bit, we’re underperforming the market. I think I’m something like plus 11 or 12% for the year. And actually the way the year has played out, I’m pretty happy with that. But yeah, the model portfolio is not looking pretty.
Background
Albert: Fair enough. But let’s just remind our listeners what the model portfolio is. It’s 15 stocks that we have chosen and it’s equally weighted in a portfolio, and the intention for this portfolio is to beat the S&P 500 over the long term. We do want to beat it in the year of inception, but really these portfolios are intended to be held for several years. And the aim of the portfolio is quite important as it will direct our choices for the stocks in the portfolio. And just to be clear, this is not a dividend portfolio to provide income. It’s not a conservative portfolio to minimize drawdowns, and it’s definitely not a YOLO portfolio!
Luke: Each year we’re trying to design it to be balanced, to reflect the key megatrends that we feel are gonna be the big driving forces for the year ahead. And we’re trying to have a good, diversified mix of trends, but also of big and small companies, and also risky and less risky companies. And risk is always a bit subjective, but we try and assess the friskiness of each stock in the portfolio to have a mix.
Albert: Our personal portfolios are similar, but are somewhat more balanced with more stable, lower volatility companies and some dividend stocks. At least mine is.
Luke: Yeah, mine not yet, but perhaps soon. I’m definitely starting to build a more stable portfolio now I’m in retirement. The other thing that’s key about our personal portfolios is we have an unweighted allocation. I think you and I have been protected to some extent this year, by our big overweighting in companies like Tesla and Shopify, and those companies have done great this year, and so that’s protected us against a lot of the downside. Whereas I suppose the model portfolio has been a bit of a victim by having 15 equally weighted allocations, and that’s hurt us.
Albert: In most portfolios, you’re going to find equally-weighted positions. You’re going to find the positions where you have the highest conviction in have larger positions in your portfolio and possibly the positions that are largest in your portfolio are more stable and less volatile.
Luke: I suppose it is an interesting question for us to ask ourselves, should we have an unequal weighting based on conviction when we go into the portfolio structure for 2022.
Albert: That could be a change we do for this year.
Luke: Something to think about. So in today’s episode, we’re going to debate the structure of the portfolios. We’re going to go through each of our megatrends, debate why we think they may or may not be a big influence on 2022, and then we’re going to try and allocate our 15 slots in the portfolio to each of the trends.
Albert: I expect there will be some clear choices based on our current choices for the 2021 portfolio where we finally agree on how these stocks would perform or at least how we think they will perform. And in some ways, based on our own areas of interest and expertise. It’s not possible to consider all possible stocks in the stock market!
Luke: Yeah, exactly. And I think there’s definitely going to be points where you and I agree firmly, and then there’s going to be areas where we have some debate. So what we’re planning to do through the rest of December, once we agree the slots today, we’re then going to try and firm up the actual stock picks. And where we have disagreement, we’ll be having champion challenger conversations between the two of us. We’re not going to bore our listeners with all that detail as we did last year, but we are planning to announce all 15 stocks at year-end.
Albert: Bore our listeners? Wow. I think some listeners might be interested in our thought process.
Luke: Maybe, well perhaps we’ll surface some of the more controversial outcomes of those discussions.
Albert: Even when we do a deep dive on the company, we don’t always agree. Sometimes you buy, sometimes I buy. All depends on how we feel the stock suits our own portfolios and our own investment style.
Luke: Agree, but we’ve always felt the hive mind of Luke and Albert is more powerful than the individual components. And I think the model portfolios should reflect the debate and then ultimately the agreement on which are the 15.
Albert: Yeah, definitely Luke. Our personal portfolios are quite similar. We may have a few stocks that I own that you don’t and vice versa, but for the most part, they’re very similar.
The macro-economy
Luke: Alright, so shall we get into it? And perhaps a good place to start is to talk about just the broader economy and the macro events we think are going to drive investment returns and company performance in 2022.
Albert: Let’s start with supply chains, and supply chains were completely disrupted when the coronavirus hit last year and it’s taking a very long time to recover. And even now it hasn’t fully recovered and it could continue to take another year or so to normalize, barring any more disruptions.
Luke: And not just coronavirus right, there all these crazy things that happened, like the oil pipeline hack, the Suez canal blockage, those are silly things that in a normal year might have been a bit of a bump, but everything coming at the same time has really put a strain on supply chains.
Albert: Was it called the Evergiven or was it Evergreen? Oh, Evergreen’s the Chinese property company.
Luke: Yeah the Evergiven that’s right. Great example of terrible advertising, having their logo on the side of that ship as it was parked up a week.
Albert: Another thing that’s happened over the last year or so is something called the Great Resignation, which we discussed in previous podcasts, where a lot of people are quitting their jobs and not coming back. This is creating a supply chain issue on the labour side.
Luke: So the net result of this is companies are finding it hard to manufacture or distribute their products, which is creating demand-supply imbalances. And ultimately, that’s one of the drivers of inflation. You’ve got too much money, too much demand as people have suddenly got their coronavirus payments in their bank accounts chasing not enough supply because companies can’t put goods and services where they’re needed.
Albert: Actually, this reminds me of a photo I saw on Twitter, and I’m not sure whether it’s real or it’s a joke, but basically it’s a sign in the shop window that says “we are hiring”, and in smaller letters underneath it, it said, ” anyone who turns up!”
Luke: Yeah. If that’s true, quite scary if companies are literally finding it that hard to hire or retain their staff.
Albert: Something tells me it has to be a joke but you never know!
Luke: So another macro event is governments all around the world, but particularly the Federal Reserve announcing their plans to stop quantitative easing. Basically stop pumping money into the economy, which they’ve had to do to keep the world afloat during COVID while basically society was shut down.
Albert: And part of this would be interest rates going up, and this may result in less discretionary spending.
Luke: Yeah, exactly. Quite simply if the man in the street is earning interest on their bank account, well they’re going to be incentivized to hang on to a bit of money and earn that interest rather than spending it.
Albert: And also if the interest rates on loans is going up, people will be less likely to take loans in the first place. Not just individuals but also companies may be more reluctant to take business loans to expand because of higher interest rates.
Luke: And I think there’s debate around when this money supply is going to be turned off, but there’s no debate around if it’s going to happen. It’s definitely going to happen sometime in 2022, some pundits would argue it’s already beginning.
Albert: One thing that we haven’t talked about yet is the pandemic. And it’s still ongoing after two years, and a new variant turned up last week, the Omicron variant. And because of this, the pandemic could continue for several years as vaccination rates haven’t been great around the world, unfortunately, for different reasons. In developed nations, there’s been a reluctance to get vaccinated, but in developing nations, there’s been a lack of access to vaccines.
Luke: Yeah, I think we all accept that we’ve missed our window to achieve herd immunity and put the clamp on coronavirus. It’s going to be here to stay. I suppose then the question is, are we still always on the point of having health systems overrun? So I guess the main question is the extent to which new variants, which will continually appear every year, impact society. Are they actually killing people or is it becoming more like the background rate of malaise, and it becomes something like the regular flu and the regular common cold?
Albert: I think we’ve seen that disruptions have lessened over time. Her science has improved and people understand more about the coronavirus and how it spreads and how to treat it, that has influenced government policy and how they have handled outbreaks, and I think we are seeing less disruption over time, and this might continue where, in one or two years time, coronavirus will still be with us, but the disruptions will be less noticeable.
Luke: Yeah, as you say, either because the impact is lower or because governments have just said guys, we’ve done everything we can and now we just need to get on with life no matter what.
Albert: So with that in mind, we think that 2022 will be a reopening year, but we may still see a lot of pressure for workers to work from home or work from anywhere.
Luke: I think one of the benefits that’s come out of coronavirus is it’s woken us all up to the fact that we don’t need to be in the office five days a week, looking at our colleagues in the eyes. We can do our jobs from anywhere. And now that we’ve realized that, and we’ve created the capabilities, I think everyone, employers and employees are benefiting from that. would argue that actually, what we’re seeing now is the start, not the end of the work from anywhere megatrend. I don’t think looking at things like the Great Resignation, I don’t think we’re going to go back to a world where we’re all back in the office full-time. I think the world of the future is going to be much more flexible.
Albert: My fear is that we’ll be saying next year will be a reopening year until it actually happens. We could be having this same discussion this time next year.
Luke: Yeah, let’s hope not, but that’s certainly possible.
Albert: Other macro events are increasing geopolitical tensions. We’re definitely seeing more of this, but what you’re going to do, these are hard to predict and the economic consequences are even harder to predict.
Luke: Yeah, certainly it seems to be US / China where the tensions are. And as you say, it’s very hard to predict and hard to build an investment plan around how relationships end up. But I would like to be optimistic and hope that we are now in a connected world where global wars are a thing of the past.
Albert: Yeah, a lot of people have raised inflation as a reason for the stock market going down. But I think you can always find reasons not to invest if you look for them. And if you’re concerned, you can always reduce the amount you invest, or just sell some and increase your cash position, but I would say it’s hard to recommend getting out of the stock market completely.
Luke: Yeah. I guess you said the ghost word there, inflation, and I suppose inflation is the result of all of those things that we’ve talked about, all of those macro events, supply chain imbalances, dropping of quantitative easing, new coronavirus variants, inflation is where things end up and it’s interesting how inflation impacts companies differently. Inflation certainly hurts growth companies, but actually, it’s quite good for value companies, so you do have to find a balance in your portfolio that benefits from the upside, but protects you on the downside.
Megatrend summary for 2022
Albert: Shall we just go through each of the megatrends that we’ve been tracking and discuss what we’ve been thinking about them.
Luke: I think we’ve got 15 in our megatrend tracker today, and they are e-commerce, fintech, electric autonomous vehicles, alternative protein, healthtech, biotech, machine learning, digital transformation, automation, travel, entertainment, work from anywhere, metaverse, programmatic advertising, and space economy.
E-commerce
Albert: So Luke, let’s start with e-commerce, and this has been one of our big megatrends over the last few years and it played a big part of the model portfolio for 2021, where we had picks in Shopify, MercadoLibre, and Sea Limited. And I think it’s been clear that this megatrend was greatly accelerated by the pandemic over the last two years, and as we come out of the pandemic, hopefully, growth rates for e-commerce might drop back down to where they were pre-pandemic. But the problem is that valuations and expectations are very high at the moment.
Luke: I suppose you didn’t list the monster there, Amazon, which actually has quite a sensible valuation. And it does sit as a core part of both of our portfolios, but it didn’t make the model portfolio.
Albert: I think the difference between Amazon and the other stocks that I mentioned is that Amazon now it feels like half the company is e-commerce and the other half is cloud computing. The cloud computing part is massive.
Luke: So you and I firmly believe in e-commerce and I don’t think we believe this is going to go away as a megatrend any time soon. So I think we’re both agreeing we’re going to allocate two out of our 15 slots to that megatrend for 2022.
Albert: It definitely will play a big part in my own portfolio, and already many of my largest positions are e-commerce stocks, such as Shopify and MercadoLibre.
Fintech
Luke: So should we go on to a related megatrend, which is fintech, and closely aligned to e-commerce, selling stuff, but fintech is paying for stuff. And there were loads of really interesting innovative companies in this space and actually, it’s becoming an even more exciting, innovative area with the rise of e-payments and buy now pay later, and cryptocurrency and blockchain-based payment capabilities.
Albert: Yeah, and new technologies such as AI are really revolutionizing businesses such as insurance and loans. And a lot of the innovations in this space are to remove inefficiencies in the current monetary network, such as cross-currency transactions if you want to do business across international borders. And as you said Luke, payments are increasingly digital and mobile-driven.
Luke: So again, no debate on this one. I think we’re both happy to allocate another two slots. So that’s four out of our 15 already taken up by e-commerce and fintech.
Albert: Yeah, we allocated one slot last year and that went to Square. Or should I say Block now? But maybe this year, there’s been so many new companies in the space that we have more options to choose from.
Luke: And I’m comfortable with that two allocation. I think that reflects our conviction in this being a growth area for 2022.
Electric and autonomous vehicles
Albert: The next megatrend we’ve been tracking is in electric and autonomous vehicles. And this is clearly an established trend now, but one that is possibly over-hyped with valuations overextended. For example, I was interested in buying Rivian, but the problem was so was everybody else and I just couldn’t justify investing at the valuation I had after the IPO. I saw the chart recently and the valuation has dropped from $150 billion just two weeks ago to maybe a more reasonable 95 billion, but I still think it’s too high for me, given that it’s delivered less than 200 vehicles.
Luke: I think the excitement around that company is their partnership with Amazon, but it’s too early. And as you say, the valuation is too whack for me, but focusing on the trend. Again, definitely, this is going to be a major area of growth and innovation and investment in 2022. We all know who the behemoth is in this area, it’s Tesla, and with its current market cap, it just feels like too much of a gamble to have any significant part of my own portfolio or one of our valuable 15 model portfolio slots allocated to it. And if we’re not going to invest in Tesla, who are we going to invest in?
Albert: Tesla is one of my largest positions and I’ve tried trimming it over the past year or so, but it keeps growing. Maybe at this point, I should just leave it alone and concentrate on some other positions in my portfolio.
Luke: Yeah, just becoming too much of a distraction for me. I’ve actually muted Tesla in my Twitter timeline because literally every other tweet was something about Musk or Tesla and I’ve really cut my allocation down to a tiny percentage now, I’m just going to let it drift into the background I think.
Albert: So Luke, I think we’re agreed that for the model portfolio for 2022, we won’t be choosing a company in this megatrend of electric and autonomous vehicles.
Luke: Agreed.
Alternative protein
Albert: Our next megatrend is alternative protein, which is like plant-based meat or cultured meat. And this is one that we had hoped would become a big trend, but there’s been a lack of investment options. The only one that is publicly available at the moment is really Beyond Meat and I know that you’ve sold your Beyond Meat position recently and I have as well, so I guess we don’t really feel comfortable in investing in this space.
Luke: I think we’ve both got out of Beyond Meat because it just feels like the whole space is becoming commoditized and we’re both waiting for cultured meat products, which aren’t public market investments just yet.
Albert: Yeah, I agree with you. I think this is becoming commoditized and I’m starting to think that plant-based meat is just another food product with low margins and it will be difficult to differentiate. And there’ll be hundreds, if not thousands, of brands. It’s like investing in biscuits.
Luke: Interesting analogy, okay.
Albert: Actually this reminds me of a stock chart I saw on Twitter. Someone had posted the stock chart for Lotus Bakeries, and Lotus Bakeries makes these biscuits that you get on flights. And believe it or not, its stock is up 47% year to date, and almost 8000% since year 2000.
Luke: Wow, those guys are doing great. I think I’ve tried their biscuits, they’re all crumbly and not that tasty, right?
Albert: But you don’t get a choice, that’s all you get on the plane. What are you going to do, not eat it? I think that goes to show that a great business can happen in any sector, but again, you wouldn’t have guessed biscuits as a growth area.
Luke: Definitely not.
Albert: Getting back to plant-based meat, I did see something recently that caught my eye and that was something called Redefine Meat. And they do 3d printed steaks, where they are able to print these plant-based steaks with fat and protein blended together to actually resemble a piece of meat. That could be interesting, but unfortunately, that’s still private.
Luke: Yeah, and I think that technology of printing is going to be applicable when we start culturing meat. You’re going to have to culture each of the different component parts of a steak and then stitch it together. But you can imagine you will be able to print a beautiful cubic meter of Wagyu beef if that’s what you wanted. We had our friends Jaie and Anna’s 10-year wedding anniversary last weekend, and Jaie is a massive meat fan. So as our 10-year gift to them, we actually bought them a half kilo of A5 Wagyu straight from Japan. Beautiful piece of meat. It wasn’t cheap, I can tell you. So if you could culture that and print it in giant meter cube blocks in the future of cultured meat, that’s going to be game-changing when it comes to murdering your waistline with the most expensive, delicious meat products.
Albert: I suspect if you flood the market with this artificial Wagyu beef, prices will go down somewhat.
Luke: That’s the purpose, right? You’re trying to stop all those cows being murdered, all of that massive land use, and give people what they want.
Albert: Yeah, I fear for our waistlines Luke. Actually, I read an article about cultured meat a few weeks ago that was really eye-opening. And it was just telling you that the technology for cultured meat is not as advanced as a lot of people think, and there’s a lot of inherent problems in making cultured meat products and the scale that you would have to do it in to replace actual animal meat is unbelievable. It’s just not feasible. So I’m a bit less confident in cultured meat as a sector now.
Luke: Well, like anything, it’s got to grow, but once we’ve got the technology and the capability in place, it’s then just an engineering challenge to scale up.
Albert: But I think the point of the article was that the engineering challenges are not trivial, it’s actually extremely hard.
Luke: Oh, no doubt. And if you were relying on governments to institute these capabilities, it would never happen, but there’s a lot of money to be made here. As you said, there’s demand for expensive meat products and it’s expensive to grow a cow. So I think the private market’s going to step in and make it happen. We’ll have giga-factories for steaks.
Albert: I hope so, Luke. But my personal feeling is that it would be far too early to invest in that technology at the moment.
Luke: Yeah, totally agree there. So I think we’re in agreement that this is sadly another sector that’s going to get zero slots in the model portfolio.
Albert: Especially since we both sold Beyond Meat literally a month ago.
Healthtech
Luke: I suppose all that talk of steaks damaging your waistline is a nice segue to our next megatrend, which is health tech.
Albert: And unfortunately our health tech pick for 2021 has been a disaster. Teladoc Health is currently down 65% from when we picked it.
Luke: Yeah, it’s damaged both our own portfolios and it’s damaged my reputation as the investor in the family. This is the one I bought for all my cousins’ kids.
Albert: Oh yeah. I remember! Are your cousin’s kids impressed?
Luke: They’re too young to know so far. And by the time they grow up, hopefully, Teladoc has made a turnaround. I’m not planning to sell it, but this could be a long story.
Albert: I hope by the time they look at their portfolios, Teladoc has at least broken even. Oh, this is surprising given that telehealth is as important as ever with coronavirus still being around. I really don’t understand how Teladoc has dropped so far, but we had a fantastic discussion about health tech with Richard Chu a few weeks ago, and he really gave us a lot of insight into why he thought Teladoc wouldn’t do so well.
Luke: Yeah. So this year’s model portfolio, we actually had two allocations here. We had Teladoc and also Intuitive Surgical, which is the first single investment I ever made and a company I’m fully committed to in my own portfolio.
Albert: Intuitive Surgical is not doing too badly.
Luke: Yeah. But perhaps its crazy growth days are behind it, perhaps it’s now one of those solid, steady performers. That certainly seemed to be Adu Subramanian’s view when we interviewed him on this sector mid-year.
Albert: Last time I checked, Intuitive Surgical is up 26% year to date. It may be a bit lower now, given the drop in the stock market over the past week or so.
Luke: But I think the Richard Chu discussion has opened our eyes to other opportunities in this sector. And he’s given us some food for thought around some companies we should do a bit of a deeper dive into personally. So what are we thinking, Albert? Are we going to allocate one of our valuable slots to this sector or not?
Albert: I’m keen to, we always say that healthcare is an eternal megatrend that no matter what, the need for better healthcare will always be there.
Luke: Yeah, I suppose we just want to be a bit more judicious with our stock pick, but I think we agreed, we’re going to give this one, one slot.
Albert: Yeah, I can go with that.
Biotechnology
Albert: Moving on from health tech to biotech. Again, our picks for biotech have underperformed this year. Sometimes it does feel like all biotechs have suffered this year unless they were making COVID vaccines or COVID drugs.
Luke: Yeah, that’s right, COVID has damaged health tech and biotech. It’s certainly focused all of our medical investment into that one narrow area, as is right. Biotech is genetic medicine, genetic engineering, sequencing, novel drug therapies. There’s a lot of really innovative companies here, but it’s a difficult sector to invest in because they’re generally smaller companies and they’re generally quite binary bets. The kind of companies we look at, they have a bit of a drugs pipeline, and if stuff doesn’t make it through trials and gets abandoned because it has significant downsides or side effects, then companies can genuinely go to zero.
Albert: I think this sector is affected more than most where you really need domain knowledge. One person I follow is Maxx Chatsko from 7investing, and he wrote a really interesting article about gene editing a few weeks ago, and he described the differences between all the different gene-editing techniques and some of the inherent drawbacks of first-generation gene editing.
We have a stock in our model portfolio for 2021 of Editas Medicine, a company who’s developing treatments for genetic diseases and using CRISPR CAS-9 techniques to alter the genes inside human bodies. But this is using first-generation gene-editing techniques, it may have some of these drawbacks.
Luke: I think Editas are a solid company, but perhaps we made a mistake putting it into the model portfolio. And I guess we came up with the concept of our hyper-growth portfolio mid-year. Maybe Editas was a better fit there, hyper-growth rather than model.
Albert: I should have mentioned this earlier, but when we did the model portfolio for 2021, we both made a commitment to invest in these stocks for our own personal portfolios and we came up with this figure of 2% each. I have to admit now that I didn’t quite manage that for some of the stocks in last year’s model portfolio, and one of them was Editas. I only reached a 1% allocation for that one. And the reason for that is I just couldn’t justify increasing my allocation, given the news coming out of this company.
Luke: Yeah. That’s very naughty admission, Albert. I was definitely ethical and stuck to the 2% commitment for each of those stocks.
Albert: Oh, really? You managed to have 2% in all 15 stocks?
Luke: Yeah. Yeah. And much more in some,
Albert: Oh, I won’t ask you how they have done.
Luke: Mixed bag, but what are we thinking about biotech? Is it going to get a slot for 2022?
Albert: I don’t have any ideas for a stock in this sector at the moment. I would have to do quite a lot of research and find some candidates. So are you thinking about dropping it?
Luke: I’d like to keep it in. The other stock we have in the portfolio today is Guardant Health. And that’s a big feature in my own portfolio and actually, it was in our 2020 portfolio as well. I think that’s still worth consideration, but is it going to be one of our valuable 15 stocks I don’t know, but should we tentatively give a one-slot allocation to biotech, and then let’s just see what we can find when we do our research through December?
Albert: Okay, sounds good.
Machine learning / digital transformation / automation
Luke: Well, let’s come away from health and talk about something a bit more techy, and we’ve got the megatrend of machine learning. Actually, we were having a bit of debate prerecording today about the big overlaps between these next few megatrends, machine learning, digital transformation, and automation. I think they all go hand in hand.
Albert: Oh, they’re all based on technology, but so are a lot of other sectors. But I think I see a distinction in that machine learning and digital transformation are more structural in nature. Whereas automation is more of an application of those technologies for a particular purpose.
Luke: So why don’t you give a quick distinction between the three and then we can debate the slot allegations.
Albert: Okay. So for machine learning. I’m thinking about companies such as Google and Nvidia. They have technologies that allow other companies to utilize machine learning for whatever they want to use it for. Google has their algorithms and Nvidia have the hardware and the software frameworks. And I think the main reason why I wanted machine learning in the model portfolio is that I’m keen on Nvidia, and I’ve already started building out my position in this stock over the last two months or so.
Digital transformation I always saw as building out the infrastructure to support your business. So it’s not business-specific. Things like cybersecurity and cloud communications are more like tools that allow you to build your application, or at least protect your infrastructure from breaches. And. I guess automation, I’m thinking about companies such as UiPath, which is using technology such as cloud computing and AI to perform a specific purpose, which in this case is process automation.
Luke: So these three trends together are all about making business digital, making it more efficient, and creating new, innovative capabilities. Getting machines to do things that they couldn’t do in the past. They do go hand in hand, so I think it’s quite hazy the distinction between companies in this space. We’re going to find companies like Google that do a bit of everything, but let’s focus on our slot allocations, what are you thinking in terms of these three trends?
Albert: I think digital transformation will continue to play a big part of, at least, my portfolio and I hope the model portfolio. Cloud computing is still growing. I don’t know if you saw recently that Meta, the company that used to be called Facebook, recently announced that they have chosen AWS as their long-term strategic cloud provider, and I was surprised that Amazon stock was not affected by this news.
Luke: We’ve got metaverse as a separate megatrend, let’s cover that there. I suppose a phrase we haven’t said so far is SaaS, software as a service. And for me, this is a massive investment megatrend. I think it probably sits in that digital transformation space. Typically successful SaaS companies are making it much easier for other companies to do business.
Albert: In terms of slots for the model portfolio, I’m keen on having at least two for this megatrend.
Luke: For digital transformation / SaaS, totally agree with that. Are you thinking we allocate a slot to the other trends though, machine learning and automation?
Albert: I would like to, but you sound reluctant?
Luke: I am a little, and I know you were thinking about making an allocation to each of those. So four slots in total across these three megatrends.
Albert: I could drop the one for automation because I’m not that comfortable with that sector yet.
Luke: How about this? How about we do three, three slots for those three megatrends, and then through December we figure out how those three get diced up?
Albert: Okay. That sounds fair enough.
Travel / entertainment / work-from-anywhere
Luke: Alright, let’s do another grouping. We’ve got three megatrends that kind of go hand in hand, and these are travel, entertainment, and work from anywhere. I think it’s interesting to think about these three things together because they do hinge on that reopening play and the impact of COVID on 2022.
Albert: Travel especially, one of those things that’s been most impacted by the coronavirus pandemic. And it really depends if we think that 2022 will be opening up and allowing people to travel crossborder again.
Luke: Yeah. I suppose we’ve got different perspectives on this, right? Because of our geographic location. In Hong Kong, there’s probably no sign of travel re-opening. I see there’s just talk now of the border between Hong Kong and China starting to reopen, but even that hasn’t happened yet. Whereas in England, borders are open, people are travelling, and unless Omicron has a really severe turnaround, I’m optimistic that we won’t see the international travel bans that we’ve had in the past. Sure, they’re going to happen, but they’ll be much more isolated and specific rather than shutting borders entirely in the way that countries like Australia did last year.
Albert: Yeah, it seems to be a difference in the way that coronavirus has been handled, where in Europe and in the US you’re trying to get back to normal, but control the spread. But in Asia, governments are trying to stick with a zero COVID policy. It’s hard to say which approach works better, but yeah, it’s a bit of a pain here in Hong Kong not being able to travel without being quarantined.
Luke: And surely people are just antsy, right? You’re doing a staycation next week, just because you want to do some travel. Like surely this sector has taken such a battering, company valuations are quite sensible in the whole travel sector. There’s gotta be some bargains there for us to pick up.
Albert: I’m only doing a staycation next week to get away from this podcast, Luke!
Luke: We’ve got a very interesting conversation planned that we’ve had to defer by a week just so we can respect your chance to turn the brain off.
Albert: I know you have an interesting pick for the travel sector, but we’ll leave that for a later episode, but in entertainment, the big question is, is the entertainment that people want going to be at home or out of home?
Luke: Without talking companies, I think there’s one specific company if we picked it, it’s going to benefit whether people are staying home or going out. If we’re committing to that pick, then I’m happy with a slot in entertainment.
Albert: Oh, would this company be one that we covered recently, say last week?
Luke: Perhaps, yeah, let’s say it, Disney. I’m good with Disney. I’m not so sure about everything else in the entertainment sector.
Albert: And the last one you mentioned was the work from anywhere megatrend. And we had this in our model portfolio last year, where we chose Fiverr and DocuSign. As you said, DocuSign has just tanked 30% overnight and Fiverr is not doing that well either. It seems strange, but do you think this trend is maybe coming to an end?
Luke: No, I think this trend is beginning not ending. And I firmly believe that work from anywhere is here to stay. I saw a really brilliant Twitter thread on this from a guy called Chris Herd. And he listed out 10 or 12 really important forces that he feels means work-from-anywhere is here to stay. Things like seeing companies cutting their commercial office real estate by over 50% in some areas, 30% of companies going remote first, the benefit of getting access to global talent and cutting costs, remote burnout. I think his summary was that the efficiencies of work from anywhere are benefiting employers and employees and he can’t see this turning around, and honestly neither can I.
Albert: So we had two slots for this last year. What do you think about this year? I’m thinking one slot.
Luke: Yeah, I am, if you’ll give me one slot for travel.
Albert: Alright, fair enough. I dropped the one for automation to give you one for travel.
Luke: Okay. So we’ve got one for travel, one for entertainment, Disney, and one for work from anywhere.
Albert: Maybe not Disney.
Luke: Let’s see.
Metaverse
Albert: And the next megatrend is one that has a lot of hype around at the moment. And we didn’t invest in this last year because we thought it was too early, but maybe we were wrong and we should have invested, and that is the megatrend of the metaverse. And the hype has been astronomic ever since Facebook announced its name change and its move into the metaverse.
Luke: Have you sold your Facebook, sorry, Meta stock? I sold mine years ago.
Albert: I never owned Facebook stock.
Luke: Ah, yeah okay. That’s right. So if we’re committing to not buying Meta because of our ethical concerns around that company, I’m keen to have an investment in the metaverse. I guess we’ve got one already, which is doing pretty well, Matterport. It was one of our hyper-growth picks and actually, it’s up over a hundred percent since I bought it just a few months ago.
Albert: Yeah, and I also have Unity in my portfolio, and a lot of people see Unity as a metaverse stock. That’s been a good performer as well. Actually, Unity and Matterport have been two of my best performers in my portfolio this year. That’s why I think we could have invested in the metaverse last year.
Luke: I’m keen to have it in. Actually, I’m sounding a bit croaky today cause I’ve got a bit of a hangover cause I had a boozy night with two friends yesterday. I dragged them along to an immersive theatre event called Lost Origin in London. And we specifically went because they had Magic Leap headsets that they were using as part of the theatre experience.
The headsets were really cool actually. Pretty scrappy version one, but you could really see where, augmented reality could add huge value to manufacturing, industry, and just the way we operate in society. I’m really keen on this technology and this sector, I think its big days are ahead of it. Whether we’re climbing to the peak of overinflated expectations though, and we’ve got this trough of disillusionment ahead is a question, perhaps we’re getting in too early, but I’m definitely keen to look at this space.
Albert: Yeah, me too Luke, I’m keen on investing in at least one metaverse stock this year, but my concern resembles yours in that I think we may be getting in at the top of the market.
Luke: Let’s see. I think we’re going to give it a slot and then let’s see what we come up with as we do our research through December.
Programmatic advertising
Luke: We’re down to our last two trends, and the penultimate one is programmatic advertising. It’s been a real focus investment area for us this year. I think we’ve deep-dived quite a few companies in this space, and I’ve certainly added four or five to my own portfolio.
Albert: And unfortunately our pick for this sector in the model portfolio for 2021, Magnite, has not been great. I think it’s down around 50%.
Luke: Yeah, it’s the worst performer of all of those stocks in our own portfolios, unfortunately. Sorry to anyone who is following the model portfolio. I’m going to break one of our rules though, and probably chase my loser on this one, it’s definitely high on my list for reinvestment at the appropriate point
Albert: And what’s your reasoning behind that, Luke?
Luke: Linear TV is on the decline and connected TV is on the ascent, and that’s not going to reverse. The value to advertisers is much higher on putting adverts on connected TV. The advertising dollars haven’t yet followed where the eyeballs are going, but that’s going to happen. It’s a question for me of when not if, and the reason why I’m bullish on Magnite is they’re just the category leader on the supply side. Their counterpart, The Trade Desk, who’s the leader on the demand side are doing pretty great. I think there’s going to be much more of a rebalancing of where the revenues are earned across demand side and supply side, and I feel like supply side is going to have more wind in its sails coming from a smaller base.
Albert: I’m also quite bullish on programmatic advertising and also connected TV, so I’m keen on having a slot for this in this year’s portfolio. Whether or not it’s Magnite, I can’t say for sure now but at least have one slot right?
Luke: Totally agree. And I also agree it may not be Magnite, albeit that’s part of my own portfolio.
Albert: Mine too Luke.
Space economy
Albert: And the last one is the space economy. And this is more from you Luke, I think you’ve been reading too many science fiction books. You really love the space economy, but I think it’s too early.
Luke: There’s just so many wonderful things that’s going to happen. And again, this feels inevitable to me, but with things like satellite internet, starting to build orbital infrastructure, the ISS the International Space Station creaking at the seams, we’ve got to start replacing that stuff and putting more modern solutions into space. Plus talk of building staging points on the moon, perhaps starting to colonize Mars, mining asteroids, which will give us unlimited resources. Again, this is going to happen, but I would buy the challenge that perhaps it’s not an investing area for 2022, albeit our friends over at 7investing would disagree, they’ve got a number of picks in the space economy sector.
Albert: I read recently that Jeff Bezos and his company Blue Origin are building a hotel or theme park in orbit! I think it’s called Orbital Reef. Who’s going to be able to afford staying there?
Luke: It’s a brave man who bets against Jeff.
Albert: Have you seen the film Contact?
Luke: Yeah. Yeah. Multiple times.
Albert: With that rich dude just builds this thing for Jodie Foster. Yeah. Jeff Bezos reminds me of that rich dude.
Luke: Actually that reminds me of a brilliant meme photo I saw just yesterday. It was William Shatner in the first Star Trek movie, standing with the bald scientist who goes to explore V’ger and then old William Shatner in the real-world standing next to bald Jeff Bezos, as he’s just come back from his Blue Origin flight. You see that photo?
Albert: Yeah, I saw it, it was quite amusing.
Luke: So I’m bullish on this sector, but we’ve had a bit of a heated debate prior to the podcast and you’ve talked me out of it. So I’m going to give up the one slot that I wanted.
Albert: Yeah, I think it’s just too early to invest in extraterrestrial mining.
Luke: Fair enough. And anyway, we’ve burned our 15 slots already I think, with the allocations we’ve already made.
Albert: I have a sneaky suspicion that as a kid you used to play Elite, and you went around smashing asteroids.
Luke: Not as a kid buddy I’ve been playing that even somewhat recently. And by the way, our mutual friend, Brian has just bought himself an Oculus Rift so that he can play Elite in VR.
Albert: Oh really? I didn’t know that, I’ll have to ask him about it next time I see him.
Luke: I might need to dust off my Elite skills and join him on a couple of missions.
Quote
Albert: That was a really long discussion Luke, do you have a quote for us to round us out?
Luke: I do. Actually, I couldn’t decide which one to go with so I’m just going to give you them both. One was related to the model portfolio, and one was just related to the horrors of the market right now. Peter Drucker said, “Mission defines strategy, and strategy defines structure”. I do like the structured approach we take to building a model portfolio with the slots and then the stocks themselves.
Albert: And what’s the one that relates to the recent drop in the stock market?
Luke: Well, it’s from our friend Morgan Housel. Morgan said, “Compounding is hard, because a bad month can feel longer than a good decade”.
Albert: I can definitely relate to that. The last month has felt very long.
Luke: November certainly has been an extremely long month.
Albert: Whereas 2020, our best year ever, felt it passed by in a flash.
Luke: It did. It was too rapid enjoying those crazy hundred percent gains. Hopefully, those days will be ahead of us in the future too, though.
Albert: One would hope so. And you would expect that given the historical performance of stock market over the last hundred years, I wouldn’t expect it to change any time soon.
Luke: We should give a bit of a shout out to our friend Duniya. We’re playing this scaled portfolio game between about six of us, and her portfolio in the game, which is her real money portfolio, is much more founded in indexes and also, God forbid, gold. Her indexes and gold portfolio in the last few days has suddenly taken the lead. She’s jumped ahead of all of us with our frisky growth stocks!
Albert: Duniya, I knew you would beat us when you joined the game early this year.
Luke: Well, indexing is right for the large majority of investors, but over at Telescope Investing, we definitely firmly believe that judicious stock picks can help you beat the market. Well we haven’t managed to do that this year. Duniya looks like she’s going to take first prize.
Albert: Next year, I think we’ll change the podcast to index investing!
Luke: Even if we fail next year Albert, I’m committed to this course for the rest of my life. It’s got me to where I am today, and it would take something more significant than a couple of years of downturn for me to lose my conviction in growth stocks being the way to hack life.
Albert: Good job Luke, and I really hope it works out. The last thing I want to see is you back at work!
Luke: Hey, me too.
Wrap
Luke: So anyway, that’s our 15 I guess, those are our allocations. So they might change a little bit as we actually do the stock research. I think it’s probably fair to say we already know which some of these companies are, but there’s definitely a bunch of research we need to do on some of these sectors, and we’re going to try and wrap it up over the next couple of weeks. And we’re planning to announce the 15 stocks themselves by year-end.
Albert: And actually, I’d like to make a call out to our listeners. If you have any thoughts about some of these megatrends, or you have a megatrend that you think we should consider for the model portfolio, please drop us a line and let us know!
Luke: Yeah, we’ll be summarizing the megatrends and the slot allocations in the episode write-up today. So take a look at the website, telescopeinvesting.com, see what you think and drop us a line, and let us know if you think our slots could be better spent in a different way!
Albert: Yeah, you can email us at feedback@telescopeinvesting.com or send us a message on Twitter, I’m @AlbertTelescope.
Luke: And I’m at @LukeTelescope.
Albert: And one of the best ways you can show support for the podcast is to leave us a review on Apple Podcasts.
Luke: And I know our model portfolio for 2021 performed woefully, but it’s been a bad year for growth stocks all round and we’re optimistic that 2022 will be better performing. So if you’ve got a friend who you think would get value from our investing chat, maybe do us a favour and take a quick moment now to spread the word and send them a link to the show.
Albert: Obviously results are important, but the journey is also important.
Luke: Yeah, the journey and the portfolio is important, but also the world is reopening and I’m excited that I’ve got a bit of a journey coming up. I know you’re doing a staycation in Hong Kong next week. For the following three weeks though, I’m hoping to be in Costa Rica with my wife, soaking up the sun and enjoying the culture, so I’ll be recording the pod from the beach, hopefully!
Albert: Oh, I thought we were taking a three-week hiatus.
Luke: You’ve got no time off buddy, we’re committed to this at least once a week, even if it’s just me on my own insulting you because you didn’t show up!
Albert: Okay then. I guess I’ll talk to you when you’re in Costa Rica, then.
Luke: I look forward to having much more beautiful scenery behind me than my boring bookshelf.
Albert: Well have a good trip, Luke.
Luke: Thanks, Alb.
Albert: Thanks, Luke.
