Wealth Accumulated

By D J Thomas, a large-cap stock market value investor and financial writer

Apple position up 15.82% in four months

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Apple is up 15.82% since it was added to the Wealth Accumulated portfolio at the beginning of February.

It is the largest position in the portfolio by a country mile.

24% according to my broker both through holding shares of Apple and through a large position in Vanguard’s US Equity Index, of which Apple is a sizeable chunk.

There’s more than one way to pony up for Apple, and why not?

Apple is the best business in the world and so it makes sense to me to disregard textbook portfolio management theory that usually trumpets spreading positions equally among 15-20 stocks.

Why Apple is such a large position in the portfolio

It begins and ends with research.

As fun as it is to distill investment reasoning and share it on social media platforms, there’s a grain of truth to me piling into Apple based on Warren Buffet’s love of the company.

The Oracle recently opined at the annual Berkshire Hathaway shareholders meeting:

It happens to be a better business than any we own

Warren Buffett

I also often take a leaf out of Peter Lynch’s book which encourages retail investors to pay attention to their daily experiences of using products and services, ‘stumbling onto the big winners in extracurricular situations’ as Lynch eloquently puts it.

I’ve been an Apple user for over two decades, seen the ups and downs, followed their story, and even stretched to a documentary here and there.

Apple, especially the iPhone, has been central to the daily operation of my life and the lives of millions of people across the globe.

I’m writing this blog post on the WordPress app.

Booking flights, banking, relationships, buying a house – the utility of a modern cell phone is unmistakable, and Apple simply makes the best cell phones in the world.

Their laptops, tablets, and watches aren’t too shabby either.

Why Apple is such a good business

Let’s take a look at a selection of Apple’s numbers from the last three years:

The explosive growth in earnings and ROCE is incredible and unlike other tech firms, Apple is not seeing a collapse in earnings since the reopening that other notable firms have been experiencing.

Sometimes a business makes things so good that everybody has to have the things they sell. That ability (or inability) to sell ends up in the numbers.

What happened to PayPal?

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Terry Smith of Fundsmith bought the shares of PayPal after the firm split from eBay in 2015 and sold his stake six years later in December 2022 stating:

We tried to engage with Paypal as we identified, seemingly long before the management, that their lack of engagement with new customers was a problem, as was cost control, and that their acquisitions were value destroying

Terry Smith

In its 4th quarter earnings report this past February, PayPal announced the departure of its current CEO, Dan Schulman, who became CEO in 2015 after the split with eBay.

Soon after in March, PayPal’s CFO Blake Jorgensen announced his departure only after a few months in the role citing health reasons.

Here’s a more visual representation of what all the recent carnage looks like:

So what happened to PayPal?

The global pandemic lockdowns and subsequent re-openings made a mockery of investors who piled into stocks like Peleton whose market values skyrocketed and then subsequently fell to the floor.

Cathie Wood dumped Paypal in April 2022 and loaded up on Block Inc citing Block’s ownership of Cash App, a direct competitor to Paypal which was quicker to accommodate the Bitcoin frenzy and digital wallet infrastructure.

This alluded to Terry Smith’s accusation that PayPal was not engaging enough with new customers, more specifically Bitcoiners.

Regulators are not too happy with cash apps either:

So it appears that the firm has been slow to keep up with innovations in digital payments growth areas (cryptocurrencies) whilst also facing regulator disdain and competition from the entire fintech space where a sizeable percentage of investment dollars are gravitating.

In tech you innovate (keep up with trends) or die.

Fundamental Analysis, Value Investing, and Growth Investing

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I’ve just finished listening to Fundamental Analysis, Value Investing, and Growth Investing by Roger Lowenstein and Janet Lowe.

Lowe has written books on Graham, Munger, Buffet, and a host of successful investors over the years.

Lowenstein is a prolific writer and financial journalist who knows a thing or two about financial markets.

He also writes a Substack.

Two halves of the same book

I really like how the book is split into two halves.

The first half narrates how the inventor of value investing – Benjamin Graham – came to his approach, what drove his ambition to seek wealth, and what Walter Schloss described as ‘a straightforward man with a quick, brilliant mind’

Impressively there is the revelation that Graham advocated making money from stocks the way that speaks to you, even if that means using a method that is not value investing:

Do those things as an analyst that you know you can do well, and only those things. If you can really beat the market, by charts, by astrology or by some rare and valuable gift of your own then that’s the row you should hoe

Benjamin Graham

Naturally, I’m drawn to the gardening reference Graham makes here.

Lowenstein and Lowe take us on a superb journey with insights about the father of value investing I’ve not come across before.

The second half: fundamental Analysis, value investing, and growth investing

The second half will appeal to the student of the value approach; it’s awash with lessons on how to conduct balance sheet analysis.

You will benefit from a pen and paper.

The authors also compare the differences between the value approach and growth investing, drawing from the experiences of well-regarded growth investors.

That’s the only growth rate that rally counts: earnings

Peter Lynch

The comparison with growth investing is extremely useful because it’s an approach that is just as prevalent in financial markets today as the value approach is.

Net current assets, net cash, intangible assets, growth rates in earnings, ROIC, revenue, and book values – it’s all in there. Lowenstein and Lowe pack in enough detail to get you well up to speed on the value and growth approaches.

(An investor) should think about the world in which he lives rather than to analyse numbers from a balance sheet or income statement

T Rowe Price

Find an investing style that works for you, but value wins out.

The main thread throughout the book is the concept of a margin of safety and mercifully the authors provide numerous examples of how to calculate it and why it’s such a central tenet of the value approach.

This and the fact that Lowenstein and Lowe cover a vast amount of ground from a value and growth investing perspective makes it worth a listen – it’s currently only available as a CD or on Audible.

In the end, the authors have a clear preference for the value approach, and one of their gifts is a clear description of what a value investing model looks like:

The value investing style produces a low cost, low maintenance investment portfolio. But investors should not think of it as a cookbook approach to buying and selling stocks. A value investor typically looks at numbers and plays with a few formulas but no mysterious maths tricks are necessary. As taught by Benjamin Graham, value investing is more of a philosophy than a technique. It is an approach, an attitude, a style.

Roger Lowenstein and Janet Lowe

NVIDIA the Great – the king of semiconductors

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King

Tech, more specifically A.I. has clearly become the new frontier in financial markets, and NVIDIA the Great has been crowned king of the semiconductors.

NVIDIA’s 25% rise – $200 billion in market value – in a single day will inspire a new generation of investors to go ‘all in’ as it always does.

The fact is that NVIDIA is the world’s best maker of the computer chips that power today’s growth of generative A.I., that new phenomenon of computers being able to generate images and texts in response to prompts from humans.

Still in its infancy, generative A.I. has educators across the world scratching their heads on how to deal with students using it for homework and undergraduate assignments.

It also has couples using generative A.I. to redesign their back garden.

NVIDIA the Great and the future of generative A.I.

It is a safe bet that NVIDIA will power future iterations of the global computer infrastructure for at least the next decade and has already cemented its market share of generative A.I. chips to the tune of 80%, increasing to 90% in 2024 according to HSBC:

we’re shocked by Nvidia’s pricing power on AI chips that we see driving earnings upside, higher valuation… while the overall [total addressable market] of generative AI still remains difficult to forecast, Nvidia has the highest potential leverage from a hardware perspective

Frank Lee, HSBC Head of Technology

BT has already openly admitted that they are letting go of 50,000 jobs over the next 10 years, 10,000 of which will be replaced by A.I.

It is clear that the existing computer infrastructure powering the global economy will now be subject to nothing short of a revolution, as the CEO of NVIDIA himself notes:

A trillion dollars of installed global data center infrastructure will transition from general purpose to accelerated computing as companies race to apply generative AI into every product, service and business process.

Jensen Huang, CEO, NVIDIA

NVIDIA is selling pick axes and tents to gold prospectors, it’s just that NVIDIA’s pick axes are fashioned from the strongest metal, their tents from the toughest of fabric.

Green shoots of recovery and the value approach

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Potatoes have to be the simplest vegetable to grow, which is why I grow them every year without fail.

Here you can see their stems poking out of the ground in my back garden/yard through tough, dry, rocky, clay soil.

The process is as follows:

1) make a hole in the ground 10 centimetres deep, place the seed potato in the hole, and cover it with soil.

2) make sure potatoes are planted 60 centimetres apart in all directions to allow for adequate growth

3) the picture shows how I’ve ‘earthed up’ the potato plant stems with soil to protect potatoes from sunlight which will turn them green otherwise. It also helps the plant grow more potatoes.

I planted potatoes in early March, but last Autumn I completely weeded the ground and added grass clippings from my own garden and a neighbour’s to decompose over winter.

If you’re in climate zone 8 like me there are potato varieties that you can plant right through to late August in time for Christmas, but do ask your local supplier who will be happy to advise you.

Green shoots and the value approach

One of my jobs as an investor is to prepare the ground from a philosophical and practical framework of investment operations.

A value approach that makes sense to me in the same way that your favourite musician makes sense and speaks to you.

Planting potatoes into the ground without prepping it is possible but not optimal.

My preparation for recent investments has been a years-long love of reading books, annual reports, blog articles, and newsletters on subjects ranging from digital marketing, ancient philosophy and gardening in addition to value investing.

One of the greatest discoveries of the value approach is that it does not matter if the economy is experiencing green shoots of recovery or recession; a key role of the value investor is to discover the intrinsic value of a listed business and purchase its stock below that value.

In my whole life, I’ve never known no wise people (over a broad subject matter area) who didn’t read all the time – none, zero

Charlie Munger

There really is no substitute for amassing knowledge from consuming the thoughts of others who have done what you want to do and what you want to achieve.