Some clients want to look “under the hood” and understand how an engine works. Others, prefer a different perspective. They want to know how the ride will feel, what they will see, and that they will be comfortable.
Whichever approach you prefer, our goal for writing articles is to provide clarity, security and confidence that you will arrive to your destination safely and on time.
In an effort to look “under the hood” we periodically send out our thoughts on holdings. We call it “creative-deconstruction”; where we figuratively remove positions held in accounts and rebuild it. We do this to look objectively at each one; asking ourselves, “would we buy it today? And is this the best use of funds?”
During this de-construction, we took a deep dive into technology companies.
As investment advisors, analyzing technology companies presents an exciting challenge, as they are creating new methods of getting things done. Often in transformative ways. In essence, we brainstorm about the future and how the digital and physical worlds will interact.
Recently, I listened to a podcast with Malcolm Gladwell, a famous author, and the CEO of AT&T. The CEO said 5G technology could soon be in our toothbrush and able to tell us whether we were sick, long before we felt it. Imagine that.
In imagining the future, we ask ourselves; what about a company is positive? Negative? What should we watch out for? What gives them an edge over competition? How will they be successful in the future? (and we do this without a crystal ball)
The “easy” ones are those that don’t need to reinvent themselves to stay competitive. Instead, they focus on enhancing the products they already provide.
For example, Microsoft is a great one. They have a great story, phenomenal product lines, and they have been resilient during past downturns. Among the other reasons we like them, it is interesting to learn that 90% of Fortune 500 companies have a reoccurring revenue relationship with Microsoft which provides consistent cash flow and makes them a great holding.
Apple is similar in clout as they have a broad and loyal customer base (approximately 1.4 Billion active devices). Their position is strengthened by their ability to continually improve their products and expand into subscription based revenue streams (news, music and payment services). They have some added risk with their exposure to China, which causes them grief from time to time. Still a good holding.
Then there are companies such as Fiserv and Accenture, which you may see in your portfolio but may not be aware of what they do.
Accenture, is our only non-US holding, as they are based in Ireland for tax purposes. They provide technology consulting services to large companies in every industry imaginable. They help companies incorporate technology into their businesses to become more efficient. They have no debt and have been successful for a long time.
Fiserv is a payment processing company (bill pay, credit card processing and internet banking). They service 18,000 financial institutions including banks, government agencies and retailers. They’ve also been a great holding for a long time.
Accenture and Fiserv are using existing technology create value for their customers. Neither of them are actually inventing new technology which is an important differentiator as inventors of technology face plenty of issues.
Let’s use chip makers as an example for an inventor. Even though many of them have seen tremendous growth, that growth comes at a cost (increased volatility and risk). When you look at their past performance, you could get sea-sick with the up-down up-down price movement. They are highly sensitive to economic cycles so if you decide to own them, you will need to time the market and their product cycle. (We don’t advise this for prudent investors). They need to continuously create new chips, patent them and earn what they can while the getting is good. Competition will work to replicate the technology or find ways around the patent protection (this brings to mind the Chinese chip maker Huawei). To us, it gives the feeling of a race or gambling, which we seek to avoid. Careful exposure to chip makers is ok, but nothing excessive because of the risks.
Each position within an account should provide a combination of diversification, safety, and growth. We evaluate positions and make adjustments as needed while keeping a client’s capital gains and risk tolerance in mind.
We want to be the absolute best we can be, and it’s through feedback that we accomplish this. If you have questions or if there is anything we can help you with, please don’t hesitate to let us know.
Thank you for your time