In 2012, My two good friends and I started an investment club.
Each month, we sat at one of the open-aired public benches at Singapore Management University, facing the National Art Museum of Singapore.
We shared our best stock ideas. And it was a great way to get ideas fast.
After sitting through all the stock ideas back then, you’d noticed a pattern. The ideas that hold up years later are almost always the boring businesses – great companies that had durable competitive advantages, selling habit-forming products and services.
Today, the stock market is full of exciting AI stories.
SpaceX vs Tencent
I’ve no doubt Elon Musk is a successful entrepreneur. Elon Musk wants to send humans to space. He wants to build data centres on Mars. The story is so exciting.
That’s why SpaceX is trading at an outrageous 64x Price/Sales ratio.
What does that mean?
You’re paying $64 for every $1 of SpaceX’s yearly sales. NOT profits but sales. Right now, SpaceX loses money. That’s the big problem.
Investing is not betting a dream coming true. It’s about a sure-fire way to compound wealth.
I’ll never forget this. Warren Buffett said: “The key to investing is not assessing how much an industry is going to affect society, or how much it will grow, but rather determining the competitive advantage of any given company and, above all, the durability of that advantage.
The products or services that have wide, sustainable moats around them are the ones that deliver rewards to investors.”
You see, buying the right stock is accumulating great businesses with a durable competitive advantage.
So… What would I buy today?
Tencent trades at just 15x PE. It’s trading much cheaper than SpaceX. Yet, it’s one of the biggest tech companies in China.
And owns the most well-known social media platform, WeChat. Its network effect is so strong the entire Chinese population cannot live without WeChat. Tencent compounds at a faster rate than most companies.
Over the last decade, it spent a total $4.6 billion per year in capex. It was able to grow net profits from $6 billion to $32 billion in the same period. Not many businesses can generate this kind of returns on capital.
In fact, Tencent shares grew 33% per year for its shareholders. That’s impressive.
Yet, the market trades both SpaceX and Tencent so differently.
As a value investor, it’s easy to get distracted. The AI story is so exciting right now, with glamorous AI start-ups waiting to get listed.
It’s way too easy to get caught up in the “here and now” we lose perspective of one’s long-term fundamental thinking. Especially when market behaviour contradicts with how we should invest.
In other words, SpaceX sells a dream. Tencent prints money.
It’s as if people don’t care about financial analysis. As long as management has a grand vision, investors happily buy the stock.
And we all know what happens when we overpay for glamour stocks that don’t make money. Remember 2022? the Crypto market crashed. Tech stocks got wiped out.
I’ve been investing over the last 16 years. I’ve read letters from the world’s best investors. Warren Buffett, Seth Klarman, Howard Marks, Michael Burry, Jeremy Grantham. They have survived and thrived the booms and busts.
I learnt something about them.
They all pay attention to the same thing: Find a great business. Don’t overpay for its stock. Grow your profits and dividends. That’s it.
That’s the same lesson I learnt on that bench at SMU in 2012. Stock market trends come and go. If you’re starting out today, the key to growing our wealth safely and profitably can never be further away from the truth – buy great businesses.
Sometimes, investing can be simple.
Willie Keng, CFA
Founder, Dividend Titan
