It seems once you have achieved a certain level of success in life and gained a global reputation and following, you can fall into the trap of allowing your ego to be larger than your knowledge base. You often see this with influencers positioning themselves as experts in fields and industries in which they are clearly out of their depth.
If you have not bulletproofed yourself from this behaviour through the proper education, you leave yourself vulnerable.
Below is a recent tweet from Tesla Inc (NASDAQ: TSLA) CEO Elon Musk. I will explain why listening to this advice will turn your stock portfolio into a constant source of stress and disappointment.
Let's start with the opening line.
'Since I've been asked a lot:'Musk is a highly successful entrepreneur, not a stock market investor. The skills he has developed may be transferable from business to business, but they are not transferable to the stock market. Investing requires a whole different skill set that Musk does not have based on this tweet.
The fact that he claims to be asked a lot about what stocks to invest in shows how disconnected his followers are and how financial illiteracy, a pandemic that gets little mainstream media attention, is a genuine issue.
Musk deserves admiration for what he has achieved but not at the expense of your own success. If you want inspiration on starting, growing and exiting a business, then Musk is the perfect source. Yet there are far better-qualified individuals to seek guidance on picking the right stocks for your portfolio.
Let's look at the next sentence.
'Buy stock in several companies that make products and services that 'you' believe in.'One of the first rules of investing is to ignore opinions and beliefs, including your own. Your views bring attachment, which brings emotions, which brings a hornets' nest of problems such as over-risking and not knowing when to let go of the asset when it clearly is not performing.
As a mentor, I regularly get an insight into people's portfolios. When I question why a particular stock is STILL in there and why it is showing so much loss, the answers are frequently the same.
I KNOW it will go back up. I BELIEVE in the company. I LOVE the products.This has a knock-on effect of stress and sleepless nights and, in the worst-case scenario, spirals entirely out of control. It stems from a lack of process.
It is fascinating how resistant people are to changing their approach even when their system is failing or underperforming.
The correct way to pick stocks is first to have a neutral approach; in other words, do not allow the brand name to have any impact on your decision and instead focus on:
How the asset has performed in the past. How the asset is performing right now. How the asset is likely to perform in the future.The simplest way to gain all of this information in a snapshot is by using technical analysis (a flashy word for using charts), particularly on the higher time frames (monthly, weekly and daily).
This form of research focuses you on the stock's performance while simultaneously blocking out all the noise.
If the asset has performed well in the past, you instantly have the odds in your favor of a profit going forward. If it fails, risk management and exit management come into their own as part of your process.
Let's move on.
Only sell if you think products and services are trending worse. Don't panic when the market does.Yes, don't panic when the market does. The only good bit of advice in this tweet. A successful investor goes against the herd mentality. Where people are selling, we look to buy and vice versa. Timing and patience play into this essential investor skill that is often overlooked with a preference instead for chasing quick riches. Slow and steady wins the day and exponentially when you embrace compounding.
The first part of the sentence again encourages you to "think," bringing your beliefs into the process. The best way to sell a stock is when the stock price is not performing. By allowing your beliefs to guide your decision, you will exit good stocks too early and hold onto bad stocks far longer than you should. It is one of the primary reasons so many struggle with investing. As the saying goes, cut your losers short and let your winners run.
The best way to do this is to let the price dictate and never make predictions based on your beliefs and opinions.
Now for the final part of Musk's tweet.
This will serve you well in the long term.It won't. The chances of this advice serving you well long-term are slim pickings, as the foundation of this advice is based on emotion. A more profitable approach is to pick stocks where you remain neutral and allow the stock's performance to guide you. This is what the most prolific investors and traders have done for decades.
There is no getting away from the fact that we live in the time of The Influencer. You just need to be wise in how much you allow them to affect your decisions as, ultimately, when the time comes, you are accountable for your choices.
© 2022 Benzinga.com. Benzinga does not provide investment advice. All rights reserved.
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Tech shares have taken a beating in 2022 as higher interest rates decreased the present value of future earnings growth. Investors are thinking twice before paying above-market multiples, and are focusing on value stocks instead.
However a somewhat overlooked fact is that technology companies often have a very conservative capital structure. Most big technology companies, such as Apple (AAPL), are sitting on a net cash position. This is in contrast to utility and real estate companies, which often use leverage to juice up returns.
Avenues to Deploy Excess CapitalThere are several different ways companies can deploy this excess cash. First, they can invest it in their core businesses and grow organically. Second, they can use it for acquisitions. Third, they can return it to shareholders via dividends and buybacks. Lastly, they can keep their options open, and keep the dry powder on their books.
The last option allows companies to exploit periods of market turmoil to boost returns. This is what Warren Buffet does at Berkshire Hathaway (BRK.B). Berkshire ended Q1 2022 with around $103 billion in cash, down from $144 billion at the end of Q4 2021. In essence, Berkshire deemed the opportunities in Q1 2022 worth deploying some 28% of its cash pile.
It is likely that dropping share prices will prompt corporate treasurers to deploy the excess cash reserves accumulated in the good days. Nevertheless, as we have seen at Berkshire, some of the cash will remain on the books.
In this article I will explore what effects rising rates will have on corporate profits for some of the tech companies sitting on the largest cash pile.
AppleAt the end of Q1 2022 -- which for Apple is Q2 given the September financial year -- the interest-sensitive portions of Apple's balance sheet were as follows:
Balance sheet item, USD billionAssetsLiabilitiesCash and equivalents$28.1Marketable securities$164.6Commercial Paper$7Term debt$113Total$192.7$120Selected Balance Sheet Items, Author's calculations based on Q1 2022 disclosureIn total, Apple is sitting on a net cash position of about $72.7 billion, which could fetch an extra $2 billion a year in pre-tax profits if reinvested at the 3% Fed funds rate currently expected by the market over the medium term.
The impact from the extra income largely depends on Apple's product cycle. I think the effect will be more noticeable in years without major product releases. Overall though the impact should be a boost to earnings by 2-3%.
Alphabet (GOOGL)At the end of Q1 2022, the interest-sensitive portions of Google's balance sheet were as follows:
Balance sheet item, USD billionAssetsLiabilitiesCash and equivalents$20.9Marketable securities$113Long-term debt$14.8Total$133.9$14.8Selected Balance Sheet Items, Author's calculations based on Q1 2022 disclosureOverall, Google has at its disposal some $119.1 billion net for reinvestments, which could boost pre-tax income by some $3.3 billion over the medium term. Given the more conservative balance sheet of Google as compared to Apple, the boost to earnings should be around 4%.
Meta Platforms (FB)At the end of Q1 2022, the interest-sensitive portions of Facebook's balance sheet were as follows:
Balance sheet item, USD billionAssetsLiabilitiesCash and equivalents$14.9Marketable securities$29Total$43.9Selected Balance Sheet Items, Author's calculations based on Q1 2022 disclosureCuriously, Facebook has no debts. As the company moves into a more mature phase, this may prompt the corporate treasurer to diversify the capital structure.
This should allow debt investors to have an allocation towards Facebook, and at the same time potentially lower the cost of capital.
As things stand, the net cash position of around $43.9 billion should bring an extra $1.2 billion in pre-tax income over the medium term. The overall boost to pre-tax income should be around 3%.
Amazon (AMZN)At the end of Q1 2022, the interest-sensitive portions of Amazon's balance sheet were as follows:
Balance sheet item, USD billionAssetsLiabilitiesCash and equivalents$36.4Marketable securities$30Long-term debt$47.5Total$66.4$47.5Selected Balance Sheet Items, Author's calculations based on Q1 2022 disclosureAmazon recorded a sharp drop in marketable securities in Q1 2022 to $30 billion, down from $59.8 billion in Q4 2021. This was partly the result of a $8.2 billion valuation loss, of which $7.6 billion was due to a writedown in the value of Rivian (RIVN).
As of the end of Q1 2022, Amazon held a circa 18% stake in the electric car maker. Overall, the benefit to pre-tax profit from the reinvestment of the spare cash would be in the 1%-2% range.
Microsoft (MSFT)At the end of Q1 2022 -- which for Microsoft is Q3 given the June financial year -- the interest-sensitive portions of Microsoft's balance sheet were as follows:
Balance sheet item, USD billionAssetsLiabilitiesCash and equivalents$12.5Short-term investments$92.2Long-term debt$50Total$104.7$50Selected Balance Sheet Items, Author's calculations based on Q1 2022 disclosureThe reinvestment of the net cash position of Microsoft at circa $54.7 billion would results in a pre-tax earnings boots of close to 2%.
Intel (INTC)At the end of Q1 2022, the interest-sensitive portions of Intel's balance sheet were as follows:
Balance sheet item, USD billionAssetsLiabilitiesCash and equivalents$6.2Short-term investments$32.5Debt$37.25Total$38.7$37.25Selected Balance Sheet Items, Author's calculations based on Q1 2022 disclosureDespite boasting a large absolute cash pile, Intel's actual net cash position is negligible when the debt is taken into account.
Tesla (TSLA)At the end of Q1 2022, the interest-sensitive portions of Tesla's balance sheet were as follows:
Balance sheet item, USD billionAssetsLiabilitiesCash and equivalents$17.5Short-term investments$0.5Debt and finance leases$4.8Total$18$4.8Selected Balance Sheet Items, Author's calculations based on Q1 2022 disclosureAutomakers have traditionally relied on having a sizable cash pile to ride out industry downturns. Tesla's $13.2-billion net cash position could boost pre-tax profits by $350 million, or 5%-6%, which is quite significant in percentage terms.
In absolute terms, however, given the market capitalization of the company, the effect would be negligible.
Nvidia (NVDA)At the end of January 2022, the interest-sensitive portions of Nvidia's balance sheet were as follows:
Balance sheet item, USD billionAssetsLiabilitiesCash and equivalents$2Short-term investments$19.2Long-term debt$10.9Total$21.2$10.9Selected Balance Sheet Items, Author's calculations based on January 2022 Annual reportNvidia boasts a net cash position of around $10.3 billion. A reinvestment at the expected 3% Fed funds rate could boost pre-tax returns by $275 million, or close to 3%.
SummaryWhen it comes to the cash pile of tech companies, the devil is in the details. Overall, the group will be a net beneficiary of higher rates.
Older tech companies, such as Intel, Microsoft, and Apple, have a more diversified capital structure, and a sizable debt component.
Over the short term, Tesla looks like the biggest winner of higher rates. However, this is the result of a small pre-tax profit relative to the net cash position.
I expect the effect to diminish as car production increases in the future, boosting pre-tax profits. Over the medium term, Google parent Alphabet should be the biggest beneficiary of higher rates, given its meaningful $119.1 billion net cash and cash equivalents position.
All in all, while higher rates will by no means be a main driver for tech earnings, most names should experience an earnings per share bump of several percentage points.
The effect may end up being slightly larger over the very short term. This is due to the fact that the debt companies have issued is usually with a fixed interest rate.
Eventually, these bonds will have to be refinanced at higher rates. In the meantime, however, their immediate cash reserves can be redeployed very quickly at the higher Fed funds rate.
Of course, this is offset by the fact that companies themselves have invested a portion of their marketable securities into longer-duration instruments.
At the end of the day, there is still a silver lining for tech shares when higher rates are concerned.
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