THE GHOST TRAIN
THE FINANCE GHOST: Investment Dodgeball
The dip that has kept many investors up at night in the past two weeks has been the Chinese tech nightmare
Way back in 2004, Nokia was on top of the world and nobody had ever seen an iPhone. Nokia hasn’t aged terribly well but a movie from that same year, Dodgeball, certainly has. Vince Vaughn and Ben Stiller pulled off a masterpiece.
Consider that these days Dodgeball has its own World Cup and numerous online petitions aiming to make it an Olympic sport. Based on some of the arbitrary sports I’ve seen in Tokyo highlights packages, it doesn’t seem like an unreasonable request.
One of the best quotes in the movie is: "Remember the 5 Ds of Dodgeball: dodge, duck, dip, dive and dodge."
These are also the 5 Ds of investing in volatile stocks. If you can’t stomach severe dips, then growth investing is not for you. If you can’t handle the risk of high-flying CEOs getting cut down to size by the SEC, like Trevor Milton of Nikola fame, then it may be best to stick to more traditional stocks.
You know, like Steinhoff. Ahem.
Jokes aside, FinTwit is full of users punting the "buy the dip" narrative, but some dips just keep on dipping. The dip that has kept many investors up at night in the past two weeks has been the Chinese tech nightmare.
Such is the fallout that even Cathie Wood of ARK Invest has sold Chinese exposure in ARK’s funds. Some have pointed to this as a sign that there is serious trouble. I wouldn’t be so hasty to make that assertion, especially since ARK previously piled into Coinbase (down around 30% since the IPO in April) as well as the Robinhood IPO which took place last week.
I’ve met some truly horrible people in my career, but I wouldn’t buy Robinhood even with their pension savings. Robinhood’s management team had to play Dodgeball with regulators and users even before the company listed.
And considering that Robinhood’s revenue model depends heavily on crypto flows, the risks in that business are substantial.
Remember the 5 Ds of Dodgeball: dodge, duck, dip, dive and dodge. These are also the 5 Ds of investing in volatile stocks
Investors will happily point to the risks of China, while putting in bids for Robinhood and cryptocurrencies with names that would embarrass even the most foul-mouthed patrons of your local pub.
If the sharp sell-off in Pinterest last week (-19% on Friday) wasn’t an example of what happens when valuations become silly relative to the underlying business model, then I don’t know what is. The IPO market has certainly cooled off since the eye-watering scenes in 2020, which is a sign that there’s a maturity coming through in the market.
For example, Robinhood ended the week flat after closing 8% down on the day of its IPO. When Chinese ride-hailing app DiDi came to market, the bankers priced it conservatively relative to Uber. None of this mattered, obviously, once Chinese regulators decided to crush the company, but the principle is important.
Back to the dips: some are best avoided. Others bring an opportunity to top up on positions and bring down an average in-price. I did this with great success with Massmart in 2020. Initially I bought it too early after the March crash, but my investment thesis was sound and I had strong conviction, so I bought the dips and eventually sold for a proper profit this year.
I haven’t used the latest dip to buy any Naspers, Prosus or Tencent shares. My concern is that Tencent’s model is heavily geared towards mopping up smaller Chinese tech companies. Tencent is a venture capital investor of note and that’s not a great position to be in when regulators are breathing down your neck.
Instead, I topped up on Alibaba. Jack Ma has already been disciplined by the regulators and Alibaba earned itself a huge fine in the process. It’s not impossible that the regulatory lightning could strike twice, but it feels unlikely on a balance of probabilities. I think the Chinese Communist Party has already recognised the consequences of scaring off foreign investment forever.
My average in-price is now $224.20 and Alibaba is around 3.5% of my portfolio. $BABA peaked at nearly $320 a share in October, when the world was putting crazy valuations on growth companies and the regulatory chow mein hadn’t hit the fan yet.
Unfortunately, I don’t believe Alibaba will return to $320 any time soon. It finished last week over $190 after finding decent buying support at $180, so I’m hopeful that further downside is relatively limited. I need a 15% rally just to break even.
In case you’re wondering, Nokia is still around. The company now focuses on 5G infrastructure rollouts, competing against Ericsson and Huawei. It’s a shadow of what it once was, much like Chinese investment sentiment.
In the markets, we play Dodgeball on an ongoing basis. The danger is part of the appeal.
Otherwise, we would just buy ETFs and ignore the news.
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