My Portfolio: Understanding Nine Key Stock Positions
This article explains the investment thesis behind nine stocks, representing 25% of my portfolio. The approach is inspired by a recent podcast featuring Mones Pabry, emphasizing the importance of explaining investment ideas simply, even to a 10-year-old. The goal is to understand the investment thesis and potential risks associated with each company.
Investment Philosophy: Simplicity and Conviction
The core principle is to explain each investment thesis in a concise and understandable way, as if explaining it to a child. A key takeaway is that the highest form of intellect is simplicity. Furthermore, genuine conviction in an investment comes from a deep understanding of the business, not just relying on complex models. It's crucial to know the key metrics and drivers of the business by heart. Also, before investing, you should be able to argue against your own investment case.
Portfolio Overview
My current portfolio consists of 16 positions, including two ETFs (VO and VWR). The focus here is on the bottom nine holdings by allocation. Positions below 3% are not considered core allocations. For each company, both the bull (positive) and bear (negative) arguments will be presented, along with my personal perspective.
Individual Stock Analyses
1. Nvidia: The AI Chip Leader
Bull Case
Nvidia is arguably the most important company in the AI revolution. They design chips for high-end AI products, with their CUDA software creating a significant competitive advantage through network effects. The addressable market for AI is enormous, driving demand for computing power and advanced chips. After Chat GPT's rise in 2022, Nvidia's growth and margins have been exceptional.
Bear Case
There are concerns about peak demand and whether current growth rates are inflated and will normalize. Big tech companies, Nvidia's customers, are also designing their own chips. There is also customer concentration risk. Nvidia faces regulatory scrutiny, geopolitical challenges, and competition from Chinese counterparts. Furthermore, the semiconductor industry is cyclical, and demand can decline during economic slowdowns.
2. TSMC: The Chip Manufacturer
Bull Case
TSMC (Taiwan Semiconductor Manufacturing Company) is a crucial partner to companies like Nvidia, manufacturing their chips. The AI demand boom benefits TSMC directly. As the world's leading chipmaker, TSMC's high capital expenditure and reinvestment create high barriers to entry. Long-term relationships with customers like Apple and Nvidia ensure continued demand.
Bear Case
TSMC is subject to the cyclical nature of the economy and faces geopolitical risks related to China, Taiwan, and the US. It also faces customer concentration risk and is capital intensive, which could affect future valuations. The margins are not as high as design companies.
3. ASML: The Equipment Provider
Bull Case
ASML is close to operating a monopoly, providing essential equipment for manufacturing advanced chips. They benefit from the AI boom as chip manufacturers are booking profits. ASML also has upkeep and servicing revenue.
Bear Case
ASML faces cross-border regulations and restrictions. Their complex supply chain, while creating barriers to entry, can also lead to delays. The semiconductor industry's cyclical nature remains a key concern.
4. Adobe: Creative Software Giant
Bull Case
Adobe dominates the creative software market with products like Photoshop, Lightroom, and Premier Pro. They are entrenched in the design and creative ecosystem, with high switching costs for users. The subscription model provides growth visibility.
Bear Case
The uncertainty surrounding AI's impact on the industry poses a significant risk. AI-powered image and video generation could disrupt Adobe's market. Intense competition and the democratization of content creation are also concerns.
5. HaiDiLao: The Hot Pot Chain
Bull Case
HaiDiLao has successfully addressed the food and beverage "trilmma" of location, replicability, and distribution. The strong brand offsets location issues. Hot pot is easily replicable, and the company has vertical integration in its supply chain. A strong internal culture drives expansion.
Bear Case
The hot pot industry is incredibly competitive. Service excellence differentiates HaiDiLao, but the company can suffer during economic downturns.
6. Lululemon: Athleisure Apparel
Bull Case
Lululemon is a well-managed athleisure apparel brand with a cult-like following, enabling high margins. Growth opportunities include expanding into menswear and international markets.
Bear Case
Lululemon remains a fashion company that could lose relevance. Competition is increasing from brands like Alo and Gym Shark. Premium pricing makes them susceptible to recession risk. International expansion is not guaranteed.
7. LVMH: Luxury Goods
Bull Case
LVMH has a strong portfolio of iconic brands. They are masters of serial acquisitions. Operating in the luxury segment allows pricing power to a certain extent.
Bear Case
LVMH is in the lower luxury segment so pricing power is limited. There is slowing luxury demand, especially in China. Dependence on consumer discretionary spending makes them susceptible to economic cycles. Succession issues after Bernard Arnault are a concern.
8. Meituan: Food Delivery Leader (China)
Bull Case
Meituan dominates food delivery in China. It is a super app with hotel booking, travel, and ticketing functions. There is high engagement and data collection, leading to monetization opportunities. They are the gatekeeper of traffic for businesses.
Bear Case
The space is highly competitive. Meituan faces thin margins and evolving regulatory requirements. Competitors with deep pockets could challenge their network effects. The company lives and breathes in China.
9. Meta Platforms: Social Media Giant
Bull Case
Meta (Facebook, Instagram, WhatsApp) dominates social media. They have created an advertising ecosystem and integrated AI into their platform.
Bear Case
Zuckerberg's focus on VR/AR is burning money. The ad industry is cyclical. Regulatory concerns and competition from TikTok and Snapchat are potential threats.
Conclusion
This exercise has clarified my conviction in different stocks. By considering both bullish and bearish arguments, I've gained a better understanding of the risks and opportunities associated with each investment. This is a good practice to encourage all investors to periodically review and document their investment theses.
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