When I shared about our U.S. holdings in the “Inside The Bedokian’s Portfolio” series here and here, I mentioned there were four securities/counters that I had identified for newbies to go into when they want to start off in the U.S. markets. I had stated three so far, which are SPDR S&P 500 ETF (SPY), Berkshire Hathaway Class B (BRK.B) and Apple (AAPL). The next obvious question is: what is the fourth U.S. counter?
Sometime in 2014, I had researched and concluded on four U.S. counters which were relatively safe for investors, newbies and seasoned alike, who were stepping into U.S. markets for the very first time. The rationale is simple: SPY and BRK.B represented U.S. equity markets in general, while AAPL and the fourth counter stood for the technological and innovation might of the U.S.
Since the hint is there, you might be wondering if this fourth one is a giant e-commerce firm that started off as an online bookstore, or an electric vehicle company whose founder had a vision of a Mars settlement within a few decades. Well, it is not these two.
The answer is Alphabet (formerly known as Google).
Think of search engines, and Google would likely be the first to come to mind. In fact, the word “googling” had entered into our written and spoken language to mean searching for stuff on the internet. Back in 2014, Google’s market share in the desktop search engine market was about 88% throughout1. Between Jan 2010 and Oct 2020, Google’s desktop search engine market share never dipped below 85%2.
And that is not all. Google is beyond just search engine; it developed the Android OS, the other most commonly used mobile device operating system in the world; it produces its own range of mobile phones (Pixel), and it owns YouTube. To sum it all up, it represented almost the entire internet ecosystem, ranging from simple things like email services (Gmail) to remote collaborations like Google Classroom. And those were back in 2014.
Fast forward to 2021, the abovementioned services were improved, and a slew of new services was introduced, too, such as Google Meet (which came in useful during the COVID-19 pandemic) and Google Pay.
Giving an objective perspective, some of the Google services do face stiff competition from other equally strong rivals (e.g., Apple and Samsung for payment, Microsoft and Amazon for cloud services, etc.), and it resulted in at least one big exit (social media Google Plus). Furthermore, they are subjected to a number of legal and regulatory issues and suits, ranging from anti-trust to privacy (but frankly, some tech firms face these issues, too).
Like Apple, Alphabet is probably seen as getting more evolutionary than revolutionary, especially when digitization and digitalization are getting more common place which gives the impression that not much stuff is surprising anymore, and also other companies, both big and small, are also introducing their own individual/suite of applications that could be seen as substitutes for their products and services.
Things have changed since my analysis back in 2014, especially with the coming of the “new world (tech) order” and the emergence of bigger/newer/faster challengers (e.g., Amazon). There is still potential in Alphabet, and I say again, they are more than just a search engine.
I have to disclose that I do not own Alphabet directly (i.e., owning the shares), which explains why there is no “Inside The Bedokian’s Portfolio” for it. I do own it indirectly, though, through ETFs and unit trust funds.
Do note that Alphabet has two classes of publicly traded shares: Class A (GOOGL) and Class C (GOOG), with the difference being the former having voting rights while the latter does not. Both tend to trade at around the same prices, with GOOGL having a higher premium.
The Numbers Between The Four
Back to our discussion of the four U.S. counters, let us take a look at their performance and statistics for two periods: from Jan 2005 to Dec 2014 (around the point where I gave my “four counters” conclusion) and from Jan 2005 to Dec 2020 overall.
Fig.1: Portfolio returns with an initial amount of USD 10,000 of BRK.B, AAPL, GOOGL and SPY (displayed as SPDR S&P 500 ETF Trust), Jan 2005 to Dec 2014. Jan 2005 was selected as GOOGL went public in Aug 20043. Returns are shown before inflation.
Fig.2: Portfolio returns with an initial amount of USD 10,000 of BRK.B, AAPL, GOOGL and SPY (displayed as SPDR S&P 500 ETF Trust), Jan 2005 to Dec 20203. Results are shown before inflation.
The numbers in Figures 1 and 2 clearly stated the high returns and risks of AAPL and GOOGL compared with those of SPY and BRK.B. Despite the high-risk nature of the technology counters, their Sortino Ratios (which measures the amount of returns earned per amount of bad risk taken) are higher than the other two.
Of course, we are not looking at these four counters individually or by sector, but at the level of geographic diversification which is the U.S. markets. If we set aside USD 10,000 for the U.S. markets, allocate 25% to each of these four and rebalance them annually, the numbers may surprise you.
Fig.3: Portfolio returns with an initial amount of USD 10,000 of the four counters, with annual rebalancing, Jan 2005 to Dec 20143. Returns are shown before inflation.
Fig.4: Portfolio returns with an initial amount of USD 10,000 of the four counters, with annual rebalancing, Jan 2005 to Dec 20203. Returns are shown before inflation.
Cross referencing with Figures 1 and 2, by combining all of them, you could get the compound annual growth rate (CAGR) of GOOGL’s, a Sortino Ratio similar to that of AAPL’s, a standard deviation of BRK.B’s and the correlation near to the S&P 500. This is the “magic” of diversification, where things are averaged out across, albeit with lesser returns but giving you a peace of mind with lesser risks, too.
The Bedokian is vested directly in SPY, BRK.B and AAPL.
Past performance is not indicative of future results.
1, 2 – Worldwide desktop market share of leading search engines from January 2010 to October 2020. Statista.com. https://www.statista.com/statistics/216573/worldwide-market-share-of-search-engines/ (accessed 23 Jan 2021)
3 – Statistics from Portfolio Visualizer. https://www.portfoliovisualizer.com (accessed 24 Jan 2021)