Saturday, November 26, 2022

Expanding Your Circle Of Competence

“Circle of competence” is a phrase which is often used in the investment circles (pun intended). Basically, one should invest in companies and organizations that he/she knows, and by knowing very well how they are structured, operate, sustain and of course, be profitable.

While the term “circle of competence” is easily bandied about, it is not so simple while trying to put it into practice. For everyday retail investors like you and me, the main (or probably only) company/organization that we may have competence is at where we work. Problem is, even though we may be in a company that deals with a certain sector or industry, we do not have the full picture of what is going on, since we are not C-suite employees of the said companies. Also, if we are working at a sunset industry, it is not that wise to invest in it knowing that its growth (and dividends) may be dwindling as time goes by.


Institutional investors, on the other hand, have a large circle of competence; they have an army of analysts who are experts in their own fields to provide inputs, and they have the channels to speak with C-suite executives directly to get a sensing of the goings-on at their respective sectors/industries.


So, does that mean we cannot expand our own circle?


I will provide you four ways on how to expand your circle.


Way #1: Read More


There are tons of resources conveniently available online (business and financial news sites, investment forums, etc.) and offline (business books, periodicals, etc.), so I would think this is the easiest way to start off improving your circle of competence. 


Way #2: The Inside Scoop


The next source of information would come from your family members, friends and acquaintances, or rather, their line of work. Although there is no harm in asking about their jobs and the sectors/industries they are in, but this way may seem too mercenary and make your relationships “business-like”. The key thing here is not to ask too much of it in a session and be moderate. If you are not comfortable with it, then just skip this way altogether.


Way #3: Observation


Observation can be done in many forms. One form is to see what products and services that you and others are using. Another is to ask questions on why certain people like to use a product or service, like a personal survey of sorts. After these, continued research is necessary to look at your answers further. Though this may seem incomplete without the whole picture, the ultimate result of any company/organization is to get its customers use their products and services, and these are the people that you are observing/asking in the first place.


Way #4: Go Broad


This is more of a counter-way (and a spoiler) to improve one’s circle of competence, and it is to invest in a broadly diversified market index fund. If you have the whole market in your portfolio, then there are less worries on whether you know a sector/industry sufficiently. However, going broad is likely going to provide average returns, as compared to entering individual sectors/industries.


You can mix-and-match the above ways, such as getting into sector/industry specific funds or adopt a core-satellite approach (Way #4 + Way #1/2/3), or combine ways #1, #2 and #3 together for more holistic research. If you have found a new area in your circle to invest in, do not go all-in and always diversify your portfolio.

Friday, November 18, 2022

Are Tech Stocks Doomed?

The news of the technology (or tech) sector getting a big hit is everywhere, and so is the subsequent layoff news that followed: Meta had laid off some 11,000 jobs; Twitter had axed around 3,700 (though some may had left due to their own volition)1 and our locally based Sea Ltd had cut around 10% of its workforce for the past six months2

Even earlier in late 2020, China had begun its tough regulatory measures such as antitrust and data security on its own technology firms e.g., Alibaba and Tencent3. Though signs of easing were seen since June 2022, the continued Covid-related lockdowns dampened the recovery.


Flashback to the onset of the pandemic around two and a half years ago, tech stocks were seen as the darlings and the “new world order” in the post-pandemic world, in which even myself had held that opinion (and still has). Prices of technology and its related shares soared, with pandemic-friendly counters such as Netflix and Zoom went uphill and plateaued between 2020 and 2021, before coming back down again starting this year.


There were several reasons, both actual and deemed, for this. The main one would be rising interest rates, and the other was the return of the pre-Covid normalcy. From a valuation point, the prices of these stocks were overvalued due to the hype, and the two aforementioned factors caused them to go back to Earth. Some even attributed it to the fall of cryptosphere. Whatever the cause and/or effect, in my opinion, there is no single big variable but a multitude of them that resulted in this tech bust.


In the long run, the tech sector will still see growth in the form of new products and services. Innovation is an infinite resource and this applies well in the world of tech. Sounds inspirational? Well, making these statements are the easy part, and operationalizing them is the more difficult aspect. 


First, the tech sector is huge and often interconnected with other sectors and industries. For instance, Apple is a tech company but also a lifestyle one; Tesla is a tech company but also into electric cars; Netflix is a tech company but also provides entertainment content, and so on.


Second, selecting a potential successful tech company is difficult, especially when there are so many players around in almost the same field. Going back to the pre-Dot Com bust period of the late 1990s, there were a few listed internet search firms (Excite, Lycos, Yahoo, Infoseek, etc.), and did we know then that Yahoo would prevail (at least till the mid/late noughties)?


If individual picking is hard for you, then perhaps we can go the exchange traded fund (ETF) way. There are a number of tech ETFs, and thematic ETFs that touched on tech-related stuff (green energy, electric cars, cybersecurity, etc.). Investing in ETFs would bring about slower growth as compared to (hopefully) picking the winning company, but at least it is diversified enough to provide a buffer.


The last word: tech is still a sector/industry (although is broad-based), and I would advise diversifying into other sectors/industries and asset classes to give a broader exposure to the financial markets in general. A tech-concentrated portfolio would be more doomed than a diversified portfolio with different asset classes, regions/countries and sectors/industries, in the event of a market downturn.


1 – Wamsley, Laurel. It’s the end of the boom times in tech, as layoffs keep mounting. NPR. 16 Nov 2022. (accessed 17 Nov 2022)


2 – Reuters Staff. Sea Ltd laid off 10% of workforce over past six months – The Information. Reuters. 15 Nov 2022. (accessed 17 Nov 2022)


3 – Zheping, Huang. In Just One Year, Beijing’s Crackdown Has Changed Corporate China Forever. Bloomberg. 2 Nov 2022. 17 Nov 2022)