Will USA Anti Trust Action Damage Your Investments?

The Investment Perspective – December 2020

Peter Flannery CFP AFA

 

 

“Neither the investing method nor the fundamentals of the business are right or wrong because the mood of the market is favourable or unfavourable toward the “stock”. That is because when you really think about it, “stocks” (shares) are all about the financials and the trading price, the share price… the cash up value. What matters more is the economics of the business” 

Peter Flannery

US Justice Department aims at APPL, GOOGL, AMZN, FB

Not long ago the US Justice Department made noises about going after Apple, Alphabet, Amazon and Facebook.

Specifically, they are looking to investigate what they say is potentially anticompetitive behaviour.  In each case, the Justice Department insists, because of their strong market position, these businesses have unfair advantage and as a result are misusing their position unfairly.

 

So what does it mean?

The US Justice Department will possibly file action against each of these companies (they have already filed action against Alphabet again this year – having failed to achieve much in their 2013 action) and may look, worst case scenario to break these companies up into bits so that they lose their ability to undertake anticompetitive behaviour.

 

What should investors do?

Investors are different.  Some investors are more advanced than others.

Talking generally, for those less advanced investors who perhaps run a portfolio based on a Balanced, Balanced Growth or even a Growth Strategy, they may feel unsettled by the uncertainty of the lawsuits that may unfold over the next few years.  Therefore they may take the view that either scaling back their positions or indeed removing their positions totally in the likes of any of these four companies is their preference.

Other investors who are more advanced, run their portfolios on the basis of the Towards Advanced Growth Strategy or the Advanced Growth Strategy.  They might be more inclined to focus on the long-term, the quality of the business and the robustness of economics of the business. 

They are more likely to roll with the volatility, the market banter, the Court cases and the ups and downs of the trading price knowing that the economics of the underlying business will allow the business to survive even though it is difficult to know exactly what form that business will take in the future.

For you specifically, if you are unsure, you could adopt a wait and see approach which is what I am thinking at this stage although of course just send an email to invest@WISEplanning.co.nz if you’d like to discuss it.

 

What we do not know

It is very early days yet with action only recently filed against Alphabet and no real action yet against the other companies, aside from interrogations at the Senate and a reasonable amount of noise across the media.  It is just too early to know what the outcome will be.

 

What we do know

The economics of each of these businesses is robust.  If we take Microsoft as an example, they have been down this road already.  We know that the market generally does become unsettled in these situations which can see the trading price become quite volatile over a longer period than less advanced investors may be prepared to tolerate. 

What we do know is (looking back at Microsoft) we can see that the economics of the business allowed the company, after settling with the Justice Department to continue to operate under the new regime and has since gone on, after adapting to the changing environment to further growth over the last few years.

The above chart shows the trading price of Microsoft

Going back to June 1990 the Federal Trade Commission in the US launched a probe into possible collusion between Microsoft and IBM in the PC software market.  Long story short, after numerous back and forward Court cases, on November 1 2002 Judge Colleen Collar-Coately ruled that … a proposed settlement serves the public’s interest as required under the Tunney Act, which sets standards of review for antitrust settlements.

September 6 2001 the US Justice Department says it no longer sees the breakup of Microsoft as beneficial and wants to find a quick remedy in the antitrust case.

If you’d like to take a look at the timeline of events click here

So as you will see by that timeline, nothing is certain until the deal is done.

What’s slightly funny is the fact that the very reason the Justice Department is not keen on these types of businesses, is to some degree the very reason that you and I as investors like them.  The competitive advantage is the key.

 

This is also slightly amusing….

You will have heard me mention on many occasions that it is not where you invest but rather how you invest.

I mention this because of course it is what separates out those who achieve investment success with acceptable risk and those who sometimes do not.

To be clear, I am referring to specific investing methodologies.

Take for example the share traders mantra about moving averages and the movement in the share price as an indicator of whether or not to buy or sell.  Put simply, a declining share price generally signals the market suggesting challenging times are ahead and that investors might want to be careful.  Other traders see a buying signal when the trading price drops below the 50 day moving average.

Value/eco-Investors focus on the economics of the business so that when the trading price declines that is the signal to buy. 

I should add, this does not mean we will refrain from buying when the trading price is rising or even when it is expensive.

The point here is that we look beyond moving averages and the trading price which is driven by market sentiment, to the economics of the business to help minimise risk and build in reliable performance long-term.

What is slightly amusing is that one method looks upon declining trading prices as a negative or a sell indicator whereas another methodology sees a declining trading price as a buy signal.

In reality anyone can do anything in the share market and win, at least in the short-term.  The longer we go though, the more difficult it becomes to make real returns.  That is because the short-term can include some luck as well as some good investment thinking.  Longer-term though, luck becomes less and less of a factor and so the importance of the methodology and how we invest rises to the top. 

How many search engine companies were there before Alphabet dominated?  How many companies like Facebook were there before Facebook became dominant?  How many motor vehicle manufacturers were there in America before the remaining few dominated?  How many airlines were there in America before the remaining few owned the skies?

In my experience, it seems that whatever methodology we decide to use, it is not a bad idea to stick with it.  This does not mean the methodology cannot evolve and improve.  The fundamental nature of it is likely the key to its success and the discipline around it.

 

“My advice is to invest in tennis balls – they have a high rate of return.”

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