Warren Buffet says you should always invest in a business that even an idiot can run, because one day an idiot will run it.
That’s why I invest in businesses with strong network effects that are unregulated, example: Facebook, Amazon, Alibaba, LinkedIn.
“Alibaba?” you say will with a querulous tone. Surely Alibaba is not a safe investment? Surely its all tech hype and part of the latest bubble to emerge from hippieville.
A recent Barron’s article on Alibaba belied the ignorance of even the highest credentialed and well-intentioned of financial analysts when it coms to understanding the tech industry and differentiating between tech-as-a-fad and monopolies-for-life.
Alibaba is not a FindYourNearestPet app. Alibaba is the world’s largest eCommerce platform. The former is tech-as-a-fad, the latter is monopoly-for-life.
Barron’s predicts Alibaba will lose 50% market cap. Really?
That’s like predicting AT&T will lose 50% market cap. It simply can’t happen without massive fraud taking place. Alibaba listed on the NYSE in September 2014. In fact, Alibaba was the biggest IPO in the history of the NYSE.
Would they have gotten away with fraud right under the nose of the US regulators, media and financial community?
Maybe. But I don’t think so. I think the more likely answer is that they are the real deal and old-school analysts can’t get their head around the economics of new-world monopolies.
Just as with telecoms networks, eCommerce platforms are built on the back of network effects that are virtually unbreakable. Just look at eBay, almost 20 years on it has a $32billion market cap, even after unbundling PayPal for $46billion, and its still pouring cash out in spite of having one of the worst user experiences on the Web.
There’s no shame in being a networks effect monopoly. There’s only dividends.
The difference between eCommerce and telecoms is that over the decades governments have increasingly regulated the latter in order to prevent abuse of market dominance.
For example, if it were not for regulators Vodacom would not be forced to interconnect with other operators. Imagine that? If the biggest mobile operator doesn’t have to open its network to other operators then consumers would simply go with the biggest network.
Vodacom would have a 100% monopoly on mobile in South Africa.
Unlike telecoms, the new-world network effects businesses like Facebook and Alibaba are not regulated (yet) and so can exploit their market dominance to crush competition and generate monopoly profits. That may not sound great to me as a consumer, but as an investor that is music to my ears.
Who’s going to force Alibaba to allow 3rd parties access its network of buyers and sellers? Nobody.
Alibaba is the biggest eCommerce platform in the world. It doesn’t matter who runs Alibaba, it will continue to grow until a new disruptive technology appears, at which point it will plateau, like eBay has, and continue to pour cash out in the form of dividends for much longer than people anticipate.
Unlike eBay, Alibaba is optimized for emerging markets and mobile phones.
The reason eBay has plateaued is that it never evolved past US logistics and desktop web browsing.
Alibaba saw that trend long ago and is leading the way in solving 3rd-world logistics and payments challenges, whilst ensuring that it has a mobile-only user experience.
On top of its natural monopoly, Alibaba has a tried and tested visionary CEO, Jack Ma.
A former school teacher that started his Internet business in the mid-90’s in communist China without any political contacts, Jack Ma is one of the greatest entrepreneurs in the world.
Great monopoly + great jockey = great investment
Stocks like Alibaba and LinkedIn are the new utility stocks except with massively high growth prospects.
Ordinarily I’d invest my mom’s savings in a stock like Telkom. The problem is that the telecoms industry is heavily regulated and I can’t predict what the regulator will do.
So I rather invest her money in Alibaba. A monopoly with no sign of regulation on the horizon.