CHANTAL MARX: As investment professionals, we often get asked about all kinds of schemes promising to be game-changers and hundred-baggers. I have my own thoughts on what constitutes a good and safe investment, but sometimes even I miss the boat when it comes to newer technologies. So excuse the pun, Nick Dennis from Anchor Capital, but what do you see as the key differences between good and ‘fad tech’ investing?
NICK DENNIS: Look, I think the key, Chantal – and thanks for having me on – is you aren’t able to differentiate unless you gain an understanding at the product level. Sometimes or often you’re not going to be able to know the difference with really cutting-edge tech. Personally, for a lot of the newer stuff, I don’t try to differentiate. But where you can understand the products, understand what sort of value they bring to the customer, saving the customer time or money, or bringing them new features or services that they didn’t have before, then I think you can differentiate. If you can’t do that, then it’s indistinguishable and I would rather just stay away.
The final point that I make is that this doesn’t matter when the market’s going up, but it’s when you find that your shares are down 20 or 30%, that’s when it really matters. With a fad, or if it’s a piece of cutting-edge tech that you don’t understand properly if it’s down 30% you’re not going to know should I hold on or should I add? And so that’s why I think it’s really important that you really have a deep understanding at the product level of what the company is doing.
CHANTAL MARX: Yes. I think for me, where I usually struggle as I’m getting a little bit older, things like ByteDance, TikTok …… [2.0] really don’t make that much sense to me. But I can see that there’s a user case, for example, for young people who really enjoy dancing into a camera and posting it online for the world to see. But what I’m getting to is that perhaps when I don’t really understand it someone else will.
My next question kind of speaks to that. It doesn’t make sense to wait for tech shares to list and then kind of buy them in the market, or to actually look towards early-stage investors and guys with a really deep understanding of the sector like a SoftBank or even a Naspers if you ignore Tencent – or Tencent for that matter.
NICK DENNIS: I think the point that you raise on TikTok is an interesting one, and I’ve certainly been guilty of what you’ve mentioned in the past, in dismissing something that on the face of it seems silly. But quite often the really interesting things in the tech space start off as games, or they seem kind of silly, and then the really interesting use cases emerge later. So over time I’ve had to train myself to not dismiss these things, and to take them a bit more seriously.
I agree to your second point. It’s often those VC (venture capital) stage investors, like the benchmarks or the a16z’s of the world – they’re actually really good, to my previous point, at actually understanding the product – what is it trying to do? How’s it different versus the alternatives? Whereas the later-stage investors in the public market like myself tend to be more conservative and more driven by the metrics, which can actually be the wrong approach. If you get the product right, the metrics come later. And I think that’s what your SoftBanks and your VC-type type investors often get right.
CHANTAL MARX: As I said in my intro, I usually miss the boat at first, because I want the company to be cash flow-positive, and I want the balance sheet to look decent, and I want the revenue to start coming through quite strongly. So I absolutely agree.
Perhaps the answer is that if you do tend to be a more conservative investor like I am, look towards less conservative investors – but where you are quite happy with their underlying metrics and the diversification of their portfolio.
Anything you are particularly excited about right now, something new on the horizon that we might not know about, or anything that you’re very cautious about currently?
NICK DENNIS: I tend to be more in the bullish camp. I’m an optimist. I think a lot of the companies that we have today, like the next Tesla, for example, I think is going to be Tesla. And for trends like e-commerce, I think it’s still early days. So a lot of these plays and their business models are starting to deliver, some of them in terms of cash flow and returns on invested capital, or all of those kinds of metrics.
So I think you don’t need to be on the very cutting edge to generate really exciting returns. So a lot of the trends that are right in front of us today I think still have a long, long time to play out.
CHANTAL MARX: Yeah, I really like that. You don’t have to be at the cutting edge to make decent returns.
Thank you so much. That was Nick Dennis from Anchor Capital.
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