You say Apple can’t grow any more because it has a 3 trillion dollar market cap… I say Apple can ONLY keep growing because it has a 3 trillion market cap.
Before we get started, shameless plug:
In January, I will be releasing my first public issue of a strategy I call “3 Rivers Trades” …
This is a monthly basket of trades I do with a very simple idea: Can I crush the market performance using just 3 dynamic trades? (so far, the answer is yes 😀)
If you decide to join 3 Rivers, I have a special discount for you here and you’ll be signed up to receive my next issue in the first week of Jan.
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In my last issue, I talked about my daughter’s shocking answer to a simple question and the speed of technology.
You can read it here
I noted that predicting the next big thing is really hard.
However, identifying what’s already succeeding and jumping on board is substantially less hard.
And with the examples I gave (Tablets, Streaming, Alexa), I pointed out a surprising trend:
Many of the “next things” were coming from the biggest companies on the planet.
We often talk about innovation or “ground floor” ideas like they’re always generated by little-know companies trading for pennies on the dollar, but that doesn’t seem to be the case nearly as often as the anecdotal stories about breakthrough technology would lead us to believe.
And there are some obvious reasons for that. I’ll start by quickly mentioning a few of those but, ultimately, I want to talk about a different reason for this. One that I believe is often overlooked.
The reason I’ll share is a key driver of my investment decisions, and I believe it plays a significant role in shaping the next decade of the markets.
Let’s begin with the obvious reasons:
Obvious reason #1: They have the best people working on the next thing all the time.
In the most simplified explanation of this point: When you're in a position to have the best and the brightest people working around the clock on what the next leap in technology will be, you have a higher probability of achieving that technological leap than anyone else.
Not only that, but these companies don't necessarily have to originate the idea to claim ownership, leading us to reason #2.
Obvious reason #2: Big companies can simply acquire smaller companies who have the next big thing.
We've seen this time and time again. It's often easier for Facebook to acquire Instagram than to create it ( and then compete with Instagram). YouTube is now vying for the number one search engine in the world. That's exactly what Google anticipated when they acquired them.
This will continue to happen because these deals just make so much sense:
Big companies want to fend off competition, continue to innovate and find ways to grow. Small companies want money.
But that’s not the only advantage big companies have…
Obvious reason #3: Big companies have the marketing power to make old ideas work.
If you look at many of the technologies “breakthrough successes” since the turn of the century, you’ll see a fairly common denominator: They weren’t actually technological breakthroughs… They were marketing breakthroughs.
There’s no greater example of this than the largest company in the world: Apple Inc.
When iPods came onto the scene, they revolutionized music forever (or at least for a few years until iPhones could do everything iPods could and a million more things).
But when the iPod was released, there were SIX other MP3 players on the market. That didn’t matter much when Apple unleashed its marketing genius though. Within just a few short months, Apple DOMINATED the MP3 market.
Even when Microsoft, another true juggernaut, entered the race, Apple had already taken its victory lap and no one was catching them.
They didn’t invent tablets either, but they DOMINATE the tablet market.
They didn’t invent wireless headphones either, but they DOMINATE the wireless headphone market.
They certainly didn’t invent the smartphone, but they DOMINATE the smartphone market (at least in the US).
The point is, it hasn’t been the innovation breakthroughs that have allowed Apple to take quantum leap after quantum leap in growth. It’s their raving fan base and elite marketing.
They have an uncanny ability to make it seem like they’re bringing something new to the market - and for millions of people to buy in - whether it’s actually new or not.
Obvious Reason #4: They have the research and development budget
I won’t spend much time on this one because it relates to the first point and it’s pretty self-explanatory.
The fact is, technology is costly to develop. The more funds you allocate to R&D, the more likely you are to drive innovation.
And in case you’re not sure who spends the most on R&D, it’s exactly who you’d expect.  Now that we’ve covered the most obvious reasons that the current tech giants are also the tech innovators…
Let’s dive into the more hidden aspect of this trend:
Uncle Sam.
That’s right, the good ole government – in my opinion – has a lot to do with the largest companies on earth continuing to dominate.
Here’s why:
The government excels at creating rules. It’s as if they sit around all day, brainstorming new regulations (oh wait, they do).
Of those rules, thousands of pieces of legislation are aimed at businesses. And businesses are forced to comply with new rules and regulations on a constant basis.
Now here’s the thing…
Most of our politicians aren’t successful business professionals. I know this might shock you, but they often pass regulations without really understanding how they are going to impact the businesses they’re attempting to govern.
Ultimately, a very high percentage of legislation is harmful to the businesses they’re imposed on.
So, here’s the question:
Which companies are best equipped to handle harmful regulations?
It’s undoubtedly the largest and most profitable companies on earth. In fact, crippling regulation is often a concealed advantage for businesses that can withstand it.
Story Time with Nate:
It typically goes something like this…
In the age of Amazon Prime and all things delivered to your door, the government is hearing reports that delivery trucks are increasing their carbon footprint at an untenable rate.
Clearly, the federal government must step in!
In an effort to reduce excess carbon, they pass legislation requiring any company with 3 or more delivery trucks to install reporting devices on their vehicles to track carbon output, upgrade their catalytic converters, and restrict the same truck from following the same route multiple times a day.
They pat themselves on the back for a job well done and move on to the next set of rules they want to impose.
Meanwhile, Andrew and Son’s Produce Delivery, Little Town Hauling, Johnny’s Goods on Wheels and a thousand other companies like them wrestle with the new regulations.
These small companies don’t have staff to manage the new requirements. They don’t have the extra revenue to make updates to their trucks. They don’t have enough scale to limit their trucks from doing multiple deliveries on the same routes.
In other words, this regulation is a back-breaker for small to medium sized delivery companies.
At the same time, Amazon, who you could argue the bill was essentially aimed at in the first place, has very little issue complying with the regulation. Sure, they’ll lose a few million dollars along the way, but compared to the market share they will inevitably pick up from a myriad of other businesses going under, that’s nothing.
They have enough trucks taking enough routes that a quick revamp of their AI driven route planning system will solve that problem. They can order 10,000 catalytic converters at a bulk discount and the have the in-house mechanics to install the converter along with the required reporting tech. The new law is a frustrating line item on one quarterly report, but barely a blip on the radar for Amazon.
At the end of the day, the regulation was a hidden advantage for a company like Amazon. And, frankly, the more strenuous the regulation, the more advantageous (long term) for the companies that can handle them.
And that, in a nutshell…
Is why I believe big government is a critical advantage for big business.
In fact, I’d argue that the focus on “going after big business” is the biggest political hoax of the 21st century.
And don’t take my theory on face value. Just consider that the same big companies the democratic party ridicules in their speeches keep donating millions of dollars to the democratic party.
And, just to be clear, this is not a political thing to me…
It’s just objectively the case that it’s the democratic party who pushes a more regulation-based agenda specifically geared against big business… And, yet, has near universal support from those very same businesses.
But that’s just a proof point for the smoke and mirrors of it all. In reality, as long as the seats are filled in Congress, I don’t see this trend changing. Politicians love to make rules outside their scope of expertise regardless of which side of the aisle they sit on.
And that gets us to the grand conclusion of this piece.
What does that mean (and what does it not mean) about my strategy going forward?
Well, it means I am definitely betting on the biggest and best companies continuing to be the biggest and best companies.
When someone says they don’t believe Apple can grow any more because it is “too big” sitting at a 1 Trillion dollar market cap, I just remember how many people said the same thing 5 years ago. And 5 years before that. And so on.
I would rather defend the argument that Apple can only grow because they’re so big than I would the argument that they cannot keep growing because they’re so big.
And, listen, if Amazon, Apple and Exxon go under… Well, I can live with being wrong about that.
I will have a lot easier time sleeping at night losing a chunk of my portfolio on those companies going bust than if I lost it on a Biotech start up with a predestined high probability of going out of business.
But let me also clarify that this piece does not mean…
It doesn’t mean I am only focused on the top 10 companies in the world. Far from it!
While I will always defend the position I’ve laid out here, it’s just ONE aspect of my investing philosophy.
And, one of the things I love about the stock market is just how WIDE the opportunity is, so I would never limit myself to such a narrow pool of stocks.
Not to mention, the majority of the strategies I’ll discuss publicly are my more aggressive, active approaches. And the majority of my trades will not be on the biggest stocks in the world within those strategies.
Which leads me to another golden opportunity for a shameless plug!
I’d really love you to join the 3 Rivers Trades program.
It’s one of my absolute favorite ways to trade because it’s SO simple to execute and manage… Yet, it still has a ton of potential.
You see, every month I put together a basket of 3 trades. Think of it as a mini portfolio designed to beat the market with about 2 minutes of work.- The first trade is my highest conviction directional trade and I go for a target of over 100%.
- The second trade is from my “stable stock” watchlist and targets a healthy 25% income by the end of the month
- The third trade is something I call a hybrid hedge. It’s meant to protect the other two positions, but not automatically lose money if the others go up like a lot of hedges.
I think its a huge advantage to have in your arsenal every month and it’s perfect for small account because I give you the exact options plays for each position.
So you can have this powerful “mini portfolio” working for just a few hundred bucks.
If you’d like to join, just tap here.
The first issue will be out before you know it, so don’t miss it!
-Nathan Tucci |
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