Podcast Summary: TIP686: Big Tech Stocks w/ Adam Ziesel
Episode Release Date: December 27, 2024
Introduction
In episode TIP686 of "We Study Billionaires," hosted by Clay Fink of The Investor’s Podcast Network, the conversation centers around big tech stocks with guest Adam Ziesel. Adam, the founder of Gravity Capital Management and author of the acclaimed book Where the Money Is, shares his evolved investment strategies and insights into the ever-changing landscape of big technology companies.
Adam Ziesel’s Investment Journey
Adam Ziesel’s career trajectory is both unique and illustrative of his adaptive investment philosophy. He began as a journalist, transitioning into investigative journalism before moving to Wall Street. Starting at Sanford Bernstein, Adam honed his research skills under legendary analysts like Weston Hicks, who imparted lessons inspired by Warren Buffett.
Key Point: Adam founded Gravity Capital Management in 2003, initially following a traditional value investing approach that emphasized purchasing undervalued and overlooked securities. This strategy yielded impressive returns over the first decade but began to falter around 2014-2016 as the market dynamics shifted.
Evolution to Value 3.0
Recognizing the limitations of traditional value investing in the digital age, Adam introduced the concept of "Value 3.0." This modern approach focuses on investing in high-quality businesses with promising futures, particularly within the tech sector.
Notable Quote:
"Value investing is a great construct because there's a lot of discipline around it. But in the digital age, what I learned was there's no more reversion to the mean." ([06:53])
Adam’s Value 3.0 integrates the foundational principles of value investing with an emphasis on technology-driven companies, which he believes are the primary creators of future economic value.
Intrinsic Value vs. Reversion to the Mean
A significant portion of the discussion delves into the concepts of intrinsic value and reversion to the mean. Adam distinguishes between the two, emphasizing that intrinsic value is rooted in the discounted future cash flows of a business, while reversion to the mean is a mental model that may no longer hold in a rapidly evolving market.
Notable Quote:
"Intrinsic value is still a valid concept. Let's just start with the very first principle of net present value." ([14:56])
Using the example of Avon Products, Adam acknowledges the challenges and uncertainties inherent in estimating intrinsic value, highlighting that market dynamics can diverge from investor expectations.
Dominance of Big Tech: Alphabet and Amazon
Adam provides an in-depth analysis of Alphabet (Google) and Amazon, two titans of the tech industry that he continues to hold in his portfolio.
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Alphabet (Google):
- Dominates the search engine market with over 90% share.
- Maintains its moat despite challenges from competitors like Bing, which has struggled to gain significant market share even after Microsoft's partnership with OpenAI.
- Faces regulatory scrutiny, with the Department of Justice proposing remedies to curb its monopoly, though Adam remains optimistic about its resilience.
Notable Quote:
"Google has to pay Apple for search, divest the Chrome business, divest the Android business. So I find it kind of amusing..." ([31:25])
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Amazon:
- Despite narratives around high capital expenditures and reinvestments, Amazon has demonstrated robust recovery and profitability.
- Adam praises Amazon’s ability to manage overexpansion during the pandemic, maintaining a strong e-commerce infrastructure.
- Highlights Amazon's advertising business as a significant yet underreported contributor to its revenue.
Notable Quote:
"Amazon is terrible in 2022. Oh, I guess it's not so terrible. The stock doubled." ([36:47])
Missed Opportunities: Microsoft, Apple, and Nvidia
Adam candidly discusses opportunities he missed, particularly with Microsoft and Apple, acknowledging their exceptional performance and leadership in their respective fields. He also expresses skepticism towards Nvidia, despite its impressive growth, citing concerns about the sustainability of its dominance in the digital semiconductor space.
Notable Quote:
"I'm more than a little skeptical about the AI craze... I hate the digital semiconductor business." ([47:12])
Impact of Artificial Intelligence (AI) on Big Tech
When addressing the impact of AI, Adam emphasizes that while AI is a significant trend, the true value creators are the big tech companies capable of monetizing and scaling these innovations. He believes that partnerships between startups and established tech giants like Microsoft and Amazon are crucial for advancing AI technologies.
Notable Quote:
"My AI strategy is as follows. As I said earlier, tech is where the money is... I know almost to a certainty that these mega-cap companies are going to be the ones exploiting these trends." ([49:37])
Investment in Progressive Insurance
Shifting focus from tech, Adam discusses his investment in Progressive Insurance, contrasting it with Berkshire Hathaway’s Geico. He highlights Progressive’s superior use of technology to underwrite insurance risks more effectively, leading to enhanced profitability and market share gains.
Notable Quote:
"Progressive is the number two auto insurer. They overtook Geico. So they have this better mousetrap, tech-enabled mousetrap." ([54:14])
Conclusion and Final Thoughts
Adam Ziesel wraps up the discussion by reiterating the importance of adapting investment strategies to align with technological advancements. He encourages investors to focus on companies that leverage technology to maintain competitive advantages and create sustainable value.
Final Quote:
"Feel free to hit me up on LinkedIn... Please buy the book it's Where the Money Is by Simon and Schuster." ([58:27])
Key Takeaways
- Adaptability in Investing: Traditional value investing must evolve to incorporate high-quality, tech-driven businesses.
- Dominance of Big Tech: Companies like Alphabet and Amazon possess durable moats, making them resilient investments despite regulatory and competitive challenges.
- Skepticism of Hypes: While trends like AI are significant, the ability to effectively monetize these technologies lies with established tech giants.
- Investment Discipline: Recognizing when to pivot investment strategies is crucial for sustained outperformance in changing market conditions.
Connect with Adam Ziesel
For those interested in learning more about Adam Ziesel’s investment strategies or his book Where the Money Is, he can be reached via LinkedIn. Additionally, his book is available through major book retailers, including Amazon.
This summary captures the essence of episode TIP686, highlighting Adam Ziesel’s insights on big tech stocks, his evolved investment strategies, and his perspectives on key industry players. Listeners are encouraged to tune into the full episode for a more comprehensive understanding.