Episode Transcript
The Finance Ghost: Welcome to episode 237 of Magic Markets. I am your co-host, The Finance Ghost. I've just enjoyed a wonderful little mini-break in the bush for a couple of nights, which was a lot of fun, Moe now back in the saddle firmly. I woke up to the news this morning of tariffs being suspended – again - so that was interesting. Never a dull moment in global markets. And of course that's what makes what we do in Magic Markets so interesting because we like to focus on global stocks, although not always - last week we had Wandile Sihlobo on the show to come and talk to us about Mpact and their bullish outlook on the South African agriculture sector. I would highly recommend you go and listen to that if you haven't listened to it yet, because it's quite a nice good-news story around South Africa, which is always encouraging.
Moe, today we are back to talking global stocks though!
Mohammed Nalla: Indeed, Ghost. And I mean just a quick point on that last show with Wandile about SA Agri. I mean a lot of the thrust of that conversation was around the opportunity set globally and how it's also important for South Africa to diversify beyond this fixation on the US. The US is really a small contributor to the agricultural exports in South Africa. And why that is relevant is you mentioned how we just saw news flow today around tariffs being suspended. Again, it's on one day, it's off the other day. That's quite a fractured global backdrop.
But I also saw a story earlier this week around I think it's Maersk shipping line that will be limiting the amount of ships they send between South Africa and the US, so that diversification point and last week's show certainly very relevant. Go and check that out.
This week though, we're talking about global stocks. And Ghost, I think this is really your idea to try and say: how does this work when we're looking at stocks out there? It's been quite volatile, but there seems to be a trend that comes through which is that winners tend to take most of the gains. And we've had strong performances come through from big tech. We know how the top 5 or 10 stocks within the S&P make up the bulk of that index.
Is it actually a wise strategy to double down on your winners, ride that out? Should you be taking profits? We've had different approaches over time, and I think that's some of the backdrop here. But we're going to share some of our stories and specifically, let's maybe look at the tech stocks where we've had some exposure.
I know on Magic Markets Premium we recently covered Meta. Go and check that out last week. This week we're looking at Microsoft. Those have both been strong winners.
So, Ghost, I'm going to maybe pause there because I know you have stories on both of those. I'm going to let you go first. I'll come in with maybe one of my stories of where this has either worked or not worked.
The Finance Ghost: Yeah. It actually depends how you define the term winners, right? There are really two contexts you can discuss it in. The first one is winners in your portfolio - that is a stock that went up and whether or not you then take profit on that position, as you said. And maybe we can almost deal with that as a separate point, actually. And then there's winners in their respective sectors - so something like Meta, for example, would definitely be a winner in the world of apps and everything that Zuckerberg has built, but maybe we should just deal with the first one quickly.
I'll give you my view on taking profits on some of these winners, and I think it'll just naturally develop into us talking about some of these tech names as well, because we've both had quite different approaches at times to some of these names, and we've both had some regrets. I missed out on Netflix, which I know is one that you got, and I think you've maybe not caught as much of the Microsoft upswing as I have.
Anyone listening to this, if you think that Moe and I always make the same decisions in the markets, you are sorely mistaken. We have a number of robust debates, which I think just adds to the strength of what we do in Magic Markets, including in Magic Markets Premium, actually. We don't always agree - definitely not.
But just talking winners quickly and when to double down, when to cut them, etc. - what I find is I inevitably have two kinds of long positions. I have the really long-term, thematic, love-the-company, love-the-sector, keen-to-hold-it-for-the-rest-of-time - and that would be the obvious two examples here in the context of this show, stuff like Microsoft and Meta, for example, where if there are retracements in the market, if there are big sell offs, that's where the classic “buy the dip” situation becomes quite appealing. Obviously I look at it each time and try and assess whether or not I should in fact climb in a bit more.
But that is really a long-term play where I don't have a target exit price. It's just part of my long-term wealth creation plan.
And then there are other positions in my portfolio where it's almost a little bit more tactical. It's kind of like a stock has been sold off just too hard and there's a nice opportunity there. Or there's some or another kind of thematic play that is actually driving the stock price at the moment. But it's not necessarily something that I want to own forever. So maybe it's a South African retailer, for example. I don't think any of them can really go into a bucket of “forever, no matter what” type stocks - there are a handful of stocks in the world that actually fall into that bucket and those stocks are the ones that win in their respective segments. And we can talk about that a little bit now as well.
But Moe, does that sound kind of familiar to you? I mean I think you've also got a good mix of sort of long-term positions and maybe more tactical stuff with your own money as well?
Mohammed Nalla: Yeah, indeed Ghost. And I think that's probably one of the challenges, right, is what goes in which bucket? I've got a growth bucket and then I've got a long term buy-and-hold bucket as well. And what's maybe happened almost by default, not intentionally, is a lot of the strong dividend players go into my super-long-term bucket. I ride those out. However, this is where some of the mistakes have crept in, right. Is because on stocks like Microsoft, that's one where I was arguably too active. I had it in the portfolio, then I sold it out, then I bought it back in again. Netflix you've mentioned, and I'll go into more detail on Netflix, but that was another one where I hopped in and out. But just having a look at the share price performance, it would have just served me better to just keep in that position, stay long throughout, the rally that we've seen in that stock.
What I'm actually going to do here, Ghost, is talking about winners - it doesn't always have to be about tech. So for example, I'm glad we're talking winners and not losers. If we're talking losers, everyone knows about my long-suffering Novo Nordisk position, my UPS position. Those have been the losers in the portfolio.
But strangely enough, one of my strongest winners over this year, year to date, has actually been British American Tobacco. And that's a stock that I bought in - it had been sold off and it looked as though it was bouncing off a support - I bought that into the portfolio because there's a pretty juicy dividend yield that comes through there and then as it's rallied, I've actually taken some of the profit off the table. Now that's been something I generally do is as a position gets too large in the portfolio, I tend to trim that. And again, like with most of the other winners we've just mentioned here, unfortunately cutting that position back over time has meant some lost return on the upside because the stock has continued to trend quite strongly.
Wrapping that up, what does that actually mean? I haven't quite landed on whether it's a better strategy or tactic to just keep trimming those portfolio winners just in order to manage risk over time and then just reallocate that to new opportunities. But what seems to be the prevailing trend, certainly in rising markets like we've had over the course of the last several years, has been just to let your winners run. And again, that's something I've done particularly poorly. But again, I don't know if it's in my makeup, just given my conservative backdrop, to actually let that happen. I'm pretty risk averse. I like to actually recycle some of those profits and then redeploy that capital into new ideas, again with a big proviso that you've got to then consistently try and find some of those new ideas that are out there.
The Finance Ghost: Look, I think there are different buckets in your portfolio where you can do this stuff, right? So this is where a lot of people use ETFs as their “forever” equity exposure and then they'll recycle capital into other opportunities around that, in search of that elusive alpha - with a “ph” and not elusive Alfa like my classic car that I sometimes miss.
So that is an approach, definitely. But I think where letting your winners run works - and sorry, just going back to your British American Tobacco position, I know you do love a dividend Moe. There is nothing that makes you happier than a strong dividend yield, so I'm actually not surprised at all to find out that was one of your positions. Really, I'm not.
But in terms of the growth stocks and letting those winners run, I guess it's probably a good time for us to talk to this concept of maybe “winner takes most” and “winner takes all” economics, because it's actually quite an important point. And this is where I outsource a lot of my thinking around my portfolio to one or two management teams who I genuinely believe will do a great job of allocating capital, even if it sometimes makes me skrik a little bit about the extent of investment and where they are actualy playing these games.
But if you look at a guy like Mark Zuckerberg, let me just use Meta as an example. And he gave the market a huge, huge shock a couple of years ago. I think it was about three years ago, remember when the Meta share price just really plummeted because he was just throwing the kitchen sink at the Metaverse? And that stupid video of him all excited because he had “legs” - it was just a PR disaster. It really was, start to finish. It was at a time when Meta's numbers also took a knock. So the combination was just very, very bad. And we covered Meta a week ago in Magic Markets Premium, so these numbers are quite fresh, I still remember making the chart that we included in the deck that showed how they had that one really bad year and then things started to climb again.
But you know, for all of those faults and risk taking and everything else, this is the guy who literally built social media as we know it today. That is the truth. We're not overstating it here. Zuckerberg is the reason why we understand social media the way we do it today. Everyone else has kind of just ridden his coattails and walked the path that he initially carved through the jungle in building this thing.
So, if I'm going to back someone to keep making good capital allocation decisions in that space, I'm going to back him and I'm going to back his team because I believe that they have a much better view on where the world is going with this stuff than I could ever have. All I'm looking for is: are they still protecting the core business? Are they treating shareholders properly? Do they understand that they need to actually protect the share price and also make good decisions?
And I think a lot of the saving grace here is probably the extent of share based incentivisation in these management structures. Because even if Zuckerberg himself doesn't really care, and who knows whether he really cares or not about the share price, his staff definitely do because they get a big portion of their compensation in stock. And so he will lose the best minds if the share price does really, really poorly.
And at the end of the day, what does he want? He wants the best minds. They've now shown it with all of their investment in AI, getting all these people in for these big numbers.
Do I know exactly where all of that stuff is going? No, definitely not. I'm not even sure that they really know. But I think that Meta is playing in a game where it is winner-takes-most economics. In the social media game, we've seen that play out. They are the biggest and those winners just keep compounding their wins. They just have the widest moat, they benefit from network effects, they attract the best people and make the most money to keep attracting the best people. And it just snowballs and snowballs and snowballs.
And that's why the likes of Meta and Microsoft are core positions for me. Those are my two biggest positions in my portfolio. I'm so glad we've covered both of them over the past two weeks in Magic Markets Premium.
But as I said, the one I missed, Moe, is Netflix, which I think is also very much winner-takes-most economics. I've got to say - that's the one that frustrates me. That's the one I got completely wrong. Well done to you for getting it right. Did you also kind of take a similar approach of saying, well, I need to pick a winner in streaming and Netflix is the winner? What was the actual thesis there?
Mohammed Nalla: Yeah, I'm glad you asked because it's actually different to what you've indicated. I think your approach of backing a solid management team, that's one way of going about it. And again, that works very well in many instances.
With Netflix, though, the approach I took was sometimes you're looking for a business that's going to reach an inflection point. Netflix was an early mover in the streaming wars, let's call it that right now. And again, it's not always the best time to invest in them in that early phase, because all businesses go through this J-curve, you know, they burn so much money for so long, but eventually what you're looking for there, Ghost, is you're looking for a mega trend that's making sense, that's the streaming trend. And you're looking for a company that's close on reaching that inflection point where the J-curve then eventually moves positive. And for me, that was the Netflix thesis.
When we discussed this all the way back in the pandemic, effectively 2019/2020, that's when Netflix was still effectively burning cash. But to me, it looked as though they were very close on turning that corner.
And how close was that? Well, I invested in around 2019/2020, and the company actually turned free cash flow positive for the first time in 2020. So that was the inflection point. That's when it went from burning lots of cash to actually starting to spit out a lot of cash. And that for me was central to the thesis of being long Netflix.
Now, I was long Netflix for a very, very long time. And the company just continued to build on that free cash flow. It certainly escalated over time. And at the time, what's very important is also to realise that companies will go through ups and downs as the market digests the optimism and so forth. And you saw that a lot with Netflix, because what ended up happening is despite the fact that they were now cash flow positive, despite the fact that margins were improving, the market tended to hyper-fixate on one metric, and that metric was actually the number of subscribers.
Does that make sense? Yes, it does, partially, because this is a growth company and the more subscribers you have, if your unit economics actually working for you, that number going up means the share price goes up because earnings go up. And then we started to see some wobblies because Netflix effectively then reported their first loss in subscribers in 2022. So only two years after they had turned cash flow positive, they had one quarter where they actually lost subscribers for the first time in a decade - and the market absolutely panicked. Now, it panicked with good reason, because the next quarter - I mean, the first quarter was just a small loss, was around 200,000 net lost subscribers, versus a growth of 2.5 million, quite a big miss - the following quarter, they lost close on a million subscribers.
Now, what was driving that Ghost is that there were some concerns around password sharing, there were concerns around price hikes, how elastic is the demand for Netflix as a service? And there was also the rise of other competitors. You had Disney+ coming on steam, you had other streamers. And so the market got a little bit worried about that.
But subsequent to that, the company actually bounced back quite strongly. We saw that those concerns were overblown. And they were overblown specifically for the point that winners-take-most in this market. Despite the fact that we had Disney+ coming to the market, they actually have struggled to make money to this day. You know, streaming is still a sore point. If you're looking at Disney, on the latest results, the theme parks have done pretty well, but they're struggling with the streaming business. If you look at other players, you've got HBO Max, you've got Paramount+, those have all been spending a lot of money and they've been trying to gain market share, but they haven't gotten the economics to work the same way Netflix has.
And what has Netflix actually done to bolster some of that moat? First of all, they've got the subscriber revenue that comes through. But then they also introduced an ad-supported tier because they saw the market heading in that direction. So what did they do? They went - I wouldn't say first to market here because I think Disney+ came in, it was one of the other streamers maybe Amazon came in with some ad-supported tiers. Netflix however, saying, you know what, we're going to actually build out that segment of the market as well. There's clearly some demand. And so because they are the biggest and dominant player in that streaming space, they've managed to actually close off some of those avenues to for their competitors in aggregate.
What did I do with Netflix? Again, I was long for the longest time then like Microsoft, I was probably a little too active here. I did take profit, got back involved again. But this stock has actually had a very, very strong profile if you're having a look at the share price. The reason why I tend to take profit on stocks like this though, Ghost, is like you mentioned, in fact, like I mentioned, on British American Tobacco, a stock that pays a very high dividend, you’re actually paid to wait around. So even if the stock goes sideways, you're getting a juicy dividend. However, on growth type stocks like Netflix, there's generally no dividend that comes through or a very low dividend in some of the tech names. And so as a result, if you want to monetise some of those profits and recycle the capital, the only way to do that is to effectively trim that capital, trim that position from time to time, and then recycle the capital.
In aggregate, I'm happy I caught at least most of the Netflix move, if not all of the Netflix move. But again, the underlying thesis was based on the fact that the there was a mega trend and this was a company that reached an inflection point and again has now become the dominant player in the space with really some competitive pressure. But I certainly think they have the ability to continue to maintain the moat that they have built in the streaming space Ghost.
The Finance Ghost: Yeah, it's - I think I just panicked about the free cash flow. I think that was the reason why I kind of just stayed out of it because I figured they were just on this treadmill where they would just have to keep spending on content for the rest of time. And I underestimated how well they would be able to generate revenue. I think I also underestimated how long their content library is actually relevant for. And I think I gave Disney too much credit, bluntly, on building out a strong competitor. So I think a lot of households have actually obviously higher income households - here have got a variety of streaming packages that they are subscribed to. I mean, we've personally got Amazon Prime, Disney, Netflix. The joke of all of this is you can have all of this and still be paying less than DStv, so the satellite business is really in a lot of trouble, even when it's actually a streaming business. So we'll see what happens there.
But Netflix has definitely emerged as the strongest player in that game and that is the one that I missed. But again, that principle of investing in the clear leader in a type of technology, if I'd actually followed that approach in Netflix, I would have been long and I would have done well out of it. So if I'd followed the Zuckerberg, Satya-Nadella-Microsoft approach into Netflix, that would have been the right one.
That obviously doesn't always work. I've been extremely bearish on Tesla throughout and obviously people might point to that and say, well, that was for a long time the market leader in EV tech, or at least that's what people believed it to be. So you've got to assess each one on merits and you've got to actually ask yourself: what is the competitive advantage? And that was where I actually came unstuck on Tesla - or where I believed it came unstuck - was to say, well, long term, I'm not sure there is much of an advantage here. It just feels like a loss leader in an area where the big dogs in the sector will get involved once it's economically viable to do so.
I did not expect the big dogs to be coming from China. I'm not sure too many people did expect that, but I did expect some disruption to Tesla's core business and that has happened. Some of these other wide moat technology plays though, are very, very hard to disrupt.
I would say – personally Moe, I would say of the three, if I was to choose Meta, Microsoft and Netflix, I would say Netflix is the most disruptible of the three. Probably has the skinniest moat -still a wide moat, but probably the narrowest one, I should say, of the three. And maybe that's a good place to finish, actually. Would you agree with that assessment? And then which one would you say is the widest moat of the three?
Mohammed Nalla: I mean, I agree on strong players like Microsoft. Microsoft's really been solid over the years. They've proven they can evolve as the market evolves. So that would probably go top of my list. And again, no surprises that I think that is your largest position.
When you look at Netflix, it has been a growth story, but even there that has evolved. I think at the end of 2024 they stopped putting out the number of subscribers because they saw that the market was hyper-fixating on that. But just to give you a sense in terms of scale of that moat, if you combined Amazon Prime Video and Disney+, I think they would still be shy of where Netflix comes through on their last reported subscriber numbers. So I think the management team, they're working quite hard to try and decouple the fact that they can make money, they can look at margins and they can find other ways to ensure profitability rather than just hyper-fixating on a single data point.
I agree with you, they are subject to a lot of disruption. That attention economy is certainly one where you've got other disruptors from left field, like TikTok, that's in ByteDance a private company, they come through quite strongly. But again, I'm not going to give too much away because we do discuss some of this in our show where we looked at Meta. What are some of the disruptors that come through in that space?
But yeah, I think wrapping that all up, Microsoft would go top of my list there. Meta a very strong contender just because of their suite of apps. Netflix, that's slightly more, I guess, risky, but at the end of the day, still a firm example of how the winner takes most in that industry where the other players, yes, they might boast subscriber numbers that are growing, but they've still not proven that they can actually produce a viable business model in that streaming space. And until that happens, that leaves Netflix in that particular segment of the market as top of the pops.
Unfortunately, that's where we've got to leave it this week. Let us know what you thought of the show. Hit us up on social media, it's @MagicMarketsPod, @FinanceGhost and @MohammedNalla all on X or go and find us on LinkedIn. Pop us a note on there.
And if you haven't yet subscribed to Magic Markets Premium, it's only R99/month, so go and have a look at that. We hope to see you as a Premium subscriber soon. Until next week, same time, same place. Thanks and cheers.
The Finance Ghost: Ciao.
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