You’re Not Late To The Party… Not Even Close.


The world has changed a lot since I started in financial services.

I got my Series-6 to sell variable insurance products and mutual funds in 1984. Although I never sold one, I got a Series-22 just in case I ran across one of the horrific Real Estate Limited Partnerships my company occasionally sold.

At the time, I had no clue what I was doing when it came to securities.

My knowledge of the financial services world was limited to the fact that we worked indoors, which beat the hell out of my previous gig… selling Electrolux vacuum cleaners door to door.

But it didn’t take long before I became fascinated by the industry. I read every book I could find on the subject. I devoured the Wall Street Journal every day.

Eventually, I moved out to the San Joaquin Valley in California, and I met a retired Air Force Master Sergeant who was the first true financial genius I have been fortunate enough to meet in my lifetime.

Sergeant Phil was a master of weaving together complex transactions involving life insurance trusts, tax shelters, real estate schemes, oil and gas deals, pension replacement deals, and all sorts of other high-end, complex financial transactions.

He was kind enough to share a lot of that knowledge with me, and he deepened my interest in all things financial. 

There was an EF Hutton office near our insurance office, and I was jealous as hell of those guys. They drove nicer cars than I did, wore nicer suits, and went home at the end of the day.

They weren’t out every night trying to sell life policies to staff sergeants and their wives over at base housing.

I wanted their job.

Long story short, although it was a convoluted road to get there, I ended up becoming a full-fledged Series-7 and Series-3 licensed broker at EF Hutton in 1988.

The rest, as they say, is history.

When I look back at the world of the mid-1980s and compare it to today, it is a very different financial world.

Back then, technology was only a small segment of the American industry. Technology investing was the world of the high-flying growth stock gunslingers, not value-oriented investors.

According to the official statistics, technology today is about 27% of the S&P 500 and about 10% of GDP.

In reality, pretty much every industry is a significant user of technology today, and without the incredible improvements we have seen over the past decade, our GDP would be dramatically lower than it is right now.

If we are being intellectually honest, had we not seen the explosion in technology between 2000 and 2010, the recent pandemic would have been a catastrophe. There wouldn’t have been any ability to work or learn from home. The health and economic consequences would have been some magnitude of order worse than they were.

In many respects, technology is the most essential segment of markets and GDP.

The Tables Have Turned

In the 1980s, Warren Buffett was not quite the celebrity he is today, but he was becoming pretty well known in financial markets. He was buying things like Coca-Cola (KO) and Gillette. He owned banks, insurance companies, and newspapers in the Berkshire Hathaway (BRK-A) portfolio.

He owned Kirby Vacuum Cleaners and World Book Encyclopedia in the 1980s, both of which were still sold door to door.

In fact, the closest thing Buffett owned to a tech company was ABC Television.

While Carl Icahn is considered an activist investor, the less polite world of the 1980s called him a corporate raider. He targeted companies that made sewing patterns, energy companies, airlines, tire manufacturers, department stores, and other more mundane businesses.

Private Equity was still a fairly new industry back in the 1980s. Backed by the massive fund-raising capability of Michael Milken’s junk bond empire, they were engaging in highly leveraged buyouts of companies that gushed cash flow. KKR (KKR) was the big kid on the block back then, and they were buying RJR Nabisco. 

That was a wildly successful deal for KKR, but cookies and cigarettes are not technology companies.

Other notable deals for KKR in the 1980s included the grocery chain, Safeway. They bought television companies, movie theaters, luggage companies, conglomerates that owned food and consumer companies, and battery companies.

Bottom line: Not even the legends of Wall Street were buying up technology companies back then.

Now, 40 years later, it’s a whole new world.

Warren Buffett now owns over $100 billion worth of Apple (AAPL) stock, bought into the IPO of software firm SnowFlake (SNOW), and owns a massive stake in Amazon (AMZN).

Icahn has even more fully embraced technology. He owned Apple shares for a while and currently has a big stake in Xerox (XRX) which is remaking itself as a tech company.

Icahn just got a big payday when it was announced that a cloud computing company in which he owns a big stake, Cloudera (CLDR), was sold to a group led by KKR.

Private Equity is a big player in technology now too. There are technology-focused funds like Silver Lake, Thoma Bravo, and Vista Equity that own cutting-edge technology companies.

In last week’s Investment Advisory update, members were briefed about Symphony Technology Group and Crosspoint Capital Partners, two technology-focused Private Equity firms making significant commitments to cybersecurity companies – perhaps our most important tech companies of all.

It is not just the new guys either…

KKR is buying Cloudera and giving Icahn a nice payday. They also recently invested in eSSENTIAL Accessibility, a company that sells software to help companies comply with certain provisions of the Americans with Disabilities Act.

The old-school Private Equity firm has a Technology Growth team devoted to finding tech companies for KKR to buy or invest in. This division has invested in some leading-edge technology companies like FanDuel, Epic Games, and Lyft (LYFT).

They also have a stake in DarkTrace, a company that provides machine learning-enabled cyber-security solutions for network security and advanced threat detection.

This sure isn’t the 80s anymore!

Think You Missed The Boat? Think Again.

Pretty much all of the old-school Private Equity firms have embraced technology investing today.

Investors who insist on remaining old school and cite Buffet’s insistence that you have to “stay within your circle of competence” as an excuse to avoid technology stocks are missing the boat.

I do not know how to make a semiconductor chip. I would even struggle to explain precisely how one works. But I know that the world will need a lot more chips as everything is digital today.

I could not build you a cloud computing platform or upload your data for you. I do not have to understand every widget and byte of data that goes into a cloud computing network. As an investor, I just need to know that a massive switch from in-house physical storage to cloud computing is underway. Businesses, government agencies, and individuals are all switching to the cloud.

I also don’t have to be a hacker to know that cybersecurity is well on its way to becoming the most important business in the world. That’s why if we can buy into cybersecurity companies at an attractive price with the right investors supporting the stock, I will be an aggressive buyer.

While many of the basic principles of investing are timeless, the world we live in is changing every day. 

Technology is the fastest moving industry in the world and truthfully it’s not just an industry anymore – it is part of the fabric in the world we live in today. 

All new appliances are now technology-driven. You can conduct all of your personal affairs on a device that fits in the palm of your hands. Your car has computing power and entertainment abilities that your TV and computer combined couldn’t offer a decade ago.

It is truly a brave new world.

We can either embrace it or leave a lot of money on the table.

Best,
Tim

P.S. There is a lot of money that is going to be made in the cloud computing business. Companies that have activists working to push cloud computing companies to be better or sell for a higher price are going to be top-performing stocks quite often.

That’s why we own two of them in the Investment Advisory model portfolio. Click here to learn more.