Colin’s Note: Today’s Bleeding Edge video will be a little different from our usual fare.
In this investor Q&A edition, I’ll be responding to some of the readers who have been diligently writing me over the past months.
And two common concerns have stood out to me while poring over your messages.
The first… how concerned should folks be about China invading Taiwan when it comes to investing in semiconductor stocks? And the second has to do with insider trading…
So click below for today’s video where I share my thoughts on these issues… the underlying thread that ties the two… and three things to focus on in the stock market instead.
As usual, if you prefer to read, I’ve provided a transcript that my team and I have edited for flow. And if you have a question you’d like me to address in the next Q&A-style video, you can write me at [email protected].
What’s going on investors? Hopefully, you guys are doing well today. My name is Colin Tedards. Welcome back to The Bleeding Edge.
For today’s show, I’m diving into two questions that I’m constantly asked. I get these questions so often, if I had a dollar for each time someone asked me about these issues, my kids would probably have a couple extra Lego sets lying around.
And the questions are related. Both of them involve investors overestimating risk and underestimating reward.
That’s all the stock market is… It’s risk versus reward. So when talking about any investment opportunity, you should consider what you have to lose… And balance it out by considering what you have to gain.
So, onto the Q&A. The first question I get all the time…
How much should investors be concerned about China invading Taiwan as it relates to semiconductor stocks?
This has come up even more often over the last year. We’ve spent a lot of time talking about the semiconductor industry as it relates to artificial intelligence (“AI”), cloud computing, and the other areas of tech tied to the semiconductor industry…
So first, let’s take a broad step back and look over the past 12 months.
The SMH is a broadly diversified semiconductor ETF. It’s got all the big-name semiconductor companies in there. That includes Nvidia, Advanced Micro Devices (AMD), Intel, Broadcom, Qualcomm, and Taiwan Semiconductor Manufacturing Company (TSM). And over the past year, it’s up 70%.
Not over the past five years… that’s over the past 12 months. You would’ve done very well with that ETF as many of our subscribers have since we first started recommending it in July 2023.
Then there’s AMD… If you’ve taken a single-stock risk, AMD is also a favorite here at Brownstone. And it’s up 157% just over the past 12 months. Look at a five-year or 10-year chart of AMD, it paints a glorious story.
Then there’s Nvidia, the poster child of rising semiconductor stocks. Nvidia shares are up 254% over the past 12 months. Compare that with the broader markets… The S&P 500 is up just 24% over the past 12 months.
So just think about that.
First of all, nobody wants China to invade Taiwan. It would almost certainly launch World War III. And that’s probably the biggest deterrent to that event even happening. But let’s just imagine, heaven forbid, that China does invade Taiwan.
Even if the semiconductor index, AMD, and Nvidia took a large haircut, chances are over the past 12 months… they’d probably still be outperforming the S&P 500.
And it was easy to forecast these types of returns once you saw the rise of AI. Microsoft, Google, and Amazon went into an arms race to develop AI technology, so it was pretty easy to see semiconductors were likely to take off.
Now, one thing that I often talk about is the stock market is not where you place your bets… or hedge against World War III breaking out.
The truth is, bad things happen all the time. I’m 25 years into investing. In that time, there have been multiple recessions, a pretty rough global pandemic, multiple terrorist attacks – one we can all think of right off the top of our heads that was incredibly tragic – and multiple wars… some very serious, and some little, country-to-country skirmishes.
That has all happened just over the past two decades. And with every single recession, pandemic, terrorist attack, and war that has broken out, if you bought stocks through these crises, you’re probably up quite a bit. The stock market isn’t as heavily impacted by tragedy in the long term as you might think.
Now, that doesn’t mean we blindly ignore risk. We don’t assume bad things can’t happen to take away some of our wealth… particularly as you get older and get closer to retirement, it’s important that you’re taking profits and have stop losses in place.
But instead of piling into the semiconductor industry, you’re just allocating a smaller position. The headlines on Fox News, CNN, and the doom-and-gloom blogs out there have been calling for an invasion for not just the past 12 months, but for the years and years that this has been a possibility.
And if you let it shake you out of investing, then it has taken away your opportunity to make life-changing gains over the past 12 months – really over the past decade – in the semiconductor industry.
Bad things happen in the stock market. Every single time, it presents a buying opportunity.
Have your stop losses in place. When stocks go on a big run, take a couple of chips off the table. Reallocate into other areas. Maybe go on a vacation or buy something nice for yourself, the grandkids, the children, the wife. That’s all you have to do.
Don’t sit here and think you can predict when World War III is going to break out. If you can do that, you probably shouldn’t be investing in stocks. You should maybe be running for president.
Now, the second question I’m constantly asked is about insider selling.
I get emails all the time saying, “Hey, this company’s CEO just sold a bunch of shares,” or, “This company’s CFO just sold a bunch of shares.”
That’s the case almost all the time. If you look at Nvidia – one of the best-performing stocks in 2023 – their CEO Jensen Wong is the biggest pumper of that stock. In some cases, he makes Elon Musk look tame as it relates to pumping his stock at his company.
And what did he do over the past year? He sold a ton of Nvidia stock. Why does he do that? It’s because that is how these executives are compensated.
More often than not, executives have a low base salary, certainly in the tax bracket they are in. Even if they’re making several hundred thousand dollars, a lot of that is going to federal and state income taxes, depending on where they are.
The other thing that you have to realize with a CEO is they live the CEO lifestyle. They probably have at least one or two multimillion-dollar houses. Just the property taxes – particularly out here in California and other places where property taxes are relatively high, even if you own those houses outright – can be enormous.
They likely have a family. They have children, and those children are probably getting into expensive schools and have expensive habits. Maybe they have to drive a nice car.
Speaking of cars and boats and yachts, well, these CEOs look around and they see other CEOs living a pretty nice lifestyle. And in some cases, as it relates to executives, it’s keeping up with the Joneses.
I have never, ever looked to see if executives are selling stocks and then drawn conclusions. Now, one reason you could draw conclusions is if the CEO, CFO, or a lot of management is buying shares.
If they’re buying shares, that could be a great sign that something behind the scenes is about to materialize. But most of the time, these sales are planned.
They’re planned by accountants, or they’re planned by their tax attorneys. They’re planned because these executives make a small base salary. And the vast majority of their compensation is in the form of stock.
They have to pay taxes on those transactions. So they have to sell the stock to fund their lifestyle, to pay taxes, or to pay for other expenses, just like you and me.
So instead of focusing on whether World War III is going to break out or whether an executive is buying and selling… You just need to focus on three things in the stock market…
First, focus on revenue growth. Is the company growing revenues? Is there a path for the company to grow revenues this year and into the future…
Second, can they grow their profits? Are profits materializing now, and will profits be there in a few years?
And third, focus on their margin expansion through improving product and out-competing competitors. Can they make more per dollar of sales? So as that revenue growth happens, can you expand margins at the same time?
If you look at Nvidia over the past year, that’s exactly what that company has done. They’ve grown their revenues, they’ve expanded their profits, and they’ve expanded their margin. And that is why shares of that company are up more than 250%.
It is far easier to focus on the things that drive a stock – revenue and profits – rather than if an executive is selling shares to pay his taxes or to buy a new multimillion-dollar mansion or a Bentley… Or whether China going to invade Taiwan, as has been predicted or theorized as possible for the past two decades.
Investing isn’t all that complicated. The fact is, most investors take in too much information and are paralyzed by that information.
Just remember, bad things happen. Recessions, wars, terrorist attacks, pandemics, and every time, each one of those things has occurred over the entire history of the stock market. And every time it’s been a buying opportunity.
So keep that in mind next time you’re consuming a lot of doom-and-gloom content. I hope you guys enjoyed today’s video. Back later this week. Colin Tedards, signing off.