When To Buy and Sell: Company Cycle

When To Buy and Sell by Inspecting Business Cycle
When To Buy and Sell by Inspecting Business Cycle

The best timing to buy Amazon stock is when Jeff Bezos works in his garage(1). We are going to evaluate this investing strategy by answering the question of when to buy and sell. In that process, we incorporate the business life cycle as a guide.

  1. Amazon is out of big ten largest market cap global 2014

This post is inspired by Yen Liow’s work, and we were impressed by his presentation, but for some noobs, the terms used are still rather complex. We are here to deliver it in simpler and plainer English along with some modifications and commentaries.

In This Issue

Everything Has Its Own Cycle
Introduction Company Cycle for Answering When To Buy and Sell

Not every player is LeBron James or Michael Jordan, or Leo Messi and Cristiano Ronaldo. In business, not every start-up is Apple or Amazon. And since we lack a crystal ball that can read the future, the idea to buy every promising company in its infant phase is extremely risky – in our opinion.

To get a better understanding of this point, we discuss a company’s lifecycle in this post.

In short, every “ideal” company experience the beginning of its life, the growth phase, then decay. Before becoming an American icon for industry, General Electric was just a lightbulb company. Then it grew at a rapid pace, became bigger, stronger, then as fate dictate, become mature and decline.

Before Take-Off
When To Buy? Don’t Invest in Inception Phase

This phase is when the fresh idea comes. When the new business model is introduced and revolutionary products attack the incumbent. This is when Bezos gets the ambition that Amazon should rule all online shopping – not only book but begin from there. This is the time when Jobs transform Apple from a computer company like Microsoft to customer-centric with iPod then iPhone.

Invest here? I have no adrenalin to put money in this phase. This is the most exciting moment but at the same time, it is the toughest one. When Amazon gets into the market, for the book, America has Barnes and Noble, eBay for online shopping, and The behemoth Walmart for the retailer. In some other universe, if eBay management is not stupid and Walmart not too complacent, maybe we can’t see Amazon for this big, maybe Bezos not divorce his hot wife.

Texas Instruments and AMD

There is too much competition in this phase, and the durable economic advantage isn’t yet strong to withstand. Some company gives up, not because they can’t, but because the management can’t see the clear path for winning. This is why Texas Instrument throws its mobile processor business unit in 2012 even when it is leading at that time. Motorola, ZTE, Amazon (with Kindle Fire), Nokia, LG, and RIM are prestigious customers. But due to the rising of ARM architecture that gets more popular in mobile devices, Texas Instrument throws the towel.

Another example is AMD that spun off its foundry business in 2008 due to tight competition from Intel and TSMC. By releasing Global Foundry, AMD could focus on designing chips. As we know, after several years, it could get competitive against Intel with its Ryzen.

Investor in Action.

The crucial question for this phase is, whether a company with new technology or business model could cement its position and eventually create some barrier to entry. This is the reason why we discuss Teladoc Health here and tell the reader that competition could get more heated up. Or here, when we talk about ride-hailing businesses like Uber. Or when we make an analysis of Lemonade. All these three are breakthroughs in their respective field. But the durability of the moat seems questionable.

And don’t forget Tesla.

It doesn’t mean that these remarkable company and their vision can’t beat the incumbent, but we think it should do extra steps which we cover in the next section.

Competitive Advantage.
Consolidation Phase in Company Cycle Investing Strategy

After getting ideas and love from customers and users, the next step that the company needs to do is create some network effect for its business. This means that an additional user could enhance a whole participant. For instance, after getting attention from the market, Microsoft scales up its Windows and Office software to the professional world (GUI versus DOS, Word versus Wordstar, Excel versus Lotus123). Soon, every company has the same language – Microsoft Excel for its spreadsheet.

By getting more and more customers, it becomes more and more difficult for the professional world to abandon the Office product. In our perspective, Microsoft has successfully locked the customer into its ecosystem.

This is what Tesla, Teladoc, Lemonade, Airbnb has to do: Scaling up, Creating some network effect, then building the high barrier to entry. And it is an extremely difficult task.

Making Moat

Investor in Action

In this phase, when we see that the company with competitive advantage has cemented its position, creating such a barrier to entry, it is time to put our capital. When the competition is fading – it is a good sign for your money.

Case for Microsoft
Case for Amazon

Monopolistic Business
When Disruptor Become Incumbent: To Grow Beyond The Former Shelf

In this phase, the company enjoys the monopoly (or bi-poly or few-poly) business. The characteristics are there are only a few players in the respective industries – like Intel and AMD, or Boeing – Airbus, GE Healthcare – Siemens Healthcare. The boring phase since almost no challenger poses threat to the incumbent, but we warn you to stay alert.

If the company has great management skills, it will not stay complacent in this phase. When the growth opportunity begins to deplete since you have conquered it all – like Amazon and e-commerce, the next step is seeking new opportunities beyond your core.

This is when you see greedy Amazon want to eat all it can. From the bookseller under pressure from titans like Walmart, Barnes, and Noble to become a monster that can take all it wants. From cloud to EV. The same case with Microsoft that try to make its own devices by acquiring Nokia, now it makes Surface. Google with Fitbit. In this phase, investors need to pay careful attention to management merger and acquisition strategy.

If the corporate strategy results in destructing value rather than enhancing it, the investor needs to revisit their investment thesis.

Eroding Moat
When To Buy and Sell, Do It in Mature Phase – If You Find Better Opportunity

One thing for sure: Monopoly (or bi-poly, or three-poly) can’t hold forever. Someday, it will come. Right now Microsoft enjoys semi-monopolistic business, but, what if – due to US-China tension – Jinping ban all Office products and force China to use Kingfsoft made, WPS Office. Like What he did to Google, he forces the people to use Baidu.

Or when Visa and MasterCard are prohibited in certain countries.

Some people really hate monopoly.

It doesn’t mean that you should immediately hit the sell button. Just reconsider your portfolio again. One most deceitful thing is, once an economic moat is created, it will last forever.