Article by Dr. Tanapoom Damraks, CFA.

Why should we pay attention to companies that are changing the world with technology, despite the many other investment opportunities available? Companies like Nvidia, Shopify, Netflix, and Tesla have seen their stock prices multiply several times over the past few years. What sets these companies apart, and why have their stock prices surged?

The Appeal of Investing in Innovative Companies

1. The speed of technological development has accelerated dramatically over the past decade.

In the past, it took a long time for humans to develop new technologies, and even longer for them to be widely adopted. For example, James Watt invented the steam engine in 1769, but it wasn't until 1869 that railroads spanned the entire United States (First Transcontinental Railroad). Today, however, smartphones have reached the majority of consumers in less than 10 years.

The rapid pace of development can be attributed to several factors, such as easier access to information and collaboration through the internet. Additionally, research that requires processing can now be done much faster due to advanced computing power.

2. Companies that can develop technologies that replace traditional business models will increasingly capture market share.

This is evident in various industries, such as:

- Retail: Brick-and-mortar stores are being replaced by e-commerce platforms like Amazon.

- Television and newspapers: These are being supplanted by social media platforms like Facebook and YouTube.

- Movie theaters: These are being replaced by streaming services (e.g., Netflix).

Companies that own these modern technologies can outcompete traditional businesses by offering products that better meet consumer needs or at lower prices. Over time, their strength and market share will continue to grow (until a new player with significantly better technology enters the market).

We will see the profits and stock prices of these companies grow year after year.

3. Technology serves as a competitive moat.

Legendary investor Warren Buffett chooses to invest in companies with competitive advantages. However, Elon Musk, CEO of Tesla, states that only companies that can develop technology faster than their competitors will thrive, as rivals will struggle to keep up, ultimately leading to sustained competitive advantage.

Criteria for Selecting Companies to Invest In

1. Management: This is the most critical factor, as management sets the company's direction and develops products that outpace competitors. They must also adapt quickly to changing industry conditions. A good manager should possess the following qualities:

- Extensive knowledge and experience in the industry, with a proven track record.

- A vision that can guide the company in the right direction.

- A significant ownership stake in the company (to ensure motivation to develop the business).

- Integrity with no history of fraud.

2. How do the products and services have an advantage over competitors?

- Features that meet consumer demands.

- Lower prices.

- Easier access to consumers.

3. Consistent revenue growth.

- Growing revenue indicates that the products or services are in demand. There should be growth of at least 15-25% per year.

- Revenue growth faster than competitors leads to increased market share.

4. Operating in a growing industry.

- Choose industries that are experiencing rapid development due to breakthrough innovations, as growth will be faster.

- Consider calculating the Total Addressable Market (TAM) for the product type to assess its size and potential for future growth.

5. Long-term vision.

- The vision should be clear, outlining what the company aims to achieve, so that all employees can align towards the same direction.

- The vision should be easily understood and not cause confusion.

Investment Process

1. Investors should gradually accumulate shares.

Due to the high volatility of stock prices, gradual accumulation is advisable, as investors may easily buy at the wrong time.

2. Hold for a sufficient duration.

It takes years for revenue and profits to grow. Holding for a long time is necessary to achieve good returns. Frequent trading may lead to missed investment opportunities.

3. Stay resilient against volatility.

Long-term investors must be able to withstand volatility. Stocks held may drop more than 50% at times, providing an opportunity to buy more (if the stock remains fundamentally strong).

4. Regularly review information.

Companies announce earnings every quarter, and investors should monitor whether the company is still growing as expected. What are the future plans? Is it still a good company? If fundamentals deteriorate, consider selling and investing elsewhere.

5. Avoid investing in a single stock.

Investing in a single stock carries risks. Therefore, diversify investments across multiple stocks to mitigate potential losses from negative factors affecting that particular stock. Risks may include:

- The emergence of alternative technologies.

As new technologies are developed, it may not be clear who will ultimately prevail. Additionally, new companies continuously emerge, sometimes from other industries, to compete.

- Stock prices may decline sharply if growth does not meet expectations.

High expectations for stocks mean that if revenue or profits fall short, investors may react strongly and sell off. Furthermore, companies may provide poor future outlooks, prompting investors to sell as well.

Dr. Tanapoom Damraks, CFA.

Article by Terra BKK from Dr. Tanapoom Damraks, CFA. Email: [email protected] Article by TerraBKK, a knowledge hub for investment to enhance wealth, helping you find good, valuable, and affordable homes.