How the Market Works #3

From my previous blogposts, you can tell that I'm wasn't sure on whether to take a bullish or bearish approach to my portfolio since I didn't feel like I was educated enough on the stock market to do so. Finally, after talking to my dad and learning more about the market, I decided that I needed to be more bullish and invest much more money that I had previously done so in order to gain a profit. Although there has been talk of an economic recession happening for a while, it's highly unlikely that there will be one before winter break so it only makes sense to invest large amounts of money right now. Therefore, after conversing with a family friend in business, the biggest tip I learnt was that you should invest lots of cash into companies that you use. So, after a spending spree on blue chip companies, in total I invested around $60,000, which I feel like is a good amount to invest in as should the market crash, I still have some remaining money to keep me afloat. The companies that I invested in were Amazon, Microsoft, Alphabet, The Walt Disney Company, and Berkshire Hathaway Class B.

I don't want to go too much into detail for the first four companies that I listed above because they are all fairly self explanatory so I will simply give a brief summary. Amazon, Alphabet, and Microsoft are tech giants that dominate the technology industry and therefore provide blue chip stability. In a world thats growing increasingly reliant on technology, I believe that it is vital to invest in these such companies as their size provides stability to your portfolio while simultaneously giving you a steady profit. However, you may of noticed that I didn't include Apple as one of the companies that I chose to invest in despite it being a major technology power player. I chose to set it aside because Apple's new iPhone sales dropped at a record pace and did far worse than predicted (BBC). Although, Apple is bigger than its latest iPhone sales, with Apple T.V and other technologies, I didn't want to take a risk with the company and therefore let it be. Finally, the last company that I will briefly mention here is The Walt Disney Company. Unlike the blue chip companies I mentioned above, Disney is in the entertainment industry, not technology industry. With Disney owning Marvel, Star Wars, releasing Frozen 2 this coming November, having a large demographic of viewers and being an enduring franchise (Fool), I decided to invest in this mega company. Thus, you can see that I invested the bulk of my money into these reliant blue chip companies.  

A company that I haven't mentioned thus far though is Berkshire Hathaway Class B stock, and this is because I want to delve in deeper into this company and explain the logistics as to why I chose to invest in it. To begin with, I invested in the Class B stock simply because the Class A stock was far too expensive to invest in as one share costs around $300,000, making it the most expensive stock to buy in the market today (Finance Yahoo). However, the Class B stock is just as profitable and still a stock worth buying. The main reason for this is that Berkshire Hathaway is very similar to a mutual fund which essentially means that the company invests in a variety of small companies but also holds shares in larger ones like Coco Cola and Apple (Morning Star). This diversification provides stability to my portfolio and ensures that I am investing in a range of companies. Another reason for why I invested in Berkshire Hathaway was because it is owned by Warren Buffet, the third wealthiest person and most successful investor in the world. Therefore, instead of me trying to beat the market by investing small amounts of money into different companies, I'd rather invest into Berkshire Hathaway and leave this tough job to the experts at Berkshire Hathaway supervised by Warren Buffet. A third reason for why I invested in it was because Berkshire Hathaway has an outstanding growth rate. For instance, a stock of the company bought in 1990 is now worth 37 times what it was back then (Investopedia). Additionally, the graph below describes how the total returns of the Berkshire Hathaway Class B stock has consistently been far higher than the S&P 500 Total Return, thus constantly beating the competition of the top 500 largest companies in the U.S. 

Continuing on, Berkshire Hathaway Class B has a 52 week range of $186.10 to $224.07 which is fairly consistent and therefore a positive thing. It hasn't all been bright and optimistic though, Berkshire Hathaway has made errors along the way and the most recent one was investing into Kraft Heinz (CNBC). This bad investment resulted in Berkshire Hathaway losing almost $5 billion this year as Kraft Heinz continues to sink. However, this can be viewed optimistically because now prices of Berkshire Hathaway are cheaper than before and therefore, I invested in it at a good time when the price was relatively low.

In conclusion, I realised that in order to understand how much money you want to invest into the market, you need to take an approach on the economy and understand your view of it. Furthermore, I found that investing in companies that I use daily is a helpful tip for realising what companies to invest in and that mutual funds can be beneficial and provide stability to your portfolio as well. 

How the Market Works #2

Since the last update on my stocks, I have invested small amounts of money into various companies, remaining conservative in my view of the market. Although, I am still unsure on whether I want to take a bearish or bullish stance on the economy, as I still believe I am not educated enough to take an appropriate view point, for now I have invested approximately $10,000. The new companies that I chose to invest in were Trip Advisor, Proctor & Gamble, Ulta Beauty, and Alibaba. Rather than giving brief explanations for each company, I will instead delve further into two companies that I am excited about: Ulta Beauty and Ali Baba.

To start off, I will write a summary on my findings for Ulta Beauty and my reasoning for investing in it. Ulta Beauty is a beauty salon chain around the U.S similar to Sephora that sells a variety of beauty brands. Although, I invested in Ulta Beauty while it was at a relatively cheap price, I unfortunately didn't invest in it when it would've been most profitable, which was last class. Since our last economics class, Ulta Beauty has grown by a whopping 8%, which would've given me high returns. However, all hope wasn't lost as investing in it this class still ensured that I wasn't too late to reap its benefits, which I will explain a little later. To give some context on Ulta Beauty, in the last 5 years, it has risen by a shocking 251%, surpassing all predictions and showing an impressive growth rate. But, this optimistic growth rate hides some of the issues that Ulta Beauty has faced recently such as the huge drop in stocks that occurred in August this year. In August, Ulta Beauty's stocks fell by over 32%, according to CNBC, and there are no clear reasons why. We can only attribute this drop to slow make-up sales and the overall slowing down of the cosmetic industry in the U.S. While, right now it seems like I am leaning towards why you shouldn't invest in Ulta Beauty, this drop is actually beneficial to investors who grab this opportunity. Going back to how investing in Ulta Beauty this class still meant that I wasn't too late, Ulta Beauty's prices remained lower that usual even with the 8% growth rate. With the August drop, Ulta Beauty has hit such a low point, almost rock-bottom, that it is only predicted to have an upward trajectory (InvestorPlace). Although it doesn't appear that Ulta Beauty will reach back to its peak position anytime soon, definitely not before winter break, it is still forecasted to have a positive growth rate even if it's slower than what we are used to right now. Thus, I chose to invest in this company in the hopes to gain a promising profit as it continues to grow.

The second company that I want to write about is Alibaba. Alibaba is a giant company and is essentially China's Amazon. To give you a sense of its enormity, Alibaba is the fourth largest internet company by revenue, accounts for 60% of the packages delivered to China, and 24,000 people work for the company which is more employees that Yahoo and Facebook have combined (Business Insider). However, instead of initially investing in a blue chip company, I chose to invest in Alibaba because it's largeness provides it with stability but doesn't prohibit its growth. Because Alibaba is a company based in China, this allows it to have a huge growth rate. China's digital economy is only in its nascent stages and as e-commerce grows in China, Alibaba will coincidently increase as well since experts forecast e-commerce sales in China to increase by at least 15% annually over the coming years and currently, Alibaba controls over half of China's e-commerce market (Investor Place). However, a concern that arose was the rising tensions between China and U.S and the effect this could potentially have on Alibaba. Fortunately, it seems that Alibaba will be minimally affected by the trade war as it is a largely domestic based group as in 2018, retail and wholesale revenue from China comprised 74% of Alibaba's total revenue compared to just 8% for international retail and wholesale revenue. Furthermore, Alibaba is expanding across South East Asia rather than the U.S (Investopedia).

Therefore, in conclusion, I invested in the two companies that I described above because of their large potential for growth and hence, ability to give me a high profit. These companies are riskier because they aren't stable companies but instead vastly growing ones, however for the purpose of this simulation, I believe that because it is so short, it's good to have a balanced portfolio of riskier companies as well as stable ones. Thus, the next companies that I invest in will likely be more stable, blue chip companies.