We live in a world where investors believe they can predict the future of rapidly evolving businesses. Even prefer them to those businesses whose probability of success is hiding in plain sight.
This is a strategy that is not new - the entire venture capital industry is built on this premise. These strategies require wide diversification. If significant risk exists in a single transaction, overall risk can be mitigated by the purchase of mutually independent commitments.
This is predicated on the belief that the gain, weighted for probabilities, considerably exceeds the loss. It has been the case for the technology sector over the past four decades. But in adopting this course, the investor is no different than the roulette player who will place chips on multiple numbers but refuse to place a single large bet.
Gauge the business economics
There is another way to approach investments, one in which an investor understands the business economics and is able to place on a select number of decently priced companies that possess long-term competitive advantages. In this scenario, diversification makes no sense.
By way of actual example, the hype surrounding AI or crypto is the bet that the future potential of such industries mandate diversification. If, on the other hand, there is this belief that a particular company has the competitive advantage to be the winner, then the large bet on such companies makes sense if and only if the investor understands the nature of such a business.
Clearly, there have been outstanding winners such as Google, Microsoft, Apple and, more recently, Nvidia. For the vast majority that do not (remember for every Google, there have been multiple Ask Jeeves, Blackberry or Nokia), is it not better to look for companies that are more reasonably priced with reasonable growth rates and decent prospects of growth that are understandable?
GEMS deal is a pointer
By way of comparison, is it not more reasonable to invest in companies like Salik, DEWA, ADNOC entities and Taaleem, where even if there is a run up in prices, it would still make sense to own them, given the underlying nature of the business they operate in?
This attitude may appear to be old-fashioned, but you can see private equity companies preferring such deals too (the GEMS stake acquisition by Brookfield and Marathon being the most recent example).
Rather than being dictated by capital market preferences, which changes whenever a new discovery concept is made, the more prudent approach would surely be adopting the ‘till death do us part’ (as owner-occupiers do with their homes) approach.
It provides for decent results and allows investors not to be held hostage to the most recent headlines.
Which brings us to the hyperkinetic activity that has surrounded the IPO hype. Surely there will be more. There is an argument to be made that the Brookfield stake in GEMS places it squarely on the road to IPO in an industry that is not only benefiting from demographic growth but also by its brand value.
Start of an investment journey
Investors should know by now that the IPO is just the beginning of the journey for investing. The UAE capital markets are in the process of a shape-shifting trajectory. One that will surely go through growing pains, but one where secondary market action will determine value.
Rather than approaching investments from a flipping/forecasting approach, the better methodology surely would be to look for investments where the comfort factor is high enough, rather than playing monopoly.
For those who believe that their skillset lies in forecasting the dawn of new industries, the diversification/roulette approach (which be definition necessitates high turnover, in the way a real estate agent recommends flipping) may be better.
For the rest of us, the world of the patient is one where neither diversification nor hyperbole is required. As attention increases in the UAE capital markets, investors would do well to keep this in mind.
