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🔑 Key Takeaways

  1. When investing, look for a company's competitive advantage and the durability of that advantage rather than solely focusing on industry growth or societal impact. It's important to adapt to changing facts and environments, as exemplified by Berkshire Hathaway's recent investment in TSMC.
  2. Taiwan Semiconductor's dominance in the semiconductor market, diversified revenue streams, and expertise in producing chips for Apple make it a solid investment choice.
  3. TSM's Foundry model separated chip design and manufacturing, leading to a surge in design-focused startups and quadrupled sales for chip companies. TSM's $40 billion investment in chip facilities in Arizona recognizes the industry's importance, but the US is still behind. TSM's cost advantage from being based in Taiwan and replicating their research and development in the US would be expensive.
  4. TSM's strong ties with the US and geopolitical tensions between the US and China pose risks for Nano Chipp development and manufacturing. China faces challenges in obtaining US components and developing domestic manufacturing.
  5. While globalized production benefits the semiconductor industry, companies with a focus on R&D spending and effective deployment of earnings are preferred by investors over those with high revenue growth but low PE ratios.
  6. Warren Buffett's investing strategy focuses on stable and predictable companies with sustained growth over time, like Home Depot, that prioritize ethical and rational management. Value growth comes from a company's earnings and moat.
  7. Successful businesses prioritize long-term growth over short-term gains, utilize little capital investment for exponential growth, and prioritize internal incentives while understanding management's incentive metrics.
  8. When investing, consider wider factors beyond just revenue growth. Meta's venture into the metaverse, relying heavily on personalized ads, and navigating user privacy concerns should all be considered.
  9. While metaverse investment by Facebook is viewed skeptically, investors should consider a long position on Meta's stock, especially if it pulls back to the 90 range, according to Aswath De Moran's doomsday scenario.

📝 Podcast Summary

Berkshire Hathaway's Investment in TSMC and a Lesson in Competitive Advantage

Berkshire Hathaway's recent large purchase of Taiwan Semiconductor Manufacturing reveals that Buffett is willing to change as the facts and environment change. Even though he historically avoids technology investments, he sees the value in TSM's ecosystem and competitive advantage in the semiconductor industry. The industry saw a surge in demand after COVID-19, and TSM's revenue and operating margin are impressive, with projected revenue growth despite macro headwinds. However, the semiconductor industry is somewhat cyclical, and a pullback in demand may affect earnings. Overall, investors should consider a company's competitive advantage and the durability of that advantage when investing, rather than focusing solely on industry growth or impact on society.

Investing in Taiwan Semiconductor for the Long Term

Taiwan Semiconductor is a solid investment choice for the long term due to its high return on invested capital and return on equity. The company's revenue is diversified across various platforms, with smartphones being the leading one, and North America being the largest market for sales. As the sole manufacturer of the chips for Apple's iPhone and producing over 50% of the world's chips alone, this semiconductor giant holds a competitive advantage based on expertise and required capital expenditures, making entry into the market difficult. The semiconductor industry overall has been a big beneficiary of Moore's Law, which allows for continued exponential improvement of computers in terms of speed and capability. Buffett's investment in TSM, as the primary supplier of iPhone chips, aligns with his bullish stance on Apple.

How TSM's Foundry model transformed the semiconductor industry and TSM's dominance in the market.

TSM's Foundry model revolutionized the semiconductor industry by separating chip design and manufacturing. This led to a surge in startups focused solely on design and quadrupled the sales of chip companies from 7% to 29%. TSM, who only focuses on manufacturing, has captured 60% of the semiconductor foundry market. The US has recognized the importance of the semiconductor industry, and TSM has announced a $40 billion investment in chip production facilities in Arizona. However, the US would still be largely dependent on foreign tech and would be one technology generation behind Taiwan manufacturing facilities. Being based in Taiwan gives TSM a substantial cost advantage and replicating their research and development in the US would be extremely costly for them.

TSM's Nano Chipp and the Impact of Geopolitical Tensions on Semiconductor Access

TSM's Nano Chipp three chips will be available in the US only in 2026, and there are risks in their technology development and manufacturing processes. However, TSM plays a neutral role in the global economy and has strong ties with the US, which accounts for over 70% of its sales. Geopolitical tensions and export control policies on semiconductor technologies affect TSM and China's access to advanced chips and manufacturing equipment. The US is implementing four semiconductor policy choke holds on China, including cutting off access to US-made high-end chips, chip design software, and semiconductor manufacturing. China's efforts to develop its domestic manufacturing and obtain US components face significant challenges and limitations.

Globalization and Regulatory Changes in the Semiconductor Industry

The semiconductor industry is heavily globalized, and relying on one country to produce such complex chips can complicate things. TS M C's President believes the impact of the new regulations on their business is limited and manageable. Intel, though having fallen behind technologically, continues to have high R&D spending. However, with a low PE ratio of 9, Intel is not preferred by investors, who instead prefer companies that design chips. A company's increase in long-term shareholder value does not come from the growth of top-line revenue, but rather from the earnings the company produces and how those earnings are being deployed, per the Buffett approach.

Berkshire's owner's earnings approach and reliable investing strategy

Berkshire focuses on owner's earnings, which is calculated by reported earnings plus depreciation, depletion, amortization, and certain non-cash charges, minus capital expenditures. Many of the companies that retail investors are attracted to because of their high growth potential end up being more speculative bets. A more reliable approach to investing is doing it like Warren Buffett does, looking for stable and predictable companies managed ethically and rationally. This way of investing can be regarded as 'get rich slow' as it aims for sustained growth over a long period of time. Home Depot is an example of a company with sustainable, longer-term growth, thanks to management's good job at allocating capital. Remember, the growth of a company's earnings and its moat should drive long-term shareholder value.

The Importance of Adaptation and Incentives in Business

Capitalism is brutal and businesses need to continually adapt to changing markets. Successful businesses are those that grow exponentially with little capital investment, while failing businesses may require high levels of capital investment but have declining returns. Management teams attracted to Wall Street short-term gains instead of focusing on long-term growth may sacrifice shareholder value. Investor obsession with EBITDA can be problematic, as it can make an unprofitable business look profitable. Founder-led businesses tend to outperform due to longer time horizons and better fiduciaries. When analyzing businesses, it's important to understand the incentive metrics for management, as well as whether a company prioritizes internal or external incentives.

Caution advised in investing based on revenue growth; Meta's shift to metaverse yet to pay off; privacy concerns a headwind in advertising space.

Investors should be cautious when buying stocks solely based on spectacular revenue growth, as it does not guarantee superior stock performance. Meta's pivot to the metaverse has not proven successful yet, causing a drastic drop in operating margins and a decrease in revenue. Additionally, their business model relies heavily on invasion of privacy and personalized ads, which is becoming a headwind as users become more conscious of their privacy. The decrease in growth of the digital advertising space may mean that Facebook and Google's revenue growth will slow over the coming years. Zuckerberg is betting big on the metaverse, but investors should remain cautious as there is no clear business model on how they plan to capitalize on this bet.

Tech Giants Thrive in Cloud Business, Questions Arise over Facebook's Metaverse Investment

Investments in the cloud business by tech giants like Microsoft, Google and Amazon have been successful, but Facebook's massive investment in the metaverse is being viewed by some as questionable, especially in the light of an anticipated recession. As per Aswath De Moran's doomsday scenario, the market is being overly pessimistic about Facebook's future with the metaverse, pricing in no additional income from its core business. However, the market is not confident in Zuckerberg's management and the lack of communication with shareholders regarding their business plan. Nonetheless, after watching Aswath's video, it is compelling to take a long position in Meta's stock, especially if it pulls back to the 90 range again.