It’s For You, Dear

Drama. Google and Apple dominate the smartphone industry in the US and Europe, but it is estimated that by 2015 – next year but for one – the number of smartphone users in China will exceed all mobile users in the US and Europe combined as China turns its focus to domestic consumption (CNNMoney, January 14, 2013, Smartphones: China’s next great economic indicator).

US Smartphone Traffic
Courtesy: Chitika Online Advertising Network

The Apple platform, iOS, has nearly 70% of the US market share in terms of traffic, with the Google platform, Android, filling in another 27%, and Other, the rest (Chitika Online Advertising Network).

Smartphone China Platforms
Courtesy: iiMedia Research Group

But in China, the numbers are reversed with Android at 67% and Apple at 10%, and, of course, the emerging manufacturers are choosing the platform that is most effective for their needs (iiMedia Research Group).

However, Google’s success with Android in China has also favoured services from Google’s competitors because most of the phones do not feature Google services that have been banned in China.

And none of this combines to give us the the really smart phone that we want – the one that works everywhere, all of the time, is indestructible, and never needs to be re-charged – but maybe it’s coming and, as investors, we should take a look at all of them, and their manufacturers, and possibly the advertising industry that pays for it all. And the telecoms that bring it all home.

Smartphone China
Courtesy: Chitika Online Advertising Network

Yes, indeed, maybe it’s a new world market – post-industrial and information and communications based – that will make the 100 year old Dow look essential but quaint.

We’ve constructed a portfolio of sixteen companies that are representative of this market – post-industrial and consumer information and communications based:

Avatars (3) – Apple, Google and Microsoft;

Smart Phones (4) – Samsung, ZTE, Huawei and Lenovo;

Band Width (6) – America Movil, China Mobile, Softbank, Siemens, Verizon, Vodaphone;

Advertising (3) – Interepublic, Amazon and Yahoo. Please see Exhibit 1 below.

Exhibit 1: (B)(N) It’s For You Dear – Portfolio – September 2013

It’s For You Dear – Portfolio – September 2013

(Please Click on the Chart to make it larger and again if required.)

This portfolio cannot succeed on a price-weighted basis because of its small size – only sixteen companies – and the huge differences in the stock prices of these companies.

For example, the nearly +200% gain on Softbank at $63 is wiped out by the minus (-11%) loss on Samsung at $1,200. To deal with that inequity we bought them on a market value basis – basically, the same amount of money in each stock as price×shares so that the price of risk is the only effective discriminant – and the number of shares that we bought in September of last year is calculated on the basis of the average price of these stocks in the preceding nine months before September 2012.

For example, the shares factor of Samsung is 3× whereas the shares factor of Softbank is 180× (please see Exhibit 1 above) so that if we bought 100 shares of Samsung, we would also buy 6,000 shares (6000=100×180/3) of Softbank. If we do that for the whole portfolio of sixteen companies, then the portfolio has returned +66% since December when it is run as a Perpetual Bond™ and +26% otherwise (buying and holding all of the companies). Please see Exhibit 2 below.

Under the usual (B)(N)-rules of the Perpetual Bond™ – we only buy and hold a stock if the ambient stock prices summarized as Risk Price (SP) appear to be above the price of risk, Risk Price (SF), and for no other reason – we only bought eight of them in December and only hold ten now. Please see Exhibit 1 for the details.

Exhibit 2: (B)(N) It’s For You Dear – Portfolio & Cash Flow – September 2013

It’s For You Dear – Portfolio & Cash Flow – September 2013

(Please Click on the Chart to make it larger and again if required.)

The portfolio scales without change. For example, if we bought 100 shares of Microsoft for $2,654 in December, we would also buy only 5 shares of Google for $3,310 (5=100×5/99 using the scale factors) but then we would also have to buy (under the rules) 1,700 shares of Huawei for $2,292 (1700=100×1677/99) if any of them were a (B). Please see Exhibit 1.

Hello, Is Anybody There?
Courtesy: Universal Pictures

Based on the same rules, depending only on our budget, we could buy a million shares of Microsoft – it’s done every day – but, then, we would also need to think about buying 17 million shares of Huawei, which is nearly a third of the current float of 50 million shares, and might raise some eyebrows regarding our intentions. Hello, is anybody there?

It’s also evident that we have not been much moved by the drama of the avatars and smart phone producers, and that the market of investors has tended to favour the end users and only some of the telcos. And if we had bought them all, then the cost would have been twice as much ($48,517 compared to $26,289 in December) and the return only half as much (+26% compared to +66%, please see the (all) Companies and Portfolio lines in Exhibit 2).

For more on what risk averse investing has done for us this year, please see our recent Posts on The S&P TSX “Hangdog” Market or The Wall Street Put or specialty markets such as The Dow Transports & Utilities or for the real class action, La Dolce Vita – Let’s Do Prada!

Postscript

We are The RiskWerk Company and care not a jot for mutual funds, hedge funds, “alternative investments”, the “risk/reward equation” and every other unprovable artifact of investment lore. We have just one product

The Perpetual Bond™“
Alpha-smart with 100% Capital Safety and 100% Liquidity”
Guaranteed
With No Fees and No Loads on Capital

For more information on RiskWerk, please follow the Tags or Categories attached to this Letter or simply enter Search for additional references to any term that we have used. Related data may be obtained from us for free in a machine readable format by request to RiskWerk@gmail.com.

Disclaimer

Investing in the bond and stock markets has become a highly regulated and litigious industry but despite that, there remains only one effective rule and that is caveat emptor or “buyer beware”. Nothing that we say should be construed by any person as advice or a recommendation to buy, sell, hold or avoid the common stock or bonds of any public company at any time for any purpose. That is the law and we fully support and respect that law and regulation in every jurisdiction without exception and without qualification to the best of our knowledge and ability. We can only tell you what we do and why we do it or have done it and we know nothing at all about the future or the future of stock prices of any company nor why they are what they are, now. The author retains all copyrights to his works in this blog and on this website. The Perpetual Bond®™ is a registered trademark and patented technology of The RiskWerk Company and RiskWerk Limited (“Company”) . The Canada Pension Bond®™ and The Medina Bond®™ are registered trademarks or trademarks of the Company as are the words and phrases “Alpha-smart”, “100% Capital Safety”, “100% Liquidity”, ”price of risk”, “risk price”, and the symbols “(B)”, “(N)” and N*.