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IFB161: Circle of Competence, Semiconductor Industry, China Politics

Announcer (00:00):

You’re tuned in to the Investing for Beginners podcast. Finally, step by step premium investment guidance for beginners led by Andrew Sather and Dave Ahern. To decode industry jargon, silence crippling confusion, and help you overcome emotions by looking at the numbers, your path to financial freedom starts now.

Dave (00:37):

All right, folks, welcome to Investing for Beginners podcast. This is episode 161 tonight, Andrew and I are going to talk about the circle of competence. And ironically, we have a great question that we got from Alan that we’re going to talk about in regards to that, which will help us talk a little bit about the circle of competence. So I’m going to go ahead and kind of start us off. And so the first part of the question is Andrew. I am a new list, or to your, and these podcasts, and due to company analysis, I have a couple of questions, one short and one, not so short of answering. So we’re going to take the second part of the question and answer that first. So we’re going to do this a little and reverse for Alan. Still, Andrew and I have been talking a little bit about a circle of competence and lately, and I am trying to branch out of my comfort zone, I guess there is the best way of putting it and trying to find other companies that could be of interest to me as well as helping me make more money for my investment.

Dave (01:36):

Just like we’re all trying to do. And I have certainly become more comfortable with the financial company world I E banks and insurance companies. But when I started kind of going beyond that, I started struggling a little bit. So Andrew has worked in and out of this summer semiconductor industry for a little while now, and he’s far more fluent in that language than I am. And so I happen to be reading a 10 K the other day, and the numbers all look fantastic for this company. But when I started reading about the products and those kinds of things, my eyes started to gloss over because I had zero ideas of what they were talking about. And so Andrew and I were kind of going back and forth about all this. And I am coming at this from a level of, I’m trying to branch out on my circle of competence.

Dave (02:29):

And so we talk about the circle of competence. We talk a little bit about things that you’re comfortable and things, you know, and you have some area of expertise or passion. And I don’t know that semiconductors for me personally is going to be something that’s going to be a passion. Still, it may be something that I could develop a passion for and would be something that I could expand my knowledge about because when you’re passionate about something, then you’re going to be far more dedicated to learning as much about it as you can. After all, it’s something that a huge interest to you. And so tonight, Andrew and I thought we would answer Ellen’s question, but we also had kind of used that as a way of explaining a circle of competence. And, and I could talk to Andrew about some of his ideas about the semiconductor industry, and I could kind of poke his brain a little bit about this. Like he’s done with me on banks, for example, in the past. So, Andrew, I could go ahead and read the second part. Yeah. Like today. And I’m going to go ahead and read the second part of the question then, and then we’ll kind of talk about that.

Andrew (03:30):

That’s all right. Yeah, definitely.

Dave (03:35):

All right. So the second part of Alan’s question is I have been considering the following three companies, PR or Teradyne, L L R X Lam Research Corp, and kale AC, which is a KLA corporation. I know from your podcast that you used to own LRC X, all these companies seem to be good in the semiconductor industry. Still, they have a significant part of their business from China, given the political climate with trade issues and politics. Is that a reason enough for you now to rule out investment in this type of business? I think T E R even does business with who I on just business terms, I am leaning towards the TER, but I’m wary of the politics. What do you think? So, Andrew, tell me a little bit about semiconductors and what your thoughts are on all this for, for Alan and I,

Andrew (04:22):

Yeah, I think, if you’re going to be investing in stocks like these, you should understand the basics. As you mentioned, Dave, I’ve been in and out of contracts in the semiconductor industry for probably close to five years now. I went to school for electrical engineering. And so my background is electrical engineering. And even though after I graduated, I started pursuing investing obviously. So I do have that base of knowledge that I can kind of draw from that helps me to interpret some of the more complicated jargon that comes around when you start to try to expand your circle of competence into a new industry. And so I liked that we’re doing this and I think it could be a lot of fun. And I think it’s very useful and, and a good way for investors to maybe test themselves. You know, maybe you don’t have access to somebody who’s an expert in the industry, but maybe you can do a sort of inner dialogue between yourself to make. It’s so easy today with Google where you can have a question type it out and then find the answer relatively quickly.

Andrew (05:32):

And so if you have this sort of inner dialogue that like Dave and I are going to have today, then maybe from that short amount of time, you can decide on whether this is something I want to spend more time on. Maybe it’s, it’s a potential circle of competence down the line that you just it’s too hard for now, or maybe it’s, I just hate this. And then it’s never going to be a circle competence, and that’s okay too. Look at Warren Buffet, right? He talks about how Apple was his first stock pick in tech, and for decades, he never got into tech, and I think he’s done just fine. So, you know, there’s, there’s nothing wrong with having industries and stocks that they’re just outside of that circle of competence. But to hone in on where your circle of competence is, and to go through this other process, like, like, like we’re trying to do here, I think that can help you when you’re making big decisions, trying maybe to slant your portfolio one way or the other, or maybe wait, or just, if you, you want to know, if you, if you have a high conviction on a certain stock, you’re not going to know and likely be right about it unless you have a circle of competence there.

Andrew (06:49):

And so obviously it’s valuable for all sorts of investors, and I’m excited to do it. So I’m going to flip it to you, Dave, let’s start. Like, I love that you’re, you’re a beginner. And I think a lot of the people who are listening to this probably don’t know hardly anything about semiconductors. And to be honest, I had to refresh myself on even some of the basics because, you know, you can be in the industry and like, just get focused on what, what produces results, and maybe gloss over the basics and the fundamentals. So maybe coming from a beginner’s perspective, like, what’s the, what’s the big question? Is it like, everything’s a question, or it’s like, you know what, what’s, what’s the next stepping stone, I guess that needs to be made because the way I see it for my most basic understanding is semi semiconductors, are they, they are what leads to chips, you know, and chips go inside computers, phones in the past when cable set-top boxes were really popular, they go into those, they go on your TV, there are even chips inside like a washing machine.

Andrew (08:05):

So that’s how I would define semiconductors. And so like, I guess based off that, did I miss something or is there like confusion on where, you know, what’s, what stage of that brings confusion, I guess. No, that part, I think I understand it. That logically makes sense to me. I guess, what, what role does a semiconductor play in a phone, a computer, any, any device that it’s, that it’s a part of? What, what, what role does it play? It’s the brains of it. So, you know, when you reached out to me this week, you were talking about Intel. So let’s use Intel as an example, they make microprocessors. So when, when, when techies talk about processing power, they talk about how fast the computer can go. They’re talking about the chips that are inside those computers, and that’s just, that’s semiconductors. So like, okay, this is, but that’s not like that’s not the only application of a semiconductor it’s one example. And it’s, it’s one of the main ones.

Dave (09:17):

Okay. So when we’re talking about, you know, the computer language that you would program it, is it running through the semiconductor then

Andrew (09:28):

The computer language of programming? So that’s a really good question. And it’s interesting, or is that,

Dave (09:35):

Is that more involved with a hard drive and things of that nature?

Andrew (09:39):

It’s very interesting. Cause you have two, two different kinds of prototypes of what ends up being a semiconductor chip. So the way I like to think about it as I think of the companies that are in the industry and maybe that’s because I’ve been in the industry and I promise to try hard, not to get too technical, but what I’m referring to is they have these things called FPG A’s and they have an S ICS Asics. So in my experience, I did a lot of design with six F PGAs. Those are a program on the programmable. And so that’s why I bring it up because those can be semi semiconductors are very confusing, not confusing, I’m sorry, complex in the manufacturing of it. And so what happens is it needs to be designed on a computer, and then they send those designs from the computer to a semiconductor factory.

Andrew (10:44):

It’s called a Foundry from there. They, they manufacture using all these advanced, crazy lasers, you know, I don’t even know to etch all this crazy stuff. And then they have, they, they manufacture just millions of these chips. And then after that, they have to verify it. And so you put them in the lab, you have a whole team that does that, and they verify, make sure everything happened. Like we wanted it to happen. Like we designed it on the computer and then based on how that happens, either you have to redesign it again. And that could cost millions of dollars, hundreds, probably hundreds of, I mean, I don’t know the scale of it, but it’s a very expensive process, and that’s for ASIC. And so the other side of that is FPGAs, and that can be manufactured very quickly. It doesn’t need the whole Foundry process, and it can be reprogrammed over and over and over again.

Andrew (11:41):

And so like on the one side, there’s like pros and cons to it because the people who code FPGA is, are expensive to hire. So, like you’ll have pros and cons for each of the two types. And so when I mentioned the companies and the industry, and I’m going to bring this back so you can understand because what’s happening with mobile, with mobile phones versus laptop computers and desktop computers makes everything I’m talking about right now, very super relevant. So like, as an example, Alterra was one of the biggest F PGA companies. And so Intel is a big CPU company which, which is generally designed on with ASIC. So Intel kind of, I don’t know, I’m assuming, you know, there are lots of reasons why Intel acquired Altera. Still, I wonder if one of them is that they kind of wanted to balance out between the two types of semiconductors because you have, you have, like, depending on the application, one technology can be better than the other.

Andrew (12:55):

And so there’s like a huge debate in the industry between like, you know, FPG is, are the standard for this or the standard for that. Are they going to be dead one day? And so like, like robotics, for example, might be a better application for FPG. At the same time, laptop computers will probably always, always be a. I guess that that did get kind of complex, but I don’t think you necessarily need to understand to that deep of an extent too it, but I think it helps at least knowing like, okay, well, I know where that FPGA is. I know that ASIC is, and I know they’re like general parts of the semiconductor industry. And so when they talk about it, and you know, some companies will be more specialized in one way or the other that helps with the definition.

Dave (13:54):

No, it does. It makes sense. So basically, what you’re saying is that there are two basic types of semiconductors out there, and depending on what they’re being used for, has a bearing on what type of chip the company is. So do, when we talk about the industry when we talk about even just these three companies that the Alan was mentioned in his question, are they more geared towards each of those types of chips or does each company make each, I guess what differentiates Teradyne from Lam research from KLA, from Intel?

Andrew (14:39):

That’s a perfect question. And I think when we talk about how deep into the weeds do you need to get into an industry, the jargon and like being like an expert, quote-unquote, you know, how, how understand do you need to know when it comes to at least this industry? So for sure, you need to know what the company makes. So for the Lam research, I’ll talk about that. Cause that’s within my circle, the circle of competence, I own them for several years. They were by far the best stock I ever owned. And I got out once, you know, I bought at the price of the book was something like one and a half. I got out when the price of the book was close to 10, and they had added a ton of debt. And so those are the reasons I sold out.

Andrew (15:26):

And so what they do is they do memory chips. And so Intel is kind of, kind of turning the corner on as well. Now Intel does more of Intel does the more the brains and the memory chips are more just like, so if you have a computer, there are the brains, there’s the memory. And I’m sure there’s one. So the funny part of this is, you know, if you’re not techie, I sound smart to you, but if you are, you’re probably like this guy, this guy needs to brush up on this. Yeah, you have the memory of the processing power, and then you have the Ram that’s the last one. So I’m sure you’ve heard, you know, people have heard about that, that they talk about your Ram when you’re buying a computer. So, you know, different companies. So a perfect example of this, and that’s very, very relevant today.

Andrew (16:23):

Is that Apple in this, in this week, they announced, no, it wasn’t this week. I’m sorry. It was within the last month; they announced that they are no longer using Intel chips inside their Mac books. So, so here, here’s what we know about Intel. And I think Dave, you’ll find this useful because you’re analyzing the stock Intel because of the type of semiconductor chip that Intel specializes in. They have to; they have to put it in bigger things. So like laptops and desktops. Okay. They tried hard to have a chip that would work for a phone, and they just weren’t able to do it for, and it kind of goes back to like that whole idea of like the Asics versus FPG is so like understanding just the basics of that you understand? Okay. Because certain, because certain technologies just in their nature work in better in some applications versus others, they’re going to perform better or worse or they’re going to, they might work well for a laptop or they’ll work better for a phone.

Andrew (17:37):

And so as an investor, you have to make the decision. I think wall Street’s kind of made the decision when it comes to Intel. Is that an, I, I think I agree with this is that the push in the feature more towards smaller devices than bigger. And I think more people are getting things like tablets, smartphones, you know, that kind of smaller stuff. And if Intel’s chip isn’t, isn’t good to be in there, then how are they going to continue to grow? If they’re stuck with laptops and PCs, which people are buying less and less of.

Andrew (18:15):

Right. So, and that makes sense. So I guess what Intel’s been in business for a while, they’re no dummies. So how do they, how do they pivot off of that? Do they go out and buy a company that has expertise in that other type of chip and tries to pivot off of that? Or do they try to do that kind of stuff in the house then? Yeah. So that’s, that’s something where I don’t think anyone can reasonably answer it and management’s working their butt off to try to figure it out. That’s a problem with it’s the beauty, and the, and the problem with tech is it’s so unpredictable and, you know, any little discovery can change. It could shake up an entire industry. So while it helps to understand the basics of, you know, different as, as an example for this portion of the slice of tech, that helps to know the fundamentals of semiconductors.

Andrew (19:20):

You also, I don’t, I think you have to be careful about getting married to it because just because that’s a standard today, it doesn’t mean it’s going to be the same tomorrow. So that’s kind of where value investing can come into tech is that you know. I guess I have to be cautious of what I’m saying here, cause I’m not just saying don’t, I don’t want to say don’t like go out and buy all the cheap tech because that’s probably a really bad idea. Still, I’m just saying that’s, that can be a great generator of returns when you’re buying cheap because a lot of the people doubt the company. Then the company could all of a sudden turnaround and just make a fantastic discovery or reinvent themselves. I mean, look at Apple back in the early nineties, Steve Jobs left and then they came back and then it became this extraordinary thing.

Andrew (20:05):

So when we talk about Intel specifically and where I can come from, my circle of competence is the fact that Apple changed to away from Intel. They started doing in the house. And so that’s like a competitive pressure on Intel. And besides, you have this shift. So like Lenovo is another example of a company who made a decision that could shake up at least Intel’s world, because they’re starting to put in Qualcomm, Qualcomm’s another semiconductor company. They’re starting to put Qualcomm chips in their laptops. And so that’s significant because Intel is kind of like the laptop chip master, right. But they’re putting in the type of chips that you’d put into mobile. They’re Lenovo starting to put those chips into laptops. And so not only is Intel having to deal with the fact that people are probably buying fewer laptops. I mean, I don’t know the numbers, I’m just talking from a big picture perspective. Now they have to deal with the fact that people like Qualcomm, who are making chips for phones are, are now selling those chips to laptops and laptops. You know, the more laptops that kind of get on board with that, then that can be a huge problem for their club, almost like clunky, but like their chip that needs to be in a, in a bigger, a bigger application.

Dave (21:45):

Yeah. That makes sense. So is the difference from something along the lines of processing speed or memory, or just sheer, I guess, the flexibility of ability to do a bunch of different things. I mean, what’s the, what’s the differentiation between the chips that Intel is using versus, I mean, why would Lenovo choose to go with A chip that is, Is more designed for mobile devices as opposed to a laptop? What what would be the, what would be the reasoning for that?

Andrew (22:18):

Yeah, that’s a good question. And it’s not so much that they’re moving to a completely, they’re more testing it out and see how it, how it goes. And that comes down to just technological innovation. That’s how I perceive it in this case where Qualcomm just made a really good ship. And so, you know, that’s, that’s a problem with tech is, is you have these competitors, and you know, a lot of, a lot of innovation needs to happen. And then you need to always spend on research and development. So, you know, something like this, like a Qualcomm can move into your space and start to take it. And so it’s called like the techie word for his arm, but that has to go, it has to do with the fundamentals of, of semiconductors and, and the type of basic chip it is.

Andrew (23:11):

And so I guess the movement is towards those because Qualcomm’s put out good designs and Intel has been doing a very poor job of that in the last three, four, five years. I don’t know how many years, but they’ve slowed in their progression. And that’s not like a secret if you like seeking alpha as a, as a perfect example. You know, we love to, we love to talk about seeking alpha as a good resource for investors. They talk about how they’ve been in this, in this slice of tech. And so that’s going to be problematic for them, and it’s showing, and it shows in their stock price, but there’s a story behind it. That seems like a real big deal, particularly because for Intel, I hate to like sound like I’m just ragging on intelligence. They just happened to be the company. I did a deep dive on this week. Right. But it’s tough for them when their bread and butter is being attacked. And then there; also, it just is. It’s not a good look when it comes to the entire company, when the reason why they’re, why there might be a shift is because you’ve been, you’ve been inefficient with your production basically

Dave (24:39):

Makes sense. And, and I think I understand kind of how this works a little bit better. So how does a company like are Lam Research? How do they fit into the picture between the microns and the Intels and the Qualcomms and the Cisco’s and just on and on and on, it just seems like there are so many Air quote, big-name Conductors. How do some of these other companies fit into that whole scheme of things?

Andrew (25:10):

Yeah. So Lam research is more memory chips. That’s like if you follow the path of revenue, that’s, that’s what it comes down to. So, you know, in that case, following the memory developments, that’s, that’s, that’s how you’ll see the price move when it comes to Cisco, Cisco, Cisco is like a whole completely different thing because now we’re talking away from semiconductors and we’re talking about routers. And so we’re talking about, you know, the stuff that makes wifi happen. And so I think, I think as it pertains to investors, I think there’s less, I think there’s less opportunity in becoming a tech geek and like making that into finding a great investment. I mean, it works, but I think there’s more that can be done by at least like, let’s take the semiconductors again, as an example in my mind, the way I would think of it is we know based on what we’ve talked about today in our discussion, I went maybe five steps too far with, with talking about the basics of semiconductors, but we know that they go into washing machines.

Andrew (26:28):

We know that they go to anything that needs brainpower, and that can be something as simple as a sensor, right—all the way complex to phones and computers. And so think if you trace this, it doesn’t have to be done all at once. But if you kind of intelligently Google search and you trace what the, what the path is. So if I’m interested in Qualcomm, for example, and I know that their bread and butter are mobile phones, well, how do I feel about mobile phones five, 10, 15, 20 years ago? Is it generally positive? You know, does it seem like people love their phones? You know, spoiler alert, it seems like they do. So, you know, how do I feel about messaging in the industry? Probably pretty good are their financials good if they are? And you know, if they’re good compared to other competitors who are maybe in the mobile space, maybe I feel really good about that.

Andrew (27:28):

Another interesting example is like, IBM, IBM used to be the gold standard of, of personal computers back in the eighties and probably nineties. And now they’re a cloud company, which is very weird because it’s like they do it services, but everything centers around the cloud. And so, you know, they’re making strategic moves like they acquired red hat, which is a very trendy company in tech. And they’re very involved in the cloud, and it’s more of the software side of the cloud rather than the hardware. But if you didn’t at least understand the basics of IBM, maybe you would think you were buying into laptops or personal computers when that’s not even what they do anymore. So I think, you know, at least reading, like we, it goes back to our, a lot of our principals reading the 10 Ks and trying to get an overview from it.

Andrew (28:23):

And then from there, like asking yourself intelligent questions and trying to verify that, and then see if it’s, you know, AAC, if it’s catching your interest BC, if, once you trace that path down to what’s this feature revenue where this feature revenue come from in all likelihood, and then does that make sense? And then from there, it’s like, okay, now we have a big picture. Now let’s, let’s look at some specifics with the financials. And I think, I think when it comes to at least semiconductor industry and tech, I think that’s a good framework to think about when you are considering looking at companies like this, is very helpful.

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Andrew (29:13):

And I agree with you. It goes back to the principles of investing in the things that we talk about. And I think it kind of was illustrated to be, I spent a half an hour, 45 minutes an hour reading through the financial part of Intel’s financials. And it all looked really interesting and really good. But then when I started branching into what does the company do?

Dave (29:42):

So it’s not just enough to look at revenue. I have also to understand where that is coming from and how they are going to generate that not only tomorrow but 10, 15, 20 years from now. And if I don’t understand the company, then it makes it a whole lot harder for me to, I guess, project that into the future, or even think about trying to analyze where I think that might come from if I don’t understand the business. And after talking to you tonight, it starts to; it starts to make a little more sense. So I guess another question I have along these lines, how does all of this play into five G?

Andrew (30:22):

Yeah, I think 5g like unlocks everything we’ve taught. We’ve had lots of conversations about 5g off the air, right? The way I think about it, I guess I can’t take a quote, you know, I can’t take credit for this quote, but I believe it was Jack ma. He said, do you know, do you know it was the affiliate with the city? What was it SoftBank or Alibaba? He made a metaphor for five G to be like the way the railroad infrastructure was, something like that. So, if you think about what that opens up, five G is the next level for our cell phones. It’s like our next level up to where we’re going to be able to consume obscene amounts of data instantly. So, you know, if you ever saw the spinny circle, when you’re trying to watch a YouTube video, for example, well, five days is going to blow that away. Or, you know, what else do people use data for? I don’t know like high-frequency trading or anything that needs a super, super speed. You know, it just gets that much better. So really all sorts of companies will benefit from that. And I don’t, that’s like to me, and maybe I’m wrong, but to me, it’s like saying, does, how do these highways and streets help businesses? You know, who are, how do they affect, give me an example. How, how, how do how’d the highways and roads,

Dave (32:03):

Location, location.

Andrew (32:05):

Yeah. How, how does it affect the male industry? It completely revolutionizes that revolutionizes it, how does it affect the pet sitting industry while it makes it possible? Right. So that’s the kind of thinking, I mean, it’s not as extreme as maybe roads and highways, but I think it’s, I think it’s getting there. I mean, from my standpoint, I used to find that annoying when I would have a bunch of pictures on my phone, and then my phone would break, and then I would lose all those pictures. So whether they start doing, I started putting it on the cloud, I use Google photos. And so now whenever I take a picture of my phone, it goes up to Google photos, and it gets stored in this magical place. And I can access it; whether I break five phones, ten phones, or a million phones, I can still access my photos.

Andrew (32:52):

And so, you know, I know Apple is doing the same thing with their iCloud. And so that’s just one example of how everything’s moving to the cloud. And there’s all this data that’s just; companies are hungry for data. People are hungry for data; whether they realize it or not, you have all this talk about AI and all this crazy stuff, but you know, a lot of that will just become enhanced by 5g. And so I think, yeah, I think if you’re, I think it’s, it’s, it’s hard to think of a tech company who won’t be positively affected by 5g.

Dave (33:28):

Yeah. I would agree with that. And I, I, you know, we were also talking a little bit, I think you mentioned that this would probably unlock the internet of things and make that far more prevalent than it is currently.

Andrew (33:40):

Yeah. You’ll explain that to people who don’t know what the internet of things is.

Dave (33:48):

Well, in my non-techie non-geek way, for what I understand, it is, in essence, how everything is connected through the internet. So you would be able to control everything from basically your phone. So the chips that you have in your dishwasher and your stove and your coffee maker, your microwave, your lights, your thermostat, your door handles just about anything and everything you can think of, you would be able to control via your phone through the internet. And the processing speeds that five G would allow all of that to happen over the air, I think would make it a much, much more prevalent and easier to do some of it. I think we already have all started to experience a little bit like with, for example, having Siri or Alexa being able to turn on our lights, for example, I think this is probably just kind of the next level of that if I’m correct.

Andrew (34:53):

Yeah. That’s exactly like the internet of things. That’s a perfect example.

Dave (34:58):

I think I got a pretty good handle on all this. And I think that I mean, it helps me at least understand where I need to go to start to ask other questions and to dig a little bit more. So I understand the business. And like you said, I needed to be able to understand it to the point where I can project into the future as best that I can. Cause I’m not a prognosticator, but at least understand how the business is going to make money five, 10, 15, 20 years from now, and have an idea of that. Just reading through the financials, I would never have imagined that Intel was for lack of a better maybe becoming a bit of a dinosaur. Yeah. And I would never know That, and I’m not saying that they are, but it appears that maybe they’re on the wrong side of where the business is going at this point and that they have some catching up to do. And so that would probably reflect and why it’s a lower price than some of their competitors are, for example.

Andrew (36:01):

Yeah. That’s, that’s a hundred percent. Right. And then you get into the reason why a stock is hated. And so if you have the conviction to say, well, I understand that enough to know why people hate it. And I also understand enough to; these are the reasons why I think that they’ll succeed despite that, then that could be a great opportunity. But if not, you know, you said blindly looking at the financials that’s that can be problematic. All right. So do we want to, do we want to Answer Alan’s question now?

Andrew (36:37):

Okay. Sure. So he said, so I kind of wraps into semiconductors and five G. So he talks about Teradyne doing business with Huawei, and they’ve been all over the news. Particularly with it’s, you know, it’s not just America too. It’s it’s the EU there. And I read an article from the wall street journal a couple of days ago, I think. And they’re talking about how now even the United Kingdom is, is getting into the whole game of, you know, let’s, let’s keep Huawei away from our 5g because Chinese company Huawei has the potential to spy. We don’t trust that they will respect privacy. As a Western country would just look at what’s happening with Hong Kong. So he says how he’s leaning towards Teradyne, but they do business with Huawei. And he’s also wary of the politics. So obviously there’s just like a ton in there.

Andrew (37:43):

You have the political climate with trade issues and, and politics, like, like he mentioned as well. So if you go back and you listen to our episode from last week, we talk about the importance of global diversification. So you want to make sure you’re kind of set there. I also observe the growing tensions surrounding China and not just the United States, but the rest of the world. Not just as it refers to five G, but in all sorts of ways. So I’m not going to take a stance publicly, on whether I think it’s a good idea to, let’s say for an example, buy us stocks which have heavy exports to China. I’m not going to S I’m not going to take a stance on whether that’s a good thing or a bad thing, whether you want to lean towards either not as it relates to this 5g debacle.

Andrew (38:36):

I think it is. I think it is a serious consideration. I think it’s good that Alan is making the consideration. And I think in this particular case, yeah, I don’t want to like rush a judgment or anything like that at all, but Huawei does seem to be a very, very, it’s like a Tesla or Amazon or Apple. Like we’ve never seen anything like it and the way it’s being, I don’t want to say like used, but almost like targeted by politicians is just, they’re having a lot of problems now. And it’s hard for me to see that subsiding anytime soon. And so for a company like Teradyne, if they do significant business with Wawa and you’ll have to look into that for yourself if you’re looking at Teradyne. Cause I don’t, I haven’t analyzed that stock myself, but yeah, that’s a serious consideration. And with the whole Huawei situation, I guess giving a, a news update on where they are so far from the last thing I read, they are banned from using anything to do with the US.

Andrew (39:49):

And so that’s a huge problem because going back to the semiconductor industry, they need chips from the semiconductor industry to make their network infrastructure work. And so not only are we ban, you know, there’s one big chipmaker in Taiwan, they’re called TSMC, and then you have Samsung, and they are, were Samsung South Korea. Yeah. And then, so, a lot of the chip manufacturing is done, not in the United States. There’s a couple of foundries in the United States, but the manufacturing itself has done South Korea and Taiwan, but the design work, you know, like Intel, Qualcomm, Broadcom, those guys they’re there, they’re in the United States. So while we can’t buy chips from them, Intel didn’t mention them, probably can’t buy chips from them. And then even the tools that companies use to design these semiconductors, they’re not allowed to use those either. And so it’s like, it would be like I don’t know, trying to build a tower and you’re not allowed to use cranes or something like that.

Andrew (40:57):

Right. It’s just absolutely incredible the kind of obstacles that we’re always going to have to deal with. And that’s just what we know now. And things seem to be ramping up as it goes with tensions, with China and other countries. So I think in general, you have to be cautious about making investment decisions based on politics because there can be a ton of opportunity with stocks where people are really scared of the politics, and then the political situation goes away. And then the stocks just pop, and that’s like classic value investing, right. That those are, those are, those are just money situations. But this particular one, I think because it is one of those not seeing situations before, like a Tesla, Apple, Amazon, that kind of thing, when it comes to Huawei, I would be wary with anybody, you know, doing business with them, exporting to them. It’s, it’s, it’s a, it’s a tricky situation.

Dave (41:59):

Well, I think it’s going to affect the economics of Teradyne In, by being doing With them even in some small way. And I think with all the hurdles that the company is going to have to overcome to do their thing, I just think that that would preclude Teradyne from even wanting to do business with them, I guess, short term or longterm. And I guess that would be something that I guess for me as an outsider to this type of industry would make me give me pause about whether I wanted to go down that road or not, you know, sometimes politics, again, like Andrew was saying, I’m not going to take a stance either way, but I think politics sometimes can be more just smoke and mirrors. Still, in this case, I think it’s okay.

Dave (42:58):

In China, in the fact that it will prevent them from being able to do their business and in the long run that they may be able to work that out in the long run. But in the short term, it’s going to cause a dent in their business, and anybody that’s associated with them is going to feel the ripple effect. I think it’s so that would, I guess, give me pause about being involved with the company.

Andrew (43:24):

Oh, you bring up, so, because it’s a good point you bring up too. After all, I think you have to separate Huawei from other companies that export to China. And so kind of going back to what we were talking about earlier, it’s like, how do you perceive something playing out five, 10, 15, 20 years from now absent a war between the two countries, which is also not out of the question. You know, you have to think that, well, there are also a lot of positives to export into China. They have, for one, they have like the biggest consumer base of the world. So that’s a pretty good reason. And you know, you have to wonder if hopefully, these political struggles kind of take a back seat and free trade and can happen again between the two countries. And so if something like that does happen, then stocks that you own that have exported to China will do very well. That clears up. I think it comes down to again, understanding the company and, you know, maybe if a company has 90% of their exports to China, I’m worried, right. Not only now, but because five, 10, 15, 20 years from now, there could be,

Dave (44:50):

It’d be something catastrophic. So, you know, it’s like, they’re just not globally diversified in general, but maybe, you know, maybe

Andrew (44:56):

We have another company that has 30, 40% of its revenue coming from China. So sure. There are risks there, but there’s also pretty good reward potential because China is a great export market. Plus, you, you, you have a company that might still be fine, even if things get really bad there. So you have to weigh that into everything else and, and make a good decision based off of that,

Dave (45:24):

For sure. And it’s, it’s complicated. It’s not easy, but, you know, investing in buying stocks is never easy or simple. So, alright. I think we’ve probably beaten that semiconductor conversation to a pulp. So why don’t we move on to the second part of his question? So Ellen asked I use Fidelity for my brokerage account. They have a page where they rate companies according to several analyst’s reports. Do you give any consideration to others’ opinions or only rely on your analysis? Andrew, what are your thoughts on that?

Andrew (46:03):

I’m curious to see what you want to say. Alright.

Dave (46:07):

So here’s my thought. My thought is that when I am doing my initial research and going through the company, I don’t pay any attention to what other people have to say. And the reason why I do that is that I don’t want to take into account any biases that I may get from that person. So for example, if I’m looking at a company on Fidelity’s website and I see that I’m just a beginning stage of kind of analyzing the company, and I see that an analyst has given it a top score, whatever that may be a fidelity on Schwab, they rate them by wetter. So ABCD and F a, a being the highest. So if I see that a company has given an, a rating, then I’m going to immediately start slanting, all the things that I’m thinking about towards what that person said, and that will skew my judgment over the long period because now I’m basing all that information on what this person said on the report.

Dave (47:17):

Now I will go back and sometimes read through the reports just to get an idea after I’ve already made my decision or come to a point where I think that this is what I think about them because sometimes it’s good to have other’s opinions and ideas on what’s going on. But generally, whenever I start to investigate a company, I always go to the company financials first and look through the 10 K or the 10 Q first to get an idea of what’s going on with the company before I start kind of exposing myself to others’ opinions because I feel personally that it’s going to, it’s going to affect me. And I don’t want to be swayed by something that somebody else said, and this is not the bash, any of the people that are working for those companies or the reports that they’re producing, because they’ve been to school, they know what they’re doing, they know what they’re talking about. And I’m not saying that, but what I am saying is it does, it will affect my judgment. And so I try to avoid them. So, Andrew, what are your thoughts?

Andrew (48:26):

That’s very well said. I try to take a similar approach in the sense that even I don’t want to go too deep into a company’s financials. So I’ll, I’ll run my screens, right? I, because I’ve been doing this for a long time, I can glance at a financial statement and get a sense of if I feel, I feel like there’s a good chance that this is going to be a good stock. So I take that glance. And then before I go too deep into the financials, because I’ll find like, like taking Intel, Intel is a great example because this, this happens to me where I, I looked at them a couple of months ago. I got excited because they just seem like they had a lot of things going for them, you know, like great revenue, great revenue growth, great, great earnings growth. And so what, what can happen when you look at a company is you can start to make a judgment and then everything you read after that, you kind of bias it towards that judgment. And so I’ve tried not to get, like you said, not to get a decision until I know what’s the big picture and how does that fit in, like everything we’ve been saying, you know, what do they do? What markets are they in? And then what’s their end product. And then how does that work throughout the whole thing? When it comes to analyst reports, I have a similar philosophy to, I just, I try to do my analysis. That’s the bottom line. Yeah, for sure. I think

Dave (49:59):

I will read through after I’ve done my analysis and, and gone through my checklist, I will read articles about the company on a place like seeking alpha or guru or focus or any of those kinds of places. Also, look for anything that maybe the people that I look up to have written about a company. So if I find a report to that, the tally has written about the company, then that’s going to catch my eye, and I’m going to pay attention to it because I think that somebody like he is a very smart guy and a very deep thinker and will think of angles that I won’t think of. There are things that I will do is I will also talk to Andrew. I run ideas by him all the time because I value his opinion. And he has a great way of looking at things that are different from mine.

Dave (50:54):

And so he will see things that I won’t see. And I like that because that helps me get a better picture of what is going on with a company. And I would encourage you to find a person out there that can be your looking glass and can help you with those kinds of things because having somebody else to bounce ideas off of and get opinions and get a second look is always fantastic for whatever reason. I’m not sure why, but in investing somehow somewhere got this reputation as being a solo sport that you have to do this by yourself. And I just don’t; I don’t agree with that. And I think that I think having another person that you can use as a sounding board is, is a great resource if you can find it.

Andrew (51:49):

Yeah. I agree. You know, as you were saying that I was trying to think what can be a great, applicable way to do that because I know I started, like, I couldn’t find anybody to talk to about it. And whenever I did try, I was just, you know, they weren’t on my level. What does come to mind is we have that Facebook group for value trap spreadsheet clients. And so, you know, that’s a place where you can bounce ideas off, and people have done that. It’s, it’s not a guarantee that, that they’ve ever, I will, will participate and bounce ideas off, but sometimes we do. And so that’s been, I think, a good place where people can go and check that out and, and, you know, that’s, that could be one option.

Dave (52:31):

All right, folks, we’ll that is going to wrap up our conversation for this evening. I wanted to thank Andrew and Ellen for sending in that great question and allowing us to talk about the circle of competence and allowing me to interview Andrew on the podcast and pick his brain about semiconductors. Cause I know, I learned a lot, and I hope you guys did too. So without any further ado, I’m going to go and sign us off. You guys go out there and invest with a margin of safety emphasis on safety. Have a great week, and we’ll talk to y’all next week,

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