How to pick winners; be like Apple

Apple has acquired more AI startups than any other company. There is a sense of realism behind this strategy. As an investor, if you want to pick winners, be like Apple.

Article updated: 27 July 2020 12:00pm Author: Michael Baxter

Question one: why aren’t western governments good at picking winners?

Question number two: is the Chinese government any better at picking winners.

The answer to both is related: The western government’s approach to picking winners isn’t very successful as they are not like Apple. The Chinese government might be because it is.

Let me elaborate. There is a lot of randomnesses out there, predicting whether a specific company will be a runaway success is probably impossible. You can, however, predict that there will be runaway successes in a particular sector, but it is much harder to predict which ones.

An example

Back in the year 2000, it was clear, to those who worked in the area, that the internet would create some very large companies. But how could you know which ones would make it? Imagine you had invested £1,000 into 100 tech companies in the year 2003, and one of the 100 was Apple another was Amazon.

Frankly, it is highly likely that of your 100 strong tech portfolio, Apple and Amazon would have been among them.

Now assume 98 companies in your portfolio went bust. Despite this catastrophic performance, right now, you would have been sitting on a 400 per cent profit. If you had also invested in Nvidia, in the year 2000, you would have increased your money five-fold. And of course, it is highly unlikely the remaining 97 would have gone bust, I took an extreme example to illustrate my point.

Instead you had tracked FTSE 100, your money would have increased by 50 per cent. Sure you would have got dividends too, but don’t forget Apple has paid out an enormous sum in dividends and share buybacks since 2003.

Where governments go wrong

In picking winners, governments typically make two mistakes.

Firstly, they tend to invest in large established firms, often sitting in mature industries, with limited scope for growth. By contrast, startups are more likely to develop world-changing businesses and are most certainly more likely to enjoy exceptional growth.

Secondly, they tend to focus on a small number of companies.

So returning to my investing in tech in 2003 scenario, a government trying to pick winners would have been more likely to fund half a dozen firms operating in mature industries such as car manufacturing.

Why China might be different

The problem with China’s approach to picking winners is that an awful lot of money is wasted.

But if you had invested in 100 techs in 2003 and 97 of them had gone bust, you would have wasted a lot of money; it is just that you would have still seen your portfolio outperform the FTSE 100.

China is wasting money, that is for sure, but it is investing in a considerable number of startups, many in AI. It doesn’t matter that most will fail. What matters is that a handful goes on to be spectacularly successful.

The lesson of Apple

Apple has acquired 20 AI startups since 2010. That’s more acquisitions in this area than any other company. Alphabet has acquired 14 companies, Microsoft 10, and Amazon and Facebook 7 each. 

Many of these startups had technology that dovetailed into technology that the acquiring companies were developing.

But I suspect that in a few years, many of the acquisitions will look like bad deals.

But that doesn’t matter. What matters is that there are enough successful deals to make up for the bad ones.

Your approach

You can follow this diversification approach in one of two ways.

You can choose a sector you think has massive potential and invest in lots of companies. The only snag here is that many of the startups that will ultimately change the world are not listed on the stock market, yet.

Or you can invest in companies that are doing this for you. Investing in a handful of companies can pay-off handsomely if those companies are themselves investing in startups in the sectors you believe in.

I happen to think AI is one of the most exciting sectors around at the moment — another exciting area being health-tech, but then this sector overlaps with AI.

Apple, Alphabet, Microsoft, Amazon, and Facebook have acquired 58 AI startups between them since 2010. (And collectively invested in many more, especially Alphabet.)

Or you could put it another way, invest like Apple, or invest in Apple.

These views are those of the author alone and do not necessarily reflect the view of The Share Centre, its officers and employees

Michael Baxter portrait photo
Michael Baxter

Economics Commentator

Michael is an economics, investment and technology writer, known for his entertaining style. He has previously been a full-time investor, founder of a technology company which was floated on the NASDAQ, and a director of a PR company specialising in IT.

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