PW: Welcome to “The Investor Coaching Show.” I’m Paul Winkler, talking about money and investing and walking through the news of the week. This week, Anne Sawasky did all the walking through the news for me, and she came up with some really good things I love.
AS: Yeah, I think it’s going to be interesting today.
PW: I think this is going to be really, really good, so let’s jump in.
You tell me what you want to talk about first. There’s a whole range of things, and most of them I read already, but there are a couple of them that I didn’t quite get into.
Amazon Being Sued
AS: Well, I don’t know. Should we talk about the elephant in the room, which is Amazon being sued by the FTC in 17 states for anti-competitive and monopolistic practices?
PW: I think we can. I am a fan of the services that they provide. I do like that. But I have seen things over time where you go, “Well, you hear things.” We say “anti-competitive practices” in that you come up with a product that really, really doesn’t sell and you’re just fine.
AS: Yeah.
PW: You don’t have to worry about putting your product out there and worry about any competition. But if you have a product that’s really, really good and hot and everybody wants to buy it, then all of a sudden you’re competing with them from what I understood. Is that part of it?
AS: Well, that’s part of it. It’s that they are taking monopolistic control over competition.
They control 40% of the market.
PW: That’s unreal.
AS: That’s a lot.
PW: And you go out there to other places that actually ship things.
AS: Yeah.
PW: I have actually made the decision in some cases to buy something from somebody else just to put the business someplace else.
AS: I do that. Honestly, I try not to use Amazon just because of that reason. I don’t know. I always like to support the little guy.
PW: Well, I’m all about convenience to a certain extent. But yeah, so that’s interesting. From an investing perspective, I think that we probably ought to talk about what that has to do with investing.
AS: Well, yeah, and see here, I think this is multifaceted. Part of it is that they are trying to stop them, they’re issuing a permanent injunction to prohibit Amazon from engaging in this unlawful conduct and to make Amazon loosen its monopolistic control.
They allege that Amazon is doing anti-competitive practices in a number of fashions. One is that when you do a search on Amazon, they control what comes up.
PW: Yep, sure.
AS: Let’s say they have a similar product that they’re selling directly. That will come up before the other one of the third party vendor.
PW: Yeah, it’s like “amazon preferred,” or it’s a word like that. I can’t even remember.
AS: Yeah. That’s a pretty good argument for anti-competitive practice right there is that you’re prohibiting people from seeing your competitor’s product, because the reality is people aren’t going to keep searching page after page after page to get down to some other competitor’s product.
That’s not how people work on the internet.
Investing Markets During the Trump Administration
PW: For me, here’s what I think is really salient about this and very interesting: With investing markets when Trump was president, you saw a dominance of large companies. Now you think of Trump as being a guy that’s going to be a reformer, as a lot of people paint him that way.
AS: Yes.
PW: He’s going to be a reformer, he’s going to come in, he’s not going to mess around, and he’s going to come in and take down some of the powers that be. That is kind of how it was painted. Really I thought, “There are a lot of things that he’s doing,” and I remain agnostic in all of this stuff as much as I possibly can here, and I can argue both sides of a fence on something like nobody’s business just because I get both sides of the argument.
But here’s what I saw as an investment guy during that period of time, and this is what can change in a heartbeat: large US growth companies actually dominated. Now these are companies that, for all intents and purposes, when he was president, he probably should have been really concerned about because they were doing things and putting out information and being the broadcast medium for a lot of information that was very anti-him.
AS: Well, yes.
PW: You know what I mean?
AS: Mm-hmm.
PW: What is interesting to me is those companies actually prospered during that period of time and did very well.
AS: They did.
PW: And they got bigger.
AS: Mm-hmm.
PW: Then of course you have tariffs in other countries around the world, and those tariffs didn’t just affect China, but they also affected some of our allies as well.
It made it hard for some of the smaller companies in other countries as well as in the US to compete.
Hence what happens is when you have something like this that takes place, I look at it as, “Wow, this could really give a leg up or really help out smaller companies or companies that have been out of favor for a while,” which is by definition what we call value companies.
AS: Right.
Baby Bells
PW: The hard thing is that as an investor we sit there and go, “Gosh, we want to be diversified here, diversified there.” Why do we want all this diversification? Why do we want to be in all these different markets? Because news like this can come around the bend at any time and it could change the whole playing field.
AS: Yeah, because actually one of the articles that I literally just saw came in had a heading that said, “Existential Threat to Amazon,” which could be because they say right here, “Many wondered whether the agency would seek a forced breakup of the retail giant.”
PW:
Can you say “Baby Bells”?
AS:
Yes, that was exactly where I was going, and that is what they do with monopolies.
Monopolies are viewed to be anti-competitive; they can control pricing, and they can drive out competitors.
And by the way, this isn’t only Amazon, it’s tech. This was focused on other tech giants as well.
PW: Well, let me just say something really quick because some people out there may not even know what I’m talking about with Baby Bells because they’re not old like me.
But the idea was that you had a Bell telephone, and that was it. It was kind of like you didn’t have any competition. It broke up, and it’s interesting what happened. The story behind the Bell telephone, when that breakup occurred, really after a while, it was this great breakup and you had business spread all over the place. It was a forced breakup, but they actually started to come back together as time went on.
AS: They did, yes.
PW: Which is just kind of like —
AS: It’s weird.
PW: Yeah, it is kind of weird. To quote Chris Hand, “It’s weird.”
AS: It is, it is. That really shouldn’t happen. Yeah.
PW: But that is what happened.
AS: Right.
PW: In essence, that’s what we’re talking about. It was a breaking up of that, but go ahead.
Implications for Small Businesses
AS: Well, I was just going to say, this has implications on small businesses to your point, because they were saying one of the arguments in here is that they are charging exorbitant fees — up to 45% of revenue for third parties that are using their site.
PW: Wow.
AS: That’s a lot of money that a third party vendor on Amazon is having to give them to get their product out there.
PW: Well, I’ve often heard that their biggest profit center is just plain advertising, and it’s not necessarily the sale of products, where you typically have a retailer buy something, they mark it up, and they sell it to the public. That would be advertising, yeah.
AS: But Amazon too has so many other legs to it. They have a data component, and Google is the same way. They sell big companies engineering and data management too, so they have their fingers in businesses not only in the US but all over the world and control the tech for them. Even, they just said, things like food — people order groceries and everything from Amazon these days.
PW: Having a legal background like you do, I can only imagine how much time it would take to litigate something like this.
AS: Yeah, I —
PW: It could be years and years and years in courts, right?
AS: Yeah, it could be, but you know what? With something like this, my guess is it’s not going to go to court.
My guess is they’ll settle somehow.
PW: I think that’s a good point, and probably what’ll happen is they may start to straighten out some of the practices so as not to be a target.
AS: Yeah, they might. I hate to be negative about it, but a lot of these states, when they get on board this, they just want a big payoff to go into the coffer of the state and then they’ll go away.
PW: No, no, no.
AS: I’m sorry.
PW: Say that’s not so. No, no, that can’t be.
AS: But 17 states are getting on board, and that’s usually what happens. They don’t usually end up doing anything but getting a payoff. It’s like the tobacco thing and so on. I don’t know.
PW: Some of the foreign governments have actually been fairly effective at dealing with it. That little country I talked about a few weeks ago that ended up getting the USBC into the Apple iPhone.
AS: Yeah. Yeah.
PW: Who knows, maybe it’ll be a foreign government that pushes it more than our own government. But I think that the point is you just don’t know. You can’t predict how things like this will turn out and how it will affect marketplaces and how it will create more competition.
AS: Right.
PW: Which raises the level of all boats out there.
AS: It does. Because if you’re able to cut the expenses of a lot of these small- to medium-sized businesses using Amazon by or helping them to market more effectively or breaking up Amazon and some of these other big tech giants, that’s going to have a huge effect on small and value companies. But again, we don’t predict the future at all.
PW: No.
AS: But these are classic cases of things that you couldn’t have seen a few days ago.
PW: Right, right, and I think that’s the educational part of this show.
Don’t Try to Predict the Future
Don’t try to predict this thing, but do be aware that these things come out of the blue, and recognize that you’re not going to be the one that predicts what’s going to happen, how long it’s going to take, and what the effect is, and therefore be able to pick which stocks to buy, which ones to get rid of, and what areas of the market to buy into.
Tactical asset allocation is a huge waste of time, which is most of what the investment industry engages in. That’s the point I like to make. I have workshops where we go through — I don’t care, name a financial company, any financial company except for ours — and you will be naming a company that if you go to their website has on their website all of this talk about the active management that they engage in.
AS: Mm-hmm.
PW: You don’t recognize that they’re doing it because they don’t tell you that they market time or they stock pick, but they say it in different ways. “We look for underpricing,” or, “We look for overpricing,” or, “We look for opportunities,” or they may say, “Active management.”
AS: Tactical asset allocation.
PW: Yeah, tactical asset allocation sounds great. Yeah, I’ve heard asset allocation is great. It’s a totally different animal. I think it’s important to understand that.
AS: Right, right.
PW: I think that’s going to be interesting to watch, and we’ll certainly keep an eye on that, but the point is that if you look at some of these, this is where complacency can be a real problem.
We’ve done this before, where we take big mutual fund companies and we look at how much money is in big growth stocks compared to the rest of the market, and you will see that large growth stocks dominate portfolios. That means they most likely dominate your portfolio. That is where it comes out of the blue.
This is the same thing. I feel like I have to repeat myself because we look back at the late ’90s. Literally, I was working on opening this company in the late ’90s, just before the tech bubble burst. My first full year of operation was the year 2000, and in March of 2000, that’s when the stuff hit the fan. Most investors were just caught; they were the king out in the water with no underwear on. When the tide went out, it was not pretty.
AS: 70% drop?
PW: Yeah, it was 80% actually, yeah, exactly. You look at that and go, “Wow, that’s a huge drop.” Most people were completely unprepared for it because they were complacent because it had been so good for so long for those companies.
AS: Keep in mind, this isn’t just Amazon. The FTC is targeting the monopolistic practices of other large tech companies as well. Those are the ones that have done great recently.
PW: The Microsofts, the Apples.
AS: Right. I think it could have a lot of ramifications beyond just Amazon.
PW: It will be interesting. I’m going to be fascinated as to where this all ends up going, and I hope it does go somewhere because I am a big advocate of competition because competition makes everybody stronger and makes everybody better.
In the end, the consumer wins when there’s competition.
AS: Right. All ships get raised.
PW: That’s right. You’re listening to “The Investor Coaching Show.” I’m Paul Winkler, along with Anne Sawasky. We’re going to take a quick break and we’ll be right back after this on Supertalk 997 WTN.
Advisory services offered through Paul Winkler, Inc an SEC registered investment advisor. The opinions voiced and information provided in this material are for general informational purposes only and not intended to provide specific advice or recommendations for any individual. To determine what investments are appropriate for you, please consult with a financial advisor. PWI does not provide tax or legal advice. Please consult your tax or legal advisor regarding your particular situation.
