Three Great Lessons from Peter Thiel’s Portfolio
Rookie investors have traditionally looked up to veterans for investment advice. But where do they go when the veterans get it wrong? (I’m looking at you Mr. Buffett!) Well, I say, forget the Buffetts and Mungers of the past. Instead, look at Peter Thiel—one great investor of the 21st century technology era. Peter Thiel’s net worth has hit $2.7 billion in just under a decade and a half, solely on the back of his investments in new startups and technology stocks.
Stick around for the three best tech stocks I’ve filtered through Peter Thiel’s investment advice, which have roughly returned as much as 290%, 890%, and 270% in just five years, respectively.
You see, with the rise of “Industry 4.0,” the tables are turning on traditional businesses and investors alike. A new breed of investors is now taking birth. And, blimey! All of them seem to have found a shortcut to quick riches.
What are they investing in, you ask? Technology stocks, duh!
These new investors call themselves “venture capitalists,” and they have their roots in Silicon Valley. By the way, that’s where the money minting machines of this age are being set up. These metaphoric machines are actually the tech titans of today that are jointly worth, not billions, but trillions of dollars.
Yet, some traditional investors failed to see their hidden value in time. They let them slip under the radar when venture capital investors like Peter Thiel loaded up on them. Seasoned investor Warren Buffett is one startling example.
At Berkshire’s annual shareholders meeting this year, Buffett accepted publicly that he got it all wrong on technology stocks. He regrets not having made a move when the time was right.
Thiel, on the contrary, got it right on tech stocks. One can easily see why. As a lord of the “PayPal Mafia,” Thiel had both the prowess and the experience for picking the right technology investments.
But I’ll understand if his name doesn’t ring a bell to you. After all, he doesn’t make as many headlines as, let’s say, the other lord of the same mafia, Elon Musk. And as to why I am calling them the PayPal Mafia lords…well, that’s the title Silicon Valley bestowed upon them.
Peter Thiel, Elon Musk, Reid Hoffman, Max Levchin, and Ken Howery are some of the PayPal founders who, after selling Paypal Holdings Inc (NASDAQ:PYPL) to eBay Inc (NASDAQ:EBAY), went on to build multi-billion-dollar net worths. How? Through their tech investments and post-PayPal gigs.
The point being, they were investing in the budding tech sector when Buffett and other conventional investors were shunning it.
Today, it wouldn’t be wrong to venerate them as the founding fathers of some of the best technology companies of the 21st century.
Let me give you a hint of the kind of tech titans Thiel and the mafia boys either created or invested in. These are Facebook Inc (NASDAQ:FB), Tesla Inc (NASDAQ:TSLA), SpaceX, LinkedIn Corp (NYSE:LNKD), Airbnb, Inc., Lyft, Spotify, and Palantir, to name a few.
But that’s only the tip of the iceberg, for there are tons of other great startups drawing financing from the mafia’s venture capital firm, Founder’s Fund (the name says it all, I suppose!), which Thiel jointly manages with others.
So let’s cut to the chase and begin dissecting the philosophy behind Peter Thiel investments in order to uncover the three best technology stocks for 2017.
Lesson No. 1: Invest in Monopolies
Peter Thiel has an odd notion. To him, capitalism, which builds its foundations on free markets and competition, is actually bad for businesses. Thiel believes monopolies are better investments than perfectly competitive businesses.
But wait! He doesn’t mean all monopolies. Only a certain kind.
Thiel has coined a special term for them. He calls them “creative monopolies.” These are the kinds of businesses that create value for the larger good of both themselves and the society. So they are not exploitative, like most monopolies are believed to be, but rather, they are creative.
It’s easy to see why Thiel likes these monopolies. It’s because a monopoly knows it’s the only one of its kind out there, so it doesn’t have to worry about making money. All it needs to focus on is conducting its business and money will naturally flow to it.
Now contrast a monopolist with a business functioning in a competitive landscape. Nearly all competitive businesses within one industry are inherently alike. They keep fighting tooth and nail to steal each other’s customers, but no one is really a winner at the end of the day. That’s because everyone wakes up the next morning black and blue.
Restaurants are one example Thiel often cites. He’s absolutely right! There are way too many of them out there and nothing really differentiates them from each other. A bowl of salad, a plate of sushi, and a shawarma wrap look and taste nearly the same everywhere.
So for venture capital investors, competition is a curse. As Thiel likes to put it, investments in competitive businesses mean “no profits for anybody.”
This brings us to the best tech stock that perfectly fits Thiel’s description of a creative monopoly: Facebook Inc. There’s only one of it out there, it’s creating value, and it remains unbeatable.
Facebook holds a unique edge for being the biggest social media company, connecting nearly two billion people on the planet to more than 50-million businesses. It is heavily monetized in that it makes way more money than all of its competitors combined—it made $7.85 billion in the last quarter alone! Finally, it is creating value for both stockholders and the society.
The value to stockholders is evident from its price chart below. With a steady northward stride, FB stock has delivered a solid 290% in return in just five years of going public.
Chart courtesy of StockCharts.com
As for value to society, I always like to mention Facebook’s “Internet.org” initiative with which the company is making an effort to connect remote parts of the world to the internet. Of particular note is its drone technology in the making. Facebook is building a solar-powered drone, “Aquila,” that will beam Internet from the sky by flying over areas not connected with, say, an optic fiber Internet cable.
These and a number of other bets in next-generation technologies, like artificial intelligence, deep machine learning, and virtual reality make the stock of this tech behemoth, in my view, the best tech stock in 2017.
Thiel, too, is invested in the company, and he did so when Facebook was still in its infancy. His modest investment of merely $500,000 has now turned into more than $1.0 billion!
So FB stock is definitely worth a look, my friends, because better late than never, right?
Lesson No. 2: Invest in Businesses That Don’t Need to Spend Much to Sell
Peter Thiel is very blunt on this one. According to him, the technology sector should worry about developing products, not distributing them. He believes any business could be valuable if it doesn’t have to spend anything to sell itself.
Wait, is that even possible in this age? I mean, how is it viable for any company to not advertise and still manage to make noteworthy sales?
Well, there’s one company that spends absolutely nothing on marketing. Zilch!
No, you didn’t read that wrong the first time. Yes, it has zero advertising expense. I am talking about Tesla Inc, the solar technology company that has absolutely no marketing department, no dealerships, and runs no media commercials. It saves itself from both the hassle and the expense of advertising by merely and loosely employing word-of-mouth marketing.
In case you don’t know, Tesla sells directly to its clients through its web site, thus involving no intermediaries and without spending a penny on ads. Any ads you’ll see of its cars are actually fan-made.
This means that people like the company so much that they help spread the word around, without Tesla ever asking for it. Thus, its clients help in building a very strong brand recognition for the company.
The most the company has ever done is to open a contest for fan-made commercials. That too, after a dad posted a letter from fifth-grade daughter (and Tesla fan!) to Twitter, asking Elon Musk to hold such a contest. (Source: “Exclusive: Letter From Child Prompts Musk To Run Tesla Fan-Made Commercial Competition,” Inside EVs, March 1, 2017.)
Yes, the same Elon Musk of PayPal Mafia fame, who is both the founder and CEO of Tesla. So, here too, Thiel has invested, but for more reasons than just having close ties with the company and its founder.
You see, Tesla doesn’t just sell all-electric cars. Following its acquisition of SolarCity Corp (NASDAQ:SCTY), Tesla now sells a complete line of solar energy products, including solar batteries, solar panels, and solar utility solutions. All of its products complement each other, creating a fully integrated solar energy-based business model.
What’s more; the company is undergoing massive growth. It has recently opened orders for the first-of-their-kind solar roof tiles and is putting its mass market car, the “Tesla Model 3” on the production line in two months. Plus, an all-electric semi-truck is also in the works.
All in all, TSLA stock is a promising growth play right now that has already delivered a staggering 890% in returns in just five years.
Chart courtesy of StockCharts.com
Lesson # 3: Invest Where No One Is Looking
Now, this is interesting! Thiel was the first venture capitalist of his stature to make a very peculiar investment, and this was way before it became a popular investment idea.
Back in 2014, his VC firm, Founder’s Fund ,invested in a marijuana company. Yes, that’s right! Thiel invested in a pot company long before “Mr. Market” moved in on the idea.
He invested in a Silicon Valley marijuana startup, Privateer Holdings, which is running three subsidiaries: a famous marijuana brand called “Marley Natural,” named after Bob Marley; a medical marijuana company, Tilray; and the popular marijuana news web site, Leafly.com.
It’s intriguing how Thiel saw value in this industry long before the 2016 elections, when the polls swung in favor of marijuana and new states legalized it, before Canada flashed the green signal on federal level legalization and, likewise, before the market herd moved in on the marijuana industry.
The North American marijuana industry, by the way, became a $6.7-billion industry in 2016, and by some estimates, is expected to cross the $50.0-billion mark in the next 10 years.
Coming back to Thiel’s marijuana investment, Privateer Holdings is a private company, so average investors cannot really make money off of it until it goes public. But there’s one great marijuana stock they can consider in lieu of a Thiel-like marijuana investment.
The company is a marijuana producer based in Canada which, at this point in time, is undergoing massive expansion within Canada and abroad.
I’m talking about Aphria Inc (TSE:APH).
Based out of Ontario, Canada, Aphria employs technology to grow medical-grade marijuana strains in its outdoor greenhouse facilities and then sells them to medical marijuana companies both locally and internationally.
The company has recently expanded into the U.S. market and is one of the very few marijuana companies out there that are profitable.
As for its stock, it has spiked over 270% in the last five years, but nearly all of that surge came within the last one year, when the marijuana industry bloomed.
Chart courtesy of StockCharts.com
This is definitely one investment to keep an eye out for if you’ve found any wisdom in Thiel’s investment philosophy.
Now, here’s a bonus for you.
If you’re looking for another great investment idea where Thiel is now investing, then watch out for artificial intelligence (AI) companies. There are only a handful of public companies working on this technology, while most other remain private. Some great tech stocks focused on AI are Alphabet Inc (NASDAQ:GOOG) and Google, Amazon.com, Inc. (NASDAQ:AMZN), Apple Inc. (NASDAQ:AAPL), and Facebook.
Final Word on Investing in Technology Stocks
It’s true that the dot-com bubble has etched deep scars on our memories. Investors get the jitters from technology stocks, viewing them all as too risky. But tarring all tech stocks with the same brush is great folly, for tech is the inevitable future of all industries. So keep in mind that this sector is very well poised to witness a bull market for this and many years to come.
The three lessons from Peter Thiel’s investments can help you hunt down some more great technology stocks. Unless, of course, you don’t want to invest in tech stocks and regret it like Buffett some years from now.
So for me, the three stocks I pitched remain the best tech stocks in 2017. They may be worth looking at. After all, as Thiel says, “The biggest risk you can take is not taking any risk.”