Why I Sold Alibaba

What a year! Today marks the the One Year Anniversary to the creation of my blog, and how far have we come.

A lot has changed to my investing strategy, mindset and skillsets that I acquired the past year.

And to all readers who joined the investing journey with me, I want to say a huge thank you for all the support and for reading my blog posts over the past year despite your busy schedules, because the views give me immense satisfaction and I am heartened to be able to deliver additional value and insights to knowledge-hungry individuals like you and hope to continue doing so.

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Today’s focus is on the decision that will sound crazy to me if you were to tell me this 1 year ago, and that is: Selling my Alibaba Stock.

Selling Alibaba was a tough decision given that I am very bullish about the future prospects and capital gains potential of the business in the long run.

It used to be one of my top positions and I even averaged down even when everyone were afraid of what’s happening to Alibaba when China regulators decided to crack down on Ant Group and a slew of bad news lingered around this massive growth giant.

So why did I sell Alibaba?

Opportunity Cost

The fundamental reason I sold it was due to opportunity cost.

What opportunity cost? To put it simply, my portfolio of stocks and crypto right now are growth-oriented, and after giving some time to think about how I want to allocate my portfolio, I decided that to attain the highest alpha in the long run, I have to compensate and withstand higher volatility in return.

Alibaba is a mega-cap company with a market cap of $590 Billion as of 5th July 2021.

Market Cap is a factor to determine potential upside over the long run

When we look at stocks (or even crypto), it is important to not give too much attention to the current price of the asset.

Ironically,_ price is the one thing that most beginners and speculators pay the most attention to, and without any sound analysis or due diligence, most people just conclude whether the stock is “cheap” or “expensive” simply by comparing it to the 52-Week price range.

Guilty of doing this eh? Don’t worry, I was once that fella who did that too.

The important thing to note here is to keep reminding yourself that price alone tells you nothing about a stock. It is very easy to forget that stocks are businesses and owning a stock of a company is to become a shareholder of the business no matter how little shares you own.

Alibaba is a mature business

Going back to Alibaba, so the reason it didn’t fit my criteria anymore was because:

Alibaba is already an established, mature and already in its late stage growth cycle.

The stock price has already priced in the growth of the company since IPO, and expecting Alibaba to become a 10-bagger is basically close to impossible. For Alibaba to 10X from current prices, Alibaba would essentially become a $5.9 Trillion company! Just the thought of it alone is insane.

Majority of my growth stocks right now are Mid-Cap companies with a market cap of around $100 billion or less.

Stocks in this category of market cap in my portfolio (at the point of writing) are:

1. Square Inc – $109 Billion Market Cap

2. Coinbase – $50.2 Billion Market Cap

3. Teledoc – $25.4 Billion Market Cap

4. Etsy – $25.1 Billion Market Cap

5. Fiverr – $8.64 Billion Market Cap

6. Roku Inc – $56.9 Billion Market Cap

7. *Shopify Inc – $182 Billion Market Cap

As you can see here, majority of my stocks position right now have a market cap of $100 billion or less, what this means is, if the companies were to grow bigger and become a $200 billion or even a $500+ billion business like Alibaba, their share price would follow suit over the long run.

This can be an important metric to keep in mind the next time you want to consider whether the stock you picked has the potential to become a “Five-Bagger” (5X) or a “Ten-Bagger” (10X) based on its current market cap.

A smaller market cap means that the companies are generally still in their early stage growth phase, and hence, have a huge room for growth, and potentially market beating returns over the long run. However, do take note that smaller cap stocks tend to underperform the market during bear markets and market corrections, and not all small cap stocks will eventually become large cap stocks as well.

This brings me to the next part of the equation:

Total Addressable Market

What is total addressable market? In short, it is the market sizing or how much “treasure chest” there is for companies to tap into, and hence, if they were able to get a significant chunk of the pie, they might potentially make big money and reward their investors with handsome returns in the form of share price appreciation.

Alibaba, in this case, operates mainly in the E-commerce market. The E-commerce market is filled with competition from all fronts, such as Amazon, Mercado Libre, Shopee, Coupang and many more.

The E-commerce market really started booming when Amazon started taking over the market by storm, and slowly followed by Alibaba in China with the TaoBao craze back in the 2010s.

Today, the market share of the E-commerce market is owned significantly by key market players with incumbents like Amazon and Alibaba. While I am not saying that E-commerce has already reached its peak (it certainly has not), what I am trying to put across here is that Alibaba has already experienced its ‘growth-spurt’ phase in the 2010s and has managed to consolidate their market share and attaining an immense market cap of $590 billion at the point of writing.

While Alibaba is still a blue-chip and can continuously grow at a CAGR of 20% or higher and generate impressive returns over the long run, it doesn’t quite make the cut for me as I am even more aggressive in my stocks allocation.

With share prices of Coinbase irrationally beaten down in June due to the fear and uncertainty in the crypto markets, I decided to rotate my Alibaba capital into Coinbase because crypto is still such a young, nascent industry and the total addressable market potential is monstrous.

The crypto market has a total addressable market in the trillions of dollars and it might be even more if more sectors gets disrupted or developers discover new use cases or technology.

Why Coinbase? Why not just buy Bitcoin directly?

The reason why I chose to allocate to Coinbase is because it is an investment allocation to the entire crypto space.

When crypto eventually becomes mainstream and we see billions of new users of blockchain technology, Coinbase will be the company to benefit from all the growth and adoption that is bound to happen in the future.

Buying Coinbase is almost equivalent to owning the S&P 500 ETF of the crypto space because they have support for hundreds of crypto tokens and they offer a multitude of crypto financial services beyond the scope of just being an exchange.

In short, Coinbase is a network-effect business and a software/technology company. It is very much like Apple or Google or Facebook, and I believe the next FAANG stock will have Coinbase in the mix.

While Coinbase is not the largest crypto exchange (that’s Binance), Coinbase still has a significant market share in the crypto markets and a dominant player in the United States.

Not only is Coinbase a founder-led company, the business is literally selling below its direct offering price of $250/share. That sparked my attention and I gave it a good due diligence and research into the company before I eventually decided to allocate greater into it.

Like Peter Lynch mentioned in his book “Beating the Street”, every time a stock gets irrationally sold off due to fear and fund managers are dumping them, it is the perfect time to swoop in and pick up those bargains.

That is what I did for Coinbase when it was on sale in the market for less than $220/share back in June.

At a market cap of $50 billion at the point of writing, it was an absolute steal and I am sure it will end up as one of the Multi-Baggers (3X/5X/10X) in my portfolio over the long run.

Conclusion

Alibaba is still an impressive company nonetheless and a popular stock among top fund managers and included in almost every fund that is outperforming the market right now.

While the potential for growth might be impressive over the long run, given the market cap of Alibaba and the business cycle that Alibaba is in right now, I had to trim it off my portfolio in exchange for a faster, smaller and more agile company in a growing and exponential market and that is Coinbase.

When majority of crypto prices were down 50% or more, Coinbase likewise saw a similar drawdown given its association with the crypto market. There is literally nothing wrong with the company at all: Fundamentals are the same, company is still expanding, forging more partnerships, developing more products, generating more revenue and acquiring more market share.

That was when I saw the perfect opportunity to average down my average cost and having a bigger allocation into the stock.

There was no reason not to buy in given that the direct offering of the share price went at $250/share, and being able to get in at a cheaper share price than the private investors is a huge win for retail and setting myself up for success over the long run.

My convictions in the stock is not only due to my own research and analysis in the company itself, but also my overall conviction of the entire crypto space.

I am extremely bullish about the future of blockchain technology and the life-changing potential we will be able to experience and real-world use cases such as supply chain, healthcare, financial services and even providing a livelihood for emerging economies through a new phenomenon known as Play-To-Earn.

Axie Infinity – A game which allow players to earn an income while playing

If you are in my Telegram Channel, you would have heard me mentioning a crypto-based game called Axie Infinity, which essentially is a combination of Hearthstone (Card-Game) and Pokemon. The monsters, or Axies are each NFTs and are unique. Owning the Axies would mean full ownership over it as you are the sole owner of the NFT and this can be seen on the blockchain.

Players can battle and win rewards in SLP (Small Love Potion), which is an ERC-20 token based on the Ethereum Blockchain and can be sold for cash. This seemed impossible to happen but with crypto and blockchain, anything can happen! And that is why I am so intrigued by this new technology, because the possibilities are literally endless.

I will be covering this game in more details in the near future as well, and guide you through if you wish to get started as I am already playing the game myself. Please stay tuned.

Do you share the same sentiments as me? Am I being too unreasonable or expecting too much from my investment? Am I too greedy for aiming for a 5X or 10X in the long run than a steady and established business? Leave your thoughts and comments below!

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The Power of Low Fees (My US Broker!)

One huge advantage I have as an investor is paying very minute fees which can really eat into returns in the long run because I am using Firstrade to buy US Stocks which has absolutely $0 fees and extremely fast wire transfers for deposits and lightning fast trade executions.

Ever since I switch to Firstrade last year as my main investment vehicle, I saved up on a ton of fees and hence able to achieve way better returns than before. I saved up more than 5 times the fee paid in 2018, 2019 and 2020 this year due to the switch and I am really happy thus far.

Of my entire investments in 2020, fees only take up 0.1% of my entire portfolio! (2018+2019+2020 combined across all brokers)

Alright that’s it! For now, think long term, tune out the noise and avoid the temptation of gambling meme stocks, think of the companies that will do well in the long run simply find bargains/dollar cost into your positions. If you need some inspiration for companies to research, you can check out my post on 5 stocks to buy if the market crashes here.

Disclaimer:

The content here is for informational purposes only and should NOT be taken as legal, business, tax, or investment advice. It does NOT constitute an offer or solicitation to purchase any investment or a recommendation to buy or sell a security. In fact, the content is not directed to any investor or potential investor and may not be used to evaluate or make any investment.

Do note that this is not financial advice. If you are in doubt as to the action you should take, please consult your stock broker or financial advisor.