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DeepSeek's Disruption and What It Means for Your Investments

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January 28, 2025

TLDR: Investor Stephen Yiu discusses reduced stakes in major US tech companies due to AI costs concerns by 2024 and his current investment outlook. His fund is backed by billionaire Peter Hargreaves.

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In the latest episode of Merrin Talks Money, Stephen Yiu, founder and manager of the Blue Whale Growth Fund, shares insights into the recent sell-off in big tech stocks and the transformative potential of artificial intelligence (AI). Yiu discusses his investment strategy in the context of evolving market dynamics, emphasizing how to identify opportunities amidst uncertainties.

Key Takeaways

Understanding Market Dynamics

  • Recent Market Trends: Yiu highlights a notable reduction in stakes in major US tech companies like Microsoft and Meta due to rising costs associated with AI development.
  • Growth Fund Performance: The Blue Whale Growth Fund has yielded an annualized return of over 14% since its inception in 2017, significantly outperforming UK peers.
  • AI's Economic Impact: Yiu expresses confidence that AI will revolutionize sectors, proving a deflationary force that may increase productivity and lower costs.

Investment Philosophy

  • Quality Focus: Yiu emphasizes investing in high-quality companies with sustainable business models, capable of maintaining profitability in changing environments.
  • Concentration Strategy: The fund targets 25-35 high conviction stocks, favoring comprehensive research and depth over quantity.
  • Market Sentiment: Yiu stresses the importance of differentiating perspectives to outperform passive strategies and adapt to market shifts.

Reflections on AI and Tech

  • Big Tech Concerns: The shift in strategy involves scaling back on some traditional tech giants, reflecting concerns about valuation versus performance.
  • DeepSeek Breakthrough: The advent of solutions like DeepSeek, a Chinese AI product, threatens established players by lowering the cost and energy intensity of AI applications, prompting a reevaluation of investments in traditional infrastructure.

Opportunities Ahead

  • Emerging Tech: Opportunities abound within AI and its applications, as companies rapidly adapt to new efficiencies without excessive capital expenditure. Yiu notes that such innovations can catalyze a new wave of tech companies and solutions.
  • Sustainable Growth Sectors: Yiu discusses how sectors like gaming, particularly sports betting, are emerging in the US market due to shifting consumer spending habits, offering robust growth prospects.

Strategic Outlook

  • Long-Term Perspective: Yiu’s research is grounded in long-term forecasts, targeting free cash flow projections over three to five years to assess company sustainability and potential market share capture.
  • Market Adaptability: The fund's adaptability allows it to pivot away from overvalued companies while remaining open to innovative tech firms that present compelling growth narratives.

Practical Applications for Investors

  • Evaluating Investments: Investors should consider both qualitative and quantitative measures to assess the sustainability of business models in tech and emerging sectors.
  • Staying Informed: Keeping abreast of technological advancements, particularly in AI, will be critical in understanding market dynamics and investment viability.
  • Risk Management: With increasing volatility in tech stocks, maintaining a diversified but highly concentrated portfolio may provide a buffer against market downturns.

Conclusion

Stephen Yiu’s insights on the interplay between AI developments and market investments serve as a roadmap for navigating the complexities of modern investing. The evolving landscape presents both risks and opportunities, requiring investors to stay informed and adaptable. As trends unfold, those who can identify quality businesses poised to thrive in these environments will likely succeed.

Reading Recommendations

  • Yiu is currently reading Lucky Loser: How Donald Trump Squandered His Father's Fortune and Created the Illusion of Success, reflecting on the impact of personal narratives on public perception and economic policy.

By centering on quality stocks and leveraging understanding of AI’s implications, investors can position themselves meaningfully in this dynamic market.

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