How Much Should You Care About Where Big-Time Investors Put Their Dollars?

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When Warren Buffett invests, people pay attention — for good reason. Over the years, Berkshire Hathaway has generated huge profits for Buffett, his investors, and those who track their investments in their own portfolios. The Oracle of Omaha is so renowned for his market acumen that Googling his name returns a plethora of articles posted explaining why you should (or shouldn’t) follow his investing strategy.

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With Warren Buffet, it’s easy to see the investment appeal in his footsteps, as it were. But what should retail investors think about where to put their dollars — rather than hedge funds and institutional investors — big companies?

Amazon goes net-zero

First, let’s take a look at a particularly exceptional example of venture capitalism in motion.

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As part of its plan to achieve global (or at least online retail) domination, Amazon has adopted a new mission: to reach net-zero carbon emissions by 2040. But with the current technology behind the times, it has to take matters into its own hands.

This is why Amazon’s sustainability wing launched its $2 billion venture capital program in June 2020. Fully funded from Amazon’s own balance sheet, climate pledge fund It is expected to assemble a broad portfolio of tech-based startups seeking to disrupt climate-friendly innovation.

So far, Amazon has gathered 11 companies under its umbrella. in some cases, such as Rivian Automotive, an electric delivery vehicle maker, the online giant placed the purchase orders. in others, such as jirovia And infinium, both of which seek to decarbonize the aviation industry, with the mega-investor handing over funds to research and development.

Clearly, one area in which Amazon is particularly excited is its investment. CMC Machinery, The company recently developed an automatic packing machine that reduces the volume of its boxes by about a quarter. As a result, Amazon expects to reduce the use of plastic packing pillows by 1 billion by 2023.

Microsoft invests in cyber security

Let’s switch gears to look at an entirely different corporate investment strategy.

On October 28, Microsoft President and Vice President Brad Smith took to the company’s blog with an important message: America is facing cyber security skills crisis, For every two posts of Cyber ​​Security, one is left vacant. Furthermore, one out of every 20 open job opportunities is within the cyber security sector.

To address the problem, Microsoft announced that it was throwing millions of dollars and substantial educational resources into community colleges, grants, and scholarship funds to address the shortfall. Through its efforts, Microsoft hopes to recruit 250,000 students – half of the required workforce – by 2025.

Some of the company’s investments include:

  • Scholarships and financial aid for 25,000 students, including funding for 10,000 low-income students and military veterans
  • Cyber ​​security training for faculty in 150 community colleges across the country
  • Free Online Cyber ​​Security Courses for Community Colleges to Use in Their Courses

Recruitment aside, Microsoft also plans to invest $20 billion in cyber security over the next five years. Of those funds, $150 million is earmarked to help federal, state, and local governments grow their cybersecurity networks.

big fish and small fry

If you’re used to using big investors to help you find the best investments, it may seem like a no-brainer to match the two biggest companies on the planet. But when it comes to large-scale corporate investing, the math isn’t always that simple.

difference in drive

One problem with viewing corporations as investment models is that they often have different motivations than other investors.

For example, the goal of most small-scale retail investors is to build a retirement portfolio and generate some cash. Meanwhile, institutional investors look for the biggest profits and the safest moves to raise their bottoms.

But corporations often invest for reasons other than making a profit.

Take Amazon’s Climate Pledge Fund. In an interview about the fund’s goals, the fund’s head, Matt Peterson, stated that, “If it happens that the companies we invest in do well … that’s great. It shows that it’s going to do well.” There is a recognition … but it is not the main focus of the fund relative to the broader strategic goal.”

In other words, the company expects to effect change in ways that are beneficial to its specific long-term — not necessarily its immediate bottom line. Plus, Amazon can incubate innovation while avoiding the responsibility (and cost) of developing new technologies.

But the math is a little different for Brad Smith, president and vice president of Microsoft. Although benefits are part of the equation, the company seeks to deliberately effect social change on a large scale. After all, not every cybersecurity expert company funds will work for Microsoft — but that doesn’t mean the company doesn’t recognize the value of filling a void elsewhere, too.

In a virtual event, Smith said, “As we look to the future, we as a nation need to recognize that we are facing a cyber security skills crisis in the country. We can’t protect the country until then. until we fill the open cyber security jobs that exist today, and the single best way to organize the nation’s community colleges.

Deep pockets and longer time horizons

Another difference between corporations and retail investors is the level of risk that large companies can adopt. With big pockets comes great responsibility – and the ability to absorb losses if an investment goes bad or returns take years to materialize.

For example, some retail investors have the money, time, and knowledge to educate 250,000 cybersecurity students and teachers at 150 community colleges. Nor do they have $2 billion to devote to climate-saving innovation. But companies like Amazon and Microsoft don’t mention the ability to wait for returns over an extended time frame.

Take Peterson’s explanation of Amazon’s investment strategy: “The investments we make take three to five years. We try to look around to see where our needs are going to be and those of other companies.” Where are the needs of the…

Peterson also noted that Amazon is open to investing in companies at various stages of innovation and growth, adding, “We can invest a million dollars or more than $100 million in the company” so that to help them achieve their goals.

market wave

Another major difference between corporate and retail investments is the effect that money can have in the market. For retail investors, buying $50 or $5,000 worth of stock in one day is not a big deal. But when big investors walk in, it can act as a signaling mechanism, revealing the intentions and focus of the company and where investors can put their money.

This effect is similar to the way institutional investors influence the markets. Because institutions such as banks, hedge funds and investment companies account for most of the trading activity in a given day, the price they move to stocks tends to move up. The higher the price, the more investors think they should buy, which can lead to higher prices over a longer period of time.

But when institutional investors sell out, it shows a lack of confidence in the company — and when they dump their shares, the rest of the market may panic to get out of their positions sooner. The same can happen when a corporate investor leaves a security.

Should you invest with companies like Microsoft and Amazon?

As a general rule, investing with corporate investors and even some institutional investors is a risky game. Larger investors can take more risk and play the long game than many retail investors. And, because their pockets are deep, losing their investment can hurt, but it won’t necessarily bankrupt them.

Still, when corporations and institutions put their money into new companies to effect change or encourage innovation, it pays to pay attention. When a company’s products are discontinued, funding underfunded niches can (eventually) result in massive gains. In these cases, when larger investors get involved in smaller, cheaper companies, it may be worth taking a closer look.

However, matching company investments directly may not be a wise game for you. Instead of putting unnecessary risk in your portfolio, you can look at the entire sector.

Take Amazon’s new carbon-friendly shipping and packaging investment. Instead of buying into similar companies, you can choose to put your dollars in larger, more stable tech-based climate firms.

And while you can’t buy shares of community colleges to take advantage of Microsoft’s cybersecurity dreams, you can. can do Buy into cybersecurity firms that will benefit from Microsoft’s investment down the line.

At the end of the day, you are in charge of creating your plays. And while following the big guys can’t get out dollar-for-dollar, it doesn’t hurt to pay attention to where the money flows.

Did you like what you read? Sign up for our free Businesshala AI Investor newsletter Here To get weekly AI powered investment ideas. For a limited time, customers can join a special Slack group to receive these ideas before the market opens.

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