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

When Warren Buffet invests, people take notice – and for good reason. Over the years, Berkshire Hathaway has generated massive profits for Buffet, his investors, and those who track his investments in their own portfolios. The Oracle of Omaha is so well known for its market prowess that a Google search for its name returns a slew of articles published on why you should (or shouldn’t) follow his investment strategy.

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

Amazon goes net zero

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

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

That’s why Amazon’s sustainability suite launched a $2 billion venture capital program in June 2020. With full funding from Amazon’s balance sheet, the Climate Pledge hopes to bring together a wide range of technology-based startups seeking to disrupt climate-friendly innovation.

So far, Amazon has collected 11 companies under its umbrella. In some cases, such as Rivian Automotive, an electric vehicle maker, the online giant places orders. In other countries, such as ZeroAvia and Infinium, both of which are striving to decarbonize the aviation industry, the mega investor has handed over money for research and development.

Understandably, one area that Amazon is particularly excited about is its investment in CMC machines. The company recently developed an automated packing machine that reduces the volume of boxes by nearly a quarter. As a result, Amazon expects to reduce the use of plastic packing pillows by a whopping billion by 2023.

Microsoft invests in cyber security

Let’s shift gears to look at a completely different investment strategy for the company.

On October 28, Brad Smith, President and Vice President of Microsoft, took to the company’s blog with a crucial message: America faces a cybersecurity skills crisis. For every two jobs filled in cybersecurity, one remains empty. Furthermore, 1 in 20 job openings are open in the cybersecurity field.

To address this issue, Microsoft announced that it is allocating millions of dollars and significant educational resources in community colleges, grants, and scholarship funds to address the shortfall. Through its efforts, Microsoft hopes to employ 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 members in 150 community colleges nationwide
  • A free online cybersecurity curriculum for community colleges to use in their courses

Aside from hiring, Microsoft is also planning to invest a whopping $20 billion in cybersecurity over the next five years. $150 million of this money is earmarked to help federal, state, and local governments strengthen their cybersecurity networks.

Big fish and fried small

If you are used to using large investors to help you find the best investments, it may seem counterintuitive to match two of the largest companies on the planet. But when it comes to corporate investments on a large scale, the math isn’t always so simple.

Difference in drives

One of the problems with viewing companies as investment models is that they often have different motivations than other investors.

For example, most small retail investors aim to build a retirement portfolio and generate some liquidity on the side. Meanwhile, institutional investors are seeking the biggest profits and the smartest moves to boost their bottom line.

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

Take, for example, the Amazon Climate Pledges. In an interview about the fund’s goals, Matt Peterson, the fund’s president, noted, “If the companies we invest in happen to be doing well… that’s great. It shows that it’s come true… but it’s not the fund’s primary focus in relation to the broader strategic objective.” ”

In other words, the company hopes to bring about change in profitable ways to its niche niche in the long run – not necessarily the immediate end result. At the same time, Amazon can incubate innovation while avoiding the responsibility (and cost) of developing new technologies.

But for Brad Smith, Microsoft’s president and vice president, the math is a little different. Although profits are part of the equation, the company also seeks to deliberately influence overall societal change. After all, not every company-funded cybersecurity expert will continue to work for Microsoft — but that doesn’t mean the company doesn’t realize the value of filling the void elsewhere either.

Said Smith at a virtual event, “As we look to the future, we need to acknowledge as a nation that we are facing a crisis of cybersecurity skills in the country. We cannot protect the country unless we fill the cybersecurity jobs available today, and the best way we can do is to mobilize the country’s community colleges” .

Deeper pockets and long term horizons

Another difference between companies and individual 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 takes years to generate returns.

For example, few retail investors have the money, time, and knowledge to educate the more than 250,000 cybersecurity students and faculty at 150 community colleges. Nor does it have $2 billion to devote to climate-saving innovation. But companies like Amazon and Microsoft do – not to mention the ability to wait for returns over extended time horizons.

Take Peterson’s explanation of Amazon’s investment strategy: “A lot of what we invest in is between three to five years. We try to look in the corners to see where our needs are going and where the needs of other companies are going to be…. With the 2040 time horizon, you really can’t look outward for long. A year or two; you have to think long-term.”

Peterson also noted that Amazon is open to investing in companies in various stages of innovation and growth, saying, “We can invest $1 million in the company or more than $100 million in the company” to help them achieve their goals.

ripples in the market

Another big difference between corporate and individual investing is the effect that money can have on the market. For retail investors, buying $50 or even $5,000 worth of shares a day isn’t that important. But when larger investors step in, it can act as a signaling mechanism that reveals the company’s intentions and focus and shows investors where to put their money.

This effect is similar to the way institutional investors influence the markets. Since institutions, such as banks, hedge funds, and investment firms, account for most of the trading activity on a given day, the price rises when you get into stocks. The higher the price, the more investors feel the need to buy, which can lead to higher prices in the long run.

But when institutional investors sell, it shows distrust in the company – and when they divest their stock, the rest of the market may be scrambling to get out of their positions as quickly as possible. The same thing can happen when a company’s investor drops a security.

Should you invest with the likes of Microsoft and Amazon?

As a rule, investing with corporate investors and even some institutional investors is a risky game. Large investors can take on more risk and play a longer game than many retail investors. Because their pockets are deep, losing their investment may hurt, but it won’t necessarily bankrupt them.

However, when companies and organizations put their money into startups to bring about change or encourage innovation, it pays to pay attention. Funding underfunded niches can (ultimately) pay huge dividends when a company’s products take off. In these cases, when big investors are stepping into cheap small businesses, it may be worth taking a closer look.

However, matching a company’s investments directly may not be the wisest game. Instead of pumping unnecessary risk into your portfolio, you might look at the entire field.

Take the new carbon-friendly shipping and packaging investment from Amazon. Instead of buying at the same companies, you might choose to put your dollars into larger, more stable, technology-based climate companies.

And while you can’t buy classes from community colleges to cash in on Microsoft’s dreams in cybersecurity, you can Buy into cybersecurity companies that will benefit from Microsoft’s investment in the future.

At the end of the day, you are in charge of preparing your plays. And while following dollar-for-dollar VIPs may not be helpful, it doesn’t hurt to pay attention to where the money is flowing.

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