Why have ASX tech shares had a terrible week, yet ASX dividend shares have thrived? A Warren Buffett quote might just hold the answer.
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It was an interesting week on the S&P/ASX 200 Index (ASX: XJO) and the ASX boards this week.
We started on Monday at 6,673 points, got all the way up to 6,854 points on Tuesday, and as of today (at the time of writing), we’re back down to 6,699 points, close to where we started. The more things change, the more they stay the same, I guess.
But one of the biggest movers and shakers on the ASX this week was ASX tech shares. Well, they certainly moved, and those moves had investors shaking in their boots. Take Afterpay Ltd (ASX: APT). The buy now, pay later (BNPL) pioneer was trading at $133.68 a share on Tuesday. Right now it’s $114.48 – a drop of more than 14% in just 3 days.
It’s not hard to see where this is coming from. Over in the US, tech shares have also had a terrible week. The tech-heavy Nasdaq Composite (INDEXNASDAQ: .IXIC) Index has lost more than 6% this week since Tuesday (we’ll have to see what happens tonight). That includes some big moves down for stocks like Amazon.com Inc (NASDAQ: AMZN) and Tesla Inc (NASDAQ: TSLA).
As we’ve discussed a few times this week, the primary driver of these concerns appears to be rising long-term interest rates for government bonds. Since many tech stocks are valued by what investors expect these companies to earn in the future (as opposed to what they earn today), they are especially sensitive to longer-term interest rates.
But contrast the moves we have seen in ASX tech shares this week against some of the ASX’s dividend heavyweights. Commonwealth Bank of Australia (ASX: CBA) shares are up more than 5% this week. Australia and New Zealand Banking GrpLtd (ASX: ANZ) has made a new 52-week high. And Woodside Petroleum Ltd (ASX: WPL) is up around 3%.
Tech shares down, ‘tired old blue chips‘ up. That’s not what investors have become used to seeing, I’d wager!
It just goes to prove that sometimes Aesop’s old parable of ‘a bird in the hand is worth two in the bush’ rings true. No wonder Warren Buffett loves quoting that line.
To illustrate, here’s a snippet of Buffett’s annual letter to shareholders in 2000:
Indeed, the formula for valuing all assets that are purchased for financial gain has been unchanged since it was first laid out by a very smart man in about 600 B.C. (though he wasn’t smart enough to know it was 600 B.C.). The oracle was Aesop and his enduring, though somewhat incomplete, investment insight was “a bird in the hand is worth two in the bush.”
To flesh out this principle, you must answer only three questions. How certain are you that there are indeed birds in the bush? When will they emerge and how many will there be? What is the risk-free interest rate (which we consider to be the yield on long-term U.S. bonds)?
If you can answer these three questions, you will know the maximum value of the bush, and the maximum number of the birds you now possess that should be offered for it. And, of course, don’t literally think birds. Think dollars.
In an environment of rising interest rates, investors seem to have decided they would rather have strong cash flows and a hefty dividend right now (a bird in the hand) than wait for the possibility of said cash down the road (two in the bush). Suddenly, Afterpay, who has yet to make a statutory profit, isn’t as exciting, it seems.
When the winds of sentiment change, they can change quickly. This week has been a stark reminder of that.
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John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Sebastian Bowen owns shares of Tesla. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. owns shares of and recommends Amazon and Tesla. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. owns shares of ZIPCOLTD FPO and recommends the following options: long January 2022 $1920 calls on Amazon and short January 2022 $1940 calls on Amazon. The Motley Fool Australia owns shares of AFTERPAY T FPO and Xero. The Motley Fool Australia has recommended Amazon. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.
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