Knowledge is power

One area in which Warren Buffett excels is sticking to what he knows. If he does not understand a business or its operations he avoids it in favour of those companies and sectors he does have knowledge about. For example, while he has an investment in IBM, he has never been particularly focused on new technology. Rather, he has chosen to focus on consumer goods companies, banks and other specific areas where he feels he can add value.

This could be an important takeaway for investors. It is extremely difficult to be an expert on a wide variety of sectors and/or companies. However, that is not necessary according to Buffett’s philosophy. Knowing a lot about a few companies could be all it takes to generate a seven-figure portfolio. Therefore, investors may be better served by focusing on specific industries in future.

Few decisions

Warren Buffett famously said that all investors should only make 20 investments in their careers. His rationale for such a small number is that it would cause someone to think long and hard before buying any stock. It is all too easy to dabble in a variety of companies without undertaking sufficient research, according to Buffett. Therefore, if an investor knew they had limited opportunities to place their cash, they may take more care over where they choose to invest their hard-earned money.

While 20 investments may be on the low side, the point is that making a million does not require investors to make a large number of correct decisions. They need to only get the big decisions right when it comes to where their portfolios are invested. And by limiting buying and selling activity, it may cause investors to only choose what they feel are their best ideas. These are likely to be the ones that generate the highest returns in the long run.

New opportunities

One area in which Warren Buffett may surprise other investors is his attitude towards cash. For someone who has been so successful in buying shares in recent decades, he remains very positive on the use of cash within a portfolio. This is not only so that an investor can take advantage of potential buying opportunities, but also because it can provide peace of mind in difficult periods for the stock market. This may help us to remain rational during bear markets, when the best opportunities may present themselves.

Clearly, finding new opportunities is never easy. But by focusing on a small number of industries and making sure stocks in a portfolio are the best ideas at that time, investors could generate higher returns – just as Warren Buffett has done during his career.

It trips off the tongue nicely, just like other catchy phrases such as ‘peak oil’, ‘commodity super-cycle’, or perhaps, ‘tech wreck’.

Getting serious

I used to think the Internet of Things was no more than a theory or device conceived to stoke up interest in tech firms to encourage investors to buy shares.

However, as news flow gathered pace over recent months I’ve changed my mind. Now I think the so-called Internet-of-Things (IoT) opportunity is a real potential driver of future profit growth for firms such as London-listed ARM Holdings (LSE: ARM) and IBM (NYSE: IBM.US).

Yesterday’s news from IBM gives me further reason to think seriously about the potential of the Internet of Things. A headline-grabbing announcement trumpets ‘IBM and ARM Collaborate to Accelerate Delivery of Internet of Things‘.

To me, that’s potentially big news. I’ve watched as ARM made a string of IoT-related acquisitions over recent months and then launched its IoT Subsystem, to ensure future generation IoT devices are designed with ARM technology inside.

Now, big players like IBM have noticed ARM’s progress and want to collaborate with the firm.

Another level

ARM’s IP has been in existing IoT devices for some time and it therefore seemed likely that the firm’s new ‘off-the-peg’ IoT solution would gain wide acceptance amongst manufacturers and businesses. That’s what is happening now, as IBM demonstrates.

IBM reckons it’s expanding its IoT platform — called IBM IoT Foundation — through integration with ARM by providing out-of-the-box connectivity with ARM mbed-enabled devices to analytics services. This fusion, IBM says, will allow huge quantities of data from devices such as industrial appliances, weather sensors and wearable monitoring devices to be gathered, analysed and acted upon.

ARM says that its collaboration with IBM will deliver the first unified chip-to-cloud, enterprise-class IoT platform, and that will empower companies of any size, big, small and in-between, with a productivity tool that can transform how they operate and the services they can offer.

Products powered by ARM mbed-enabled chips will be able to automatically register with the IBM IoT Foundation, and connect with IBM analytics services. That situation will unify the two firms’ offerings at the point where information gathered from sensors in connected devices is delivered to the cloud for analysis.  

It all boils down to an efficient structure to get the IOT vision working, so that washing machines can tell their owners when they are faulty, owners can open their garage doors two blocks before they arrive home, smart TVs can be operated remotely and security systems can talk directly with home and business owners, and whatever other applications we can think of.

What next?

The important thing for ARM investors like me is that the more ARM’s IOT solution gets into the supply chain the more revenue and profit the firm is likely to earn from the IOT trend.

Already, electronics manufacturers are adopting IBM’s cloud services to connect everything, and now ARM Holdings has secured its niche in the middle of that trade. Once again, ARM comes up smelling of roses and demonstrates how it keeps itself embedded in the latest trends and technologies of our time that keep driving the firm’s profit growth. 

In an attempt to modernise its offering, IBM is branching out and part of this expansion plan was a partnership with Monitise (LSE: MONI). However, after the release of IBM’s dismal third quarter earnings report, this partnership could be about to develop into something more. 

Keeping up

It has long been known that IBM is struggling to keep up with an industry-wide shift in technology. So, to try and keep up with wider industry development and return to growth, IBM is pushing into new markets, such as mobile payments and cloud computing.

This is where Monitise comes in. Indeed, around 90% of the world’s banks already use technology designed and supplied by IBM. The company is a trusted partner for banks and has been for decades but the group lacks experience in mobile payments. As part of IBM’s drive to increase its mobile presence, it makes sense to have Monitise on board. 

But it’s unlikely that IBM is contemplating an outright acquisition straight away. With 20% of Monitise’s employees set to transfer to IBM, it seems as if IBM wants to get to know the company and its business model first, before making an offer. 

Shareholder pressure 

IBM may be forced into action sooner than expected after the company’s third-quarter results disappointed investors and management discarded the company’s five-year growth plan. As a result, shareholders are clamouring for change at the company, which could force its hand into making an offer for Monitise. 

Moreover, if IBM were to make a move for the mobile payments processor, it’s likely that the company would have to offer a hefty premium for Monitise’s shares. With heavyweights like Visa and billionaire, Leon Cooperman owning a large chunk of Monitise, it’s unlikely that they will let IBM buy up Monitise at a low-ball price. 

Leon Cooperman is a vocal supporter of Monitise’s business model and firmly believes that the company is the next big thing in the mobile payment technology space. Cooperman recently revealed that he had not sold a single share in the company during the recent sell-off. The billionaire actually tried to boost his stake recently by offering to buy Visa’s stake. Visa refused to sell.

Still, IBM can afford to offer a significant premium for Monitise’s shares. IBM chucked out more than $13bn in free cash flow last year, making Monitise’s market cap of around $1bn look insignificant.

The bottom line

So all in all, IBM could be considering a bid for Monitise as the company tries to reinvent itself and drive growth. The two companies are already working together and IBM has plenty of cash floating around to fund a bid. 

Although we don’t believe in timing the market or panicking over every stock fluctuation, understanding how a business is performing, competing and changing is vital to sensible investment.

Shares in mobile banking and payments service provider Monitise (LSE: MONI) lifted by more than 14% in early trade this morning, following the announcement of an alliance with US giant IBM.

The collaboration will see teams from Monitise’s UK development and integration business (Professional Services, comprising around 20% of its employee base) transferred into IBM, while the American technology and consulting corporation will deliver services back to Monitise.

Today’s agreement also means that Monitise’s ability to manage larger projects worldwide has been increased substantially, allowing the company‘s technology to be enabled, hosted and sold as an IBM cloud-delivered solution globally in the business-to-business space.

IBM’s resources and initiatives will become available to Monitise to pursue ‘Mobile Money’ opportunities, currently limited to financial institutions but the alliance hints at targeting retailers, mobile network operators and similar markets in the future.

The news strengthens Monitise’s target of 200 million users of Mobile Money products by 2018, each generating an average revenue of £2.50, as well as reaching a profitable status in the 2016 financial year, after having to lower its full-year guidance early last month after shifting to a subscription-based revenue model.