Innovation Is Not an Act. It's a Habit.  | | Luke Lango | Hello. I'd like to welcome you again to the Exponential Growth Report. We are excited to have you on board! On a normal day, any communication from me to you would happen through monthly issues or flash alerts. This is neither. Unusual times call for unusual measures – and, folks, we have certainly found ourselves in an unusual time. Over the past two weeks, the broader stock market has been in a mild downtrend, as rising interest rates have put downward pressure on equity valuations. This mild downtrend accelerated yesterday, as the 10-Year Treasury yield temporarily spiked 20 basis points on the day to a one-year-high of 1.6%. In response, the S&P 500 dropped as much as 2.6% – marking its worst day in about four months. Tech stocks were more severely impacted, since they tend to feature richer valuations, which puts them more at risk to rate-related valuation pressures. At its low, the tech-heavy Nasdaq gave back as much as 3.6% on the day. By Thursday's close, the S&P and the Nasdaq finished the day down 2.45% and 3.52%, respectively. Many of the stocks in our portfolio – which have been huge winners over the past few months – were hit even harder. Given these recent developments, I wanted to write you to let you know our thoughts on what's going on in the market. In short, we think it's a great buying opportunity. We are big-picture investors. We tend to ignore near-term noise and don't get caught up in panics. We always remain patient and level-headed. We avoid emotional decisions and keep keenly focused on generating long-term wealth. With that in mind, we tend to tie our analysis back to one thing: earnings. In the stock market, earnings matter more than anything else. As go earnings, so go stocks. It's a pattern that has held true for decades. When earnings go up, stocks go up. When earnings go down, stocks go down. Of course, this relationship has a lag since markets are forward thinking. Thus, markets tend to drop before a drop in earnings, while they tend to rise before a rise in earnings. Nonetheless, the relationship is unmistakable… "As go earnings, so go stocks." 
The investment implication of this simple observation is equally as simple: You want to invest in companies that have long-term earnings power. Because companies that grow earnings will be accompanied by rising stock prices, and companies that don't grow earnings will be accompanied by falling stock prices. Being a great investor is that simple. Invest in earnings power. Now, let's answer the million-dollar question: How do we know which companies have the best long-term earnings power? By finding the most innovative companies in the market. You see… earnings are a function of demand. Company A makes a product. If said product has strong and growing demand, Company A's revenues and earnings will keep growing, and vice versa. The key, then, to sustaining strong earnings growth is sustaining a strong pipeline of high-demand products and services. How do companies do that? By relentlessly innovating. A company that continues to innovate and focus on the future is positioning itself to keep creating great products and services with high demand. Innovation is the fuel of earnings growth. Think about the world's largest companies today. You have Alphabet ($1.3 trillion market cap), Apple ($2.3 trillion), Microsoft ($1.8 trillion), and Facebook ($780 billion). How did they get there? Through innovation. Alphabet's founders Sergey Brin and Larry Page figured out back in the late 1990s how to create a centralized online database that indexed the entire internet and made it searchable. Then the company acquired YouTube. Then it plunged into cloud computing with Google Cloud. Then it launched a self-driving business named Waymo. That's innovation. The result? A trillion-dollar company. Mark Zuckerberg, meanwhile, figured out in the early 2000s how to connect college students online. He took that platform, and expanded its use case to the masses. Then the company got into messaging (Messenger and WhatsApp), pictures (Instagram), and commerce (Marketplace and Facebook Shops). That's innovation. The result? A near-trillion-dollar company. Lather, rinse, repeat for Microsoft and Apple. Bill Gates and Steve Jobs were relentless innovators. They made computers and smartphones ubiquitous – and then their successors created enormous software businesses on top of their hardware empires. That's innovation. Get the point? Today's trillion-dollar businesses all have one thing in common – they're relentlessly innovative. That's not a mistake. It's a pattern. As the Aristotelian saying goes: "We are what we repeatedly do. Excellence, then, is not an act, but a habit." Apple, Facebook, Microsoft, Amazon… they all made excellence a habit, by making innovation a habit. That's what our investment strategy is all about. We are looking for companies that are making innovation a habit – because these are the companies with the long-term earnings power to generate significant wealth over the next several years. This is our long-term investment approach. Higher interest rates change nothing about this approach. Yes, higher interest rates mean lower valuations. That's what you're seeing right now. Stocks are falling as valuations are adjusting lower to higher rates. But this adjustment will end. And soon. Because the Federal Reserve remains committed to zero interest rates for three years, while enormous deflationary forces in the form of globalization and automation (and more broadly, technology) will keep rates stuck in a lower-for-longer situation. So, interest rates are spiking now as the economic outlook improves. But they'll calm down, soon, as it becomes clear low rates are the new 10-year normal, thanks to companies outsourcing labor, robots displacing jobs, and technology making everything broadly more cost-efficient. In other words, the interest rate headwind that's hitting stocks this week will be short-lived and overstated. When it eventually and inevitably passes, the focus will return to the one thing that actually matters: earnings. And which companies have all the earnings power? Ding, ding, ding! You guessed it. The innovators. The companies that are making innovation a habit. The companies that we've carefully and smartly selected for you in our model portfolio. So… are we worried that many of these stocks have dropped in recent days? Not. At. All. These companies are still changing the world. They're still pioneering breakthrough technologies and creating revolutionary products and services. They're still positioned for 10-plus years of enormous earnings growth ahead. And, most importantly, they're still the best stocks to own if you're looking to sustainably generate significant wealth in the markets over the long haul. So… what are we doing right now? Doubling down. We already gave you a focused portfolio of 12 new buys. And we'll be adding a new buy recommendation next week, too. Warren Buffett used to say… "Be greedy when others are fearful." That saying isn't always true. Sometimes, the crowd is right – and running for the exits is smart. But when the world's most revolutionary, disruptive, and best companies are seeing their stock prices plunge at a time when the global economy is actually improving… Buffett's words are spot on. I'll be in touch next Thursday. Have a great weekend, everyone. Sincerely, 
Luke Lango
Editor, Exponential Growth Report
Small-cap stocks that can rise 10X over the long run are often volatile. If you are interested in these stocks, understand the risks and buy them like a professional. Learn more about the risks of nano- to micro-cap stocks and how to buy them in our owner's manual. | 
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