| All this week, we’ve been featuring a “technology” series from Luke Lango’s Early Stage Investor service.
Yesterday, we discussed an often-overlooked topic – after you’ve found potential winners, what’s the best way to buy them?
We talked specifics: limit orders, market orders, position-sizing – all the nuts and bolts of adding these high-fliers to your portfolio. It’s important stuff that most early-stage investors don’t consider.
Today, we’ll cover a powerful way to add these early-stage stocks to your portfolio using something called the “basket approach.” You’ll learn why buying, and then ignoring these stocks, could actually be the best move you could make.
Jeff Remsburg | ADVERTISEMENT ChatGPT is growing 26X faster than Facebook Yahoo reports “ChatGPT’s 100 millionth user means the age of AI is here.” It’s why Venture Capitalist Luke Lango now believes an IPO announcement could be imminent. See how to position yourself here. How the “Buy a Basket” Approach Works with Early Stage Stocks Yesterday, when we left off, we had covered how, when you make sure to win a lot when you’re right, and only lose a little when you are wrong, you can be right just 33% or 50% of the time…and still make huge profits in early-stage companies.
Next, let’s talk about how to buy these prospective high-flying stocks using a “basket approach.” It’s a great way to reduce risk while still getting exposure to these explosive high-fliers.
Let’s jump in.
During an industry’s early stages, we often see dozens of companies working furiously to become the winner of whatever epic business race they are in.
In the early days of the internet, lots of companies tried to create the best online store… the best email system… the best search engine, etc. In the early days of the automobile industry, more than 100 carmakers tried to become the industry leader.
During the early stages of an industry, it’s virtually impossible to consistently pick the one or two companies out of dozens that will emerge as the winner(s) in 10 years’ time. Placing all your chips on just one or two companies is often an extremely risky way to invest in the sector.
Instead of placing an all-or-nothing bet, I prefer to “buy a basket” when I can.
Putting all your money in a single company can pay off big if it “threads the needle” and comes out on top. But investing in one company exposes you to significant downside risk. If there is a major problem at your chosen company (like a technology problem, an accounting scandal, or a crazy management decision), you could suffer a big loss.
That’s why I like the “buy a basket” approach. When I say, “buy a basket,” I mean pick three to six of the best companies in a sector – and buy all of them.
By purchasing a basket of the best companies, you get lots of upside potential, but a good measure of diversification and downside protection. You avoid the risk of losing big on one concentrated bet.
When you buy a basket of three to six companies, you’ll probably wind up holding some losers.
But the winners will more than make up for them, providing you with an outstanding “blended” return.
To be clear, when I say, “buy a basket,” I DO NOT mean “buy an ETF.”
ETFs can be useful investment vehicles. But when you buy most ETFs, you end up buying over 40 companies. You end up owning a lot average or crappy companies. You get the bad with the good… which dilutes your returns.
That’s why I see “buy a basket” as an excellent middle-of-the-road approach.
It’s not always possible to buy a basket in a sector. Sometimes, there aren’t many good individual companies trading at good prices in a sector at the same time.
But when it’s possible to do so, buying a handful of high-quality companies is a great way to invest in an industry during its early stage. We get exposure to high-quality businesses, but we avoid single-company risk. ADVERTISEMENT Biden’s Replacement Named? Did democrats just name Biden’s replacement for 2024? Louis Navellier predicts this “shadow candidate” could upend the entire election. Why Not Seeing a Stock Quote Every Day Can be a Great Thing Many investors can’t stand the thought of going a week or even a day without checking stock quotes. They’re addicted to the constant checking in on changing stock prices.
I’ll admit, I frequently check on the markets and my stocks. But when it comes to investments in early-stage companies, NOT having access to stock quotes can be a great thing.
The very nature of a private company is that it does not have a publicly traded stock. The value of that private company may change from month to month, but you won’t see it reflected in any regular share price quote. The value is what knowledgeable insiders and shareholders know it to be.
If you can’t access an up-to-the-second quote on an investment, there’s less pressure to get upset over every 5% or 10% or 20% decline in the share price… so there’s less mental pressure to panic and hit the “sell” button.
Consider the story of Uber. As I write this, the company is a dominator of the ridesharing space. But it has taken many bumps and bruises along the way. The journey to the top of the heap for any company is typically very volatile.
If Uber had been public during its rise, I’m sure many investors would have freaked out during one of its many periods of difficulty and sold shares. However, since Uber was private during the rise, no conventional stock quotes were available.
This was a good thing for many investors. It helped them hold onto their shares and make many multiples of their original investment.
It works the same way with real estate investments. It’s good that people can’t get daily quotes on the value of their real estate holdings. It helps them ignore short-term noise and focus on long-term wealth creation.
When it comes to investing in early-stage public stocks, employing the venture capital or professional real estate investor mindset will help eliminate any emotional decisions to sell. When emotions are removed from investing, the success rate increases exponentially. How Coffee Cans Can Help You Get Rich in Stocks Do you remember coffee cans?
Now that our days are filled with Starbucks trips and single serve “K cups,” it’s easy to forget that large coffee cans were once fixtures in millions of American homes.
Here’s what I’m talking about…
It might sound funny, but coffee cans can teach us an extremely powerful investment lesson.
Coffee cans are behind an enlightened way of thinking that could help you get rich in the kind of stocks we’ve been talking about in this series. Having “coffee can knowledge” is truly one of the differences between the rich and the poor.
The coffee can story is most famously recounted by Robert Kirby, an investment manager from days past.
Kirby wrote that, “The coffee can portfolio concept harkens back to the Old West, when people put their valuable possessions in a coffee can and kept it under the mattress.”
The coffee can method of portfolio management is simple: You buy high quality businesses with promising futures.
But instead of doing what many folks do – which is check on share prices every day, fret constantly about the portfolio’s short-term performance, and trade in and out of shares – you do nothing but sit on the portfolio for years.
You stuff your shares in a figurative coffee can, put the can in the cupboard, and don’t look at it for long stretches of time.
The coffee can idea came to Kirby while he was at investment firm. He had a client whose husband, a lawyer, had died. The client inherited the stock portfolio, which she brought to Kirby.
Kirby writes: I was amused to find that he had been secretly piggybacking our recommendations for his wife’s portfolio. Then I looked at the size of the estate. I was also shocked. The husband had applied a small twist of his own to our advice: He paid no attention whatsoever to the sale recommendations. He simply put about $5,000 in every purchase recommendation. Then he would toss the certificate in his safe-deposit box and forget it. By ignoring any “sell” advice and socking the shares away, the husband had allowed a kind of wealth creation magic to happen…
Sure, there were some losers in the portfolio, worth less than $2,000. But he had several large holdings worth more than $100,000 each. And get this: there was also one giant holding worth more than $800,000. That holding was born from a small investment in Haloid, which became a large amount of Xerox shares.
This utterly inactive portfolio approach stands in stark contrast to how most individual investors manage their money. They jump in and out of stocks, take profits too early, get too impatient, worry over meaningless day-to-day stock movements, and check price quotes all day.
Most folks would be better off managing their stocks like the lawyer from Kirby’s story: Buy good, promising companies and sit on them. ADVERTISEMENT Two top analysts urge, “Do NOT do this with your money…” Whatever you do over the next two months, say these two legendary stock market analysts, do NOT… repeat… do NOT get stuck in cash. Why? Click here for details. Summing Up By investing in the best early-stage companies, we invest in companies that will change the world.
With early stage companies, you’re looking to get in early on the next Microsoft… the next Facebook… the next Google. These are the kind of stocks we recommend in Early Stage Investor. It only takes one of these winners to radically increase your net worth. By using the strategies and mental tools I’ve covered in this report, you’ll own the future… and reap the rewards.
To learn more about these types of stocks, or to join Early Stage Investor, just click here. |
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