Silicon Valley way of investing
According to Prof. Roger Ibbotson , Yale School of Management (1982), $1 invested in MicroCap vs. $1 investors in S&P 500 from 1926. The same 1 dollar invested in the S&P 500 grew to $150.64 while the same 1 dollar invested in micro-cap grew to $1,635
The real money is in micro caps. While common misconception about micro caps is that those stocks are riskier than large-cap stocks. With the help of financial ratios and filtering process, much of the risk can be reduced while keeping the upside potential.
The Big secret to being successful Micro Cap Investor
If we told you to go out and make three thousand dollars in the next 2 days, if your mindset wasn’t in the right place you wouldn’t even give it a short for a few hours and then succumb to thought. I cant’t because I’m too busy or lazy or clueless. I have tried everything and my past experience told me it won’t work.
To make it in a competitive world of investing, our thoughts and emotions catalyze not only our actions, they also supply all the ingredients for a creation:
- Belief System
- Decisive Action
Research suggests that returns from 1970-1998 period assuming a 5.23% annualized inflation that small stocks, are beating returns of 5 Yr and 20 Yr bonds, the S&P & Treasury-Bills
The returns for buying bonds is relatively easy to calculate, as a good portion of return is simply the coupon. For instance, the interest rate for 30-year Treasury bond is 6%. If interest rates do not change, you will in fact receive a 6% long-term return. If rates fall, then you will get a slightly lower return.
Estimating the value of stock or stock market is more complicated. Over the decades stock returns should be higher than bonds. As Benjamin Graham puts it, in the short run the stock market is a voting machine, but that in the long run it is a weighing machine.
Musk hopes that Tesla’s third-generation car, the Model 3 released in 2017 will be a real measure to impact car indsutry. Starting price for a Model 3 will be $35,000. In comparison, BMW sells about 300,000 Minis and 500,000 of its BMW 3 series per year. Tesla’s goal is to march those figures in the next few years.
To keep up with Tesla’s demand for lithium ion battery supply, Musk has build the world’s largest lithium oil manufacturing facility named the Gigafactory. By raising $2 billion by selling bonds, Tesla saved itself from the brink of financial disaster in 2014.
Back in 2013, when TSLA was a so called ‘Small Cap’ , I knew I needed to own TSLA’s stock when it was trading at $25. Back when Wall Street was not talking about TSLA, in fact Flashback: Mad Money Jim Cramer hated it and said this
So yes, go ahead and buy GM , F. And this is why watching CNBC and Bloomberg Won’t get you Rich ! ‘Cramer: You don’t want to Own the Stock (TSLA) , You don’t even want to RENT THE DARN THING.’
Let’s compare the returns of ‘The Silicon Valley Way of Investing ‘ vs ‘ Cramer’s style of investing ‘
TSLA , the stock we bought in with 10x returns. Or Ten Times your returns with every $10,000 invested turns into $100,000 using the ‘Silicon Valley Loophole’ method
Let’s take a look at Ford, recomended by Cramer. Same Time Frame, Different Returns?
There’s huge potential with Tesla’s goal of setting itself up to capitalize on situation like the one Apple found itself when it first introduced the iPhone.
Apple’s competitor Steve Ballmer of Microsoft laughed at the iPhone when it was first released in 2007.
Similar with competitors of Tesla, Musk said. “ They think Gigafactory is a stupid idea, and battery supplier should just go build something like that’.
Tesla is setting itself up to capitalize on station like the one Apple found itself in when it first introduced the iPhone. Once it became clear Apple had a hit, competitors will soon play the catch up game.
If Tesla in the next 5 years can prove the Model 3 to be a massive hit, this will change the automobile industry like Apple did with the iPhone.
I believe true wealth comes from owning companies for a long period of time. The upside will be saving tonnes in broker’s commissions and fees adding to my long-term profitability .
‘As Charlie Munger puts it’ The big money is not in the buying and selling, but the waiting’.
Although most small companies like these have traditional or not-so exciting businesses, we look to buy companies with solid EBIT ratio , about 8 times , which leads to strong profit potential.
TSLA , a 10x stock after delivering profitability with the Model S. TSLA briefly surpassed the valuation of GM and Ford in 2017.
Age of the Disruption
The buzz word in Silicon Valley is ‘Disruption’. Startups are. always looking to get into existing industries and ‘disrupt’ them, or improving the once tired and old business models.
Amazon disrupted the bookstore business and became the largest and cheapest place to buy a book.
Uber is changing the taxi cab industry offering a better and cheaper alternative to cabs.
Airbnb is allowing anyone to rent out an extra room in the house by disrupting the hotel industry.
Elon Musk and Tesla is disrupting the automobile industry even if that trend only involve a large group of people in the high income bracket.
How to be Antifragile
Nassim Nicholas Taleb , author of the Black Swan explained how taking a lot of small risks and being open to positive Blacks Swans can make you Antifragile.
According to Taleb (2014), Antifragility is the combination of being aggressive but conservative , or having a capped downside so you are immune to extreme events.
In other words, by reducing or capping the downside risks and keeping the upside unlimited, the positive ‘black swans’ can benefit investors with massive financial gain.
More importantly, the Barbell strategy, keeping 90% of your portfolio in conservative assets like cash, bonds, stocks and taking small risks in others say 10% in derivatives, startups, etc.
The Silicon Valley way of trial and error. When applied to investing, with low cost mistakes and a potential payoff (unlimited), you can position yourself to gain from a world of volatility.
In 2017, we are worried that various ‘unthinkables’: North Korean Nuclear, Melting of Polar Ice, World War III and so on. Meanwhile, we had witnessed the unthinkables, smartphone revolution, fall of communism, Artificial Intelligence, birth of the Electric Car, Space travel.
As we are moving away from the Industrial revolution to the new economy. As disruptive technologies has caused loss of jobs and heartache to the old economy, it also freed up millions of workers to move int exciting and productive jobs in fast-growing industries.
The argument is simple, buying stocks leveraging on this ‘new economy’ is not buying lottery tickets. Stock prices will rise if the company do well and good companies that continue to increase earnings will positively impact your bottomline.