Best of the Week
Most Popular
1.Crude Oil Price Trend Forecast 2016 Update - Nadeem_Walayat
2.Will Deutsche Bank Crash The Global Stock Market? - Clif_Droke
3.Gold Price In Excess Of $8000 While US Dollar Collapses - Hubert_Moolman
4.BrExit UK Economic Collapse Evaporates, GDP Forecasts for 2016 and 2017 - Nadeem_Walayat
5.Gold Stocks Massive Price Correction - Zeal_LLC
6.Stock Market Predicts Donald Trump Victory - Austin_Galt
7.Next Financial Crisis Will be Far Worse than 2008/09 - Chris_Vermeulen
8.The Gold To Housing Ratio As A Valuation Indicator - Dan_Amerman
9.GDXJ Gold Stocks - A Diamond in the Rough - Rambus_Chartology
10.Gold Boom! End Game Nears As Central Banks Buying Up Gold Mining Companies! - Jeff_Berwick
Last 7 days
Gold’s Moving Averages and Long-Term Outlook - 26th Sept 16
September Stock Market - The Not So Silent Demise of Deutsche Bank - 26th Sept 16
SPX sell signal confirmed - 26th Sept 16
SPX is testing the next level of support - 26th Sept 16
Outrageously Entertaining US Presidential Campaign Final Stages - What Happens Next? - 26th Sept 16
BoJ, FOMC and Where To Now? - 26th Sept 16
Stock Market New All Time Highs Next - 26th Sept 16
Why Trump Will Win US General Election 2016 Prediction Forecast - 26th Sept 16
Martial Law Rolls Out Across the US As Jubilee Nears - 26th Sept 16
Stock Market More Correction Likely - 25th Sept 16
US Presidential Election Forecast 2016 - Trump Riding BrExit Wave into the White House - 25th Sept 16
US Economy GDP Growth Estimates in Free-Fall: FRBNY Nowcast 2.26% Q3, 1.22% Q4 - 24th Sept 16
Gold and Gold Stocks Corrective Action Continues Despite Dovish Federal Reserve - 24th Sept 16
Global Bonds: Why Our Analyst Says Things Just Got "Monumental" - 24th Sept 16
Where Did All the Money Go? - 23rd Sept 16
Pension Shortfalls Could Be 4X To 7X Greater Than Reported - 23rd Sept 16
Gold Unleashed by the Fed - 23rd Sept 16
Gold around U.S Presidential Elections - 23rd Sept 16
Here’s Why Eastern Europe Is Doomed - 23rd Sept 16
Nasdaq NDX 100 Big Cap Tech Breakout ? - 23rd Sept 16
The Implications of the Italian Banking Crisis Could Be Disastrous - 22nd Sept 16
TwinLakes Theme Park Summer Super 6 FREE Return Entry for Real? - 21st Sept 16
Has the Silver Bullet Run Out of Fire Power? - 21st Sept 16
Frack Sand: The Unsung Hero Of The OPEC Oil War - 21st Sept 16
What’s Happening With Gold? - 21st Sept 16
Gold vs. Stocks and Commodities, Pre-FOMC - 20th Sept 16
BrExit UK Inflation CPI, RPI Forecast 2016, 2017 - 20th Sept 16
European banks may be more important than the Fed this week - 20th Sept 16
Gold, Silver, Stocks and Bonds Grand Ascension or Great Collapse? - 20th Sept 16
Mass Psychology in Action; Instead of Selling Gilead it is Time to Take a Closer Look - 20th Sept 16
Hillary - Finally Well Deserved Recognition for Deplorables - 20th Sept 16
Fascist Business Model: Reich Economics - 19th Sept 16
Multiweek Correction in Gold and Silver Markets Continues - 19th Sept 16
Stock Market May Turn Ugly This Week - 19th Sept 16
China Is Digging Itself into a Deeper Hole - 19th Sept 16
Yellen’s Footnote 8 Would Put Interest Rates on Autopilot - 19th Sept 16
Central Bank Digital Currencies: A Revolution in Banking? - 19th Sept 16
UK Government Surrenders to China / France to Build Nuclear Fukushima Plant At Hinkley Point C - 19th Sept 16

Free Instant Analysis

Free Instant Technical Analysis


Market Oracle FREE Newsletter

The Power of the Wave Principle

How Investors Can Leverage the Most Powerful Force in the Universe

Stock-Markets / Investing 2016 Feb 18, 2016 - 04:23 PM GMT

By: Investment_U

Stock-Markets

Andrew Gordon writes: Investing in the early days of an initial public offering (IPO) isn’t what it used to be.

Last year’s IPOs are a shining example. Shares of tech companies that IPO’d in 2015 averaged around a 40% drop from their first-day closing price to current prices.

The kind of gains you would have gotten from Amazon (Nasdaq: AMZN) (over 35,000% since its IPO), Microsoft (Nasdaq: MSFT) (over 53,000%) and Apple (Nasdaq: AAPL) (nearly 16,000%) are nowhere to be found among newly minted public companies.


As my Early Investing co-founder Adam Sharp pointed out here on Monday, that’s mainly because companies are waiting longer to tap the public markets.

Private companies - especially the stronger ones - don’t have to go public to raise large amounts of money. Uber, for example, is now in the middle of raising $2.1 billion!

And I have no doubt it will get it.

The kind of growth that makes investors serious money is now taking place before companies go public.

It’s made possible by the power of compounding.

The Most Powerful Force in the Universe

Einstein was the one who said it. The most powerful force in the universe is compound interest.

We can see it in action when we look at the rapid growth stages of startup companies. It’s not uncommon for these firms to grow revenues by 100% per year for several years in a row.

In my evaluation of companies for the Startup Investor portfolio, I consider 50% the minimum growth rate I need to see before I even think about adding a company to the portfolio. (Startup Investor is a paid research service run by Adam and me. Unfortunately, membership is currently closed. But you can still learn all about the ins and outs of the private equity world by subscribing to our free e-letter, Early Investing. Click here to check us out.)

The vast majority of companies that make it to an IPO have a substantial period of exponential growth. This can make investors a small fortune. But they have to invest in the earliest stages of a company - way before an IPO takes place.

Because it is during these periods that valuations also go up exponentially.

The most successful early-stage investors are those who understand the power and exceptionalism of exponential growth, and how they shape a startup portfolio’s risk and reward profile.

Exponential Growth Is Hard

Let’s take robotics (but it could be any industry).

Some investors might find it appealing to invest in a company making a robot that will be 10% better than what’s currently available.

Investors who understand the exponential dynamic, however, would instead invest in a company making a robot that will be 10 times better - one that could make you a fancy French dinner upon request.

It’s a much higher, more difficult bar. If this company could indeed make such a robot - and at a reasonable cost - its sales would stand an excellent chance of compounding year after year at a viral pace.

These are big ifs. But if the company can do what it says it will... and you have this company in your portfolio? All your other investments can fail and you’ll still make a handsome profit.

Basically, this company will either experience great success... or fail spectacularly.

As for the other robot, the one that’s 10% better? It’s simply marking time until it is disrupted by superior technology. It likely won’t have a substantial period of viral growth. Perhaps it’s a 2X winner.

So we have a fairly wide range of returns from these two robotics companies.

In a portfolio of startups, that’s typical. It’s called the power law of distribution (“distribution” is just another word for returns).

Returns are incredibly skewed, following the pattern shown in this chart...

The scary part? Most companies’ returns fall between 1X and 0.

And the part that trumps this scare: Companies that do well will do extremely well. They can earn you between 5X and 10X returns (and sometimes much more).

There’s just not many of them because - as I said - exponential growth is hard.

But the idea behind the power law is simple.

The small number of companies that do well will more than cover your losses and leave you with a fat profit.

Welcome to the world of startup investment - where your portfolio will have many more losers than winners, even some flat-out busts. But an exponential growth winner or two will make everything okay.

Ground-Floor Investing for Everybody

Everyday investors can now invest in this world and start a portfolio of their own, paying as little as $50 to $100 to invest in a startup. It’s all thanks to “ground-floor investing for everybody” rules issued by the government.

Early investing no longer means getting your first investment opportunity within the first or second day of an IPO, but years before a company goes public. You now have the option of investing in the earliest stages of a company - for example, when it’s raising its seed money.

As a general rule, venture capitalists aim to earn 10X their early-stage investments. They hope for much more and often get much less. But it’s those breakout investments that help even everything out.

To think exponentially means not worrying about the bucket with the busts in your portfolio. Instead, worry about putting a company or two in the “big winner” bucket.

Big ideas must turn into groundbreaking products that address huge markets before viral growth is even possible.

Fortunately, in the pre-IPO world - and only in the pre-IPO world - it is possible. Exponential growth does happen. And it’s what you need to focus on to be successful.

It’s the only approach that make sense - and dollars - for startup investors.

Good investing,

Andrew Gordon,

Co-Founder, Early Investing

Have thoughts on this article? Leave a comment below.

P.S. Investing in startups is new and frightening... I get it. But I can’t stress enough just how much money there is to be made here! If you’re having trouble getting up the courage to dive in, allow me to recommend our just-released report, “Startup Investing 101.” I personally worked for months to develop this “hit the ground running” guide to the startup investing world. It contains all the do’s and don’ts of startups - everything you need to know to get started. To learn more and pick up your copy, click here.

Source: http://www.investmentu.com/article/detail/49536/exponential-investing-how-leverage-most-powerful-force-in-universe#.VsYYwk0ny0k

http://www.investmentu.com

Copyright © 1999 - 2016 by The Oxford Club, L.L.C All Rights Reserved. Protected by copyright laws of the United States and international treaties. Any reproduction, copying, or redistribution (electronic or otherwise, including on the world wide web), of content from this website, in whole or in part, is strictly prohibited without the express written permission of Investment U, Attn: Member Services , 105 West Monument Street, Baltimore, MD 21201 Email: CustomerService@InvestmentU.com

Disclaimer: Investment U Disclaimer: Nothing published by Investment U should be considered personalized investment advice. Although our employees may answer your general customer service questions, they are not licensed under securities laws to address your particular investment situation. No communication by our employees to you should be deemed as personalized investment advice. We expressly forbid our writers from having a financial interest in any security recommended to our readers. All of our employees and agents must wait 24 hours after on-line publication or 72 hours after the mailing of printed-only publication prior to following an initial recommendation. Any investments recommended by Investment U should be made only after consulting with your investment advisor and only after reviewing the prospectus or financial statements of the company.


© 2005-2016 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

Catching a Falling Financial Knife