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The 5 Tenets of Investing in Disruption

If you are new to investing, or new to investing in high-growth high-risk companies then I think it would be wise for you to read this article. It is my goal to introduce you to the world of investing in disruption and how to navigate its treacherous waters.
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The 5 Tenets of Investing in Disruption

I - Volatility is the "New Normal"

Day-to-day market movements can be sometimes quite dramatic and unexpected. That being said, I believe it is important to understand that volatility is the "new normal". Sometimes the market makes big moves in the morning, and corrects itself later that same day. On the other hand, sometimes the market makes big sustained moves for several days straight. Volatility, leads us to our next tenet.

Takeaways:

  • If you believe in your investment choice, it may be better to hold. I am a believer in investing for the long haul.
  • Do not make investment decisions or trading actions just because of price movements. Try to look past the price movement and make your analysis based on other factors.

II - Do Not be Afraid of Dips

The best investors are not afraid of market downturns, but instead, may find ways to capitalize on market downturns. Admittedly, this is certainly easier said than done and involves greater risk. Many investors will have the instinct to sell after seeing their portfolios drop say 10%, but sometimes, investors should be doing quite the opposite.

Takeaways:

  • Consider using dips as opportunities.
  • Always be ready for a dip. Do not put yourself in a position where you would not be able to take advantage of a further dip.

III - Embrace the Duality | The Venture Capitalist and the Big Bank Analyst

There is a key difference between a disruptive company and a good investment. Some companies are very disruptive, but are currently overvalued. On the other hand some companies are not very disruptive but are somewhat undervalued. That being said, I believe the best investment prospects are companies that are disruptive and undervalued - although finding those is very difficult. I hope to make this challenge easier. The [Exclusive]Disruption Score is designed to analyze the long-term disruptive potential of a given stock but then wise investors will combine this analysis with more traditional methods to analyze current valuations and to help determine when to invest in a particular stock.

Takeaways:

  • Investment decisions should be based on the opportunity for disruption in addition to more traditional factors like current valuations.
  • The best investments today may be quite different from the best investments 6 months from now.

IV - Balance Diversification and Opportunity Cost

Perhaps some of the most enlightening investment advice I have ever heard was something said by Warren Buffet.

"Diversification, as practiced generally, makes very little sense for those who know what they are doing." ~ Warren Buffet

This may seem counterintuitive at first but I'd like you to consider the following example. Lets say you have 30 stocks that you like. Obviously, you like some more than others and so you will weigh them differently in your portfolio. In that sense, most investors ask themselves, "How much of my portfolio should I allot to each of these stocks?" Nevertheless, it seems many investors do not even realize that there is an opportunity cost associated with every investment. A dollar you invest in Stock #30 is a dollar you could have invested in Stock #1. That being said, it is important to ask "Should I invest more in Stock #1, instead of investing anything in stock #30?" The answer is not always yes, but it is still important to ask the question.

I know this advice can be a little confusing. You may be thinking, "Wait... So... Should I diversify more? or should I diversify less?" Well, the answer is that it depends.

Takeaways:

  • Assuming you are an excellent investor and you have found the best investment to meet your goals, you may want to consider investing a large portion of your portfolio in that single stock. [It is worth noting, these investors typically have experienced large gains already which makes it easier for them to take larger risks.]
  • Assuming you do not really know what you are doing, you should start with most of your portfolio in very diversified assets (E.g. SPDR S&P 500 ETF) and a relatively small portion of your portfolio allocated across your favorite disruptive high growth stocks. As you grow more experienced, get more confident in your investments, and perhaps build a cushion of gains, it might be wise to consider reducing your diversification and taking larger positions in your favorite investments. If you believe you fall into this category, I encourage you to read our article outlining some of our favorite [Exclusive]Next Generation ETFs.

V - Oftentimes... The Less You Do, The Better

When it comes to investing, one of the biggest factors to your success is "How You Invest". Even if every idea that is discussed on this platform ends up being a winner (unlikely as that is), there are still plenty of ways that investors can make very costly mistakes. That is why it is very important for investors to establish and follow good investing habits and to determine the investing strategy that works best for them given their individual situation.

That being said, sometimes "The less I do, the better I do". I believe this concept will hold true for many investors. That is why the only investment strategy we might generally recommend is [Exclusive]The Hands Off Approach.

Next Steps

The are many ways to get started. For those that may need a little more guidance, here are the questions I believe investors should be asking themselves and resources that may provide the answers that may be right for you.

How should I invest?

What am I going to invest in?

Why am I investing in it?

Lastly, here are some other helpful links that you might find useful:

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