Being an investor can give you whiplash.
Just yesterday, it seemed like you had a perfect investment plan. But today, a talking head on CNBC is preaching about how wrong your strategy is.
So, should you stick with your Magnificent Seven stocks, your QQQ, your 60/40 portfolio, or whichever plan you decided on in the past?
Or should you dump everything and buy bitcoin and gold, or jump on the AI bandwagon, or only invest in private startups?
Too bad there’s not a better roadmap — a way to invest that won’t make you feel like a chicken running around with his head chopped off.
Actually, there is a better roadmap.
And we can uncover it by looking at how two successful investors navigated a time of great uncertainty: the dot-com boom and bust.
Destroying Value!
“Value is destroyed, not created, by any business that loses money over its lifetime.”
This quote is from Warren Buffett. He was discussing his rationale for avoiding money-losing dot-coms during the late 90s. At the time, everyone on the planet seemed to be pouring money into these companies.
Buffett’s avoidance of these stocks led many to dismiss him, and his investing framework, as outdated. After all, professional and amateur investors alike were making fortunes from this trend. It seemed Buffett was missing out.
But Warren ended up doing just fine — in fact, better than fine. He’s still one of the Top 10 wealthiest people in the world, with a net worth of over $100 billion.
Does that mean he was right and everyone else was wrong?
To explore this question, let’s look at a tech investor named Fred Wilson.
Tech Investors Have Done Well, Too
Fred is the co-founder of Union Square Ventures, one of the world’s most successful venture-capital firms. He invested in money-losing startups like Twitter, Zynga, and Etsy at their earliest stages — and profited massively as they grew to become multi-billion-dollar public companies.
He tends to look at companies and investments differently than Buffett. For example, things like profits (or lack thereof) don’t necessarily concern him.
More than ten years ago, he wrote a timeless post on his blog that sums up his thinking about how he sees businesses and investments over the long term.
In the post, Fred talks about publicly-traded companies that are currently losing money, but still command multi-billion-dollar market caps.
Fred argues that these losses are intentional. After all, he says, the company’s managers could turn those losses into profits at any time. All they’d need to do is invest less in future growth.
Startups are essentially doing the same thing. They’re not losing money, per se. They’re simply making an investment in their future.
Does this mean Fred is right? Is the road to riches paved with profitless tech companies?
Here’s What You Should Do
These are two very different schools of thought when it comes to investing.
But instead of looking at what makes them different, let’s look at what they have in common.
Long-Term Thinkers
Both Buffett and Wilson take a long-term view of their investments. Buffett is clearly unmoved by the pundits on CNBC. He’s been using the same investment strategy for decades, and has been through multiple market cycles. The internet trend didn’t phase him at all; he stuck to the plan he’d always had without feeling he was missing out.
Same with Fred. After the dot-com meltdown, many “tech investors” suddenly had zero interest in tech companies. But Fred believed in the power of technology and its ability to change the word — maybe not right away, but certainly over time. He kept right on investing in new tech startups, and he’s continued to have enormous success.
Invest in What You Know
Buffett has often said he doesn’t avoid tech stocks because he thinks they’re inherently “risky.” He just thinks they’re risky for him because he doesn’t know enough about tech. What he knows about is insurance, consumer goods, and finance – which explains his investments in companies like Coca-Cola, Goldman Sachs, and Geico.
Fred, on the other hand, has been an early-stage technology investor his entire career. And before he was a venture capitalist, Fred attended MIT where he studied Mechanical Engineering. Technology is in his DNA. It’s what he knows, which explains why this is where he invests.
Frameworks
Warren and Fred don’t throw darts at the wall to pick their investments. They create an investing framework — a filter. By putting a potential investment through their filter, they can determine its merit.
Buffett’s framework, for example, involves looking for companies in specific industries, trading at prices that denote “value.”
Wilson’s framework involves getting into certain types of technology companies very early — companies that can gain “network effects,” for example, where the value of a product increases as more and more people use it. Think Facebook, or Twitter, or social games.
Without a stable framework, it’s doubtful that either investor would be as successful as they are today.
Play the Long-Hand
To wrap things up, let’s look at how this relates to what we do here at Crowdability.
Investing in private startups has become very popular recently.
Makes sense. According to Cambridge Associates, over the last 25 years, startups have returned an average of 55% per year. That’s about 10x higher than the stock market.
And if you get into startups like Uber or Facebook or Airbnb… well, you could turn a few hundred dollars into millions.
But if you jump into startup investing because it’s “trendy,” you might lose the confidence to stick around when the waters get choppy.
Keep in mind: sailing through choppy waters is one of the hallmarks of both Buffett and Wilson. They play the long-hand. And this steadfastness is what’s led them to create vast wealth.
To be the most successful startup investor you can be, follow the time-worn lessons of by Buffett and Wilson:
Think in terms of years, not months.
Stick to industries you know or can understand.
And have a framework that you can apply consistently.
We can help you create a framework in our free report: The 10 Crowdfunding Commandments »
If you haven’t already read it, dive in today!
Happy Investing.
Best Regards,
Founder
Crowdability.com
