Most folks would think the goal of investing is “always make money.” But the reality is more nuanced.
Many investors – especially those who trade – enjoy the activity.
Investing can be intellectually engaging and a lot of fun… and there’s nothing wrong with that.
I often use gambling analogies to talk about investing, and this is another case where one applies.
For those who enjoy gambling, ask yourself – why do you gamble? Again, the obvious answer would be to make money. We know the reality, though, is far different.
When gamblers lose money, they’re considered to have a problem. When investors lose money, they’re often jokingly considered “value” investors.
There’s a critical difference between the two. With gambling, the house always wins – eventually. With stocks, investors always win – as long as they’re investing in solid growth companies.
So, why do you invest? If it’s for the thrill of the game, that’s great. But if your goal is to make truly outsized returns, you need to have a plan…
I’ve often emphasized how some of the basic rules that apply to successful professional gamblers also apply to trading and investing. These are concepts like managing your bankroll, betting more on high-probability bets, and knowing when to walk away from the table.
The same sort of strategy can apply to your investment portfolios. And that means asking questions like:
- Do you want both an investing and a trading portfolio? If so, how big should each of them be?
- What is the goal of the investing portfolio? Is it just maximum return?
- How much do you care about volatility and drawdowns?
- And likewise with your trading portfolio, how active are you willing and able to be?
You can answer these questions in different ways, and the answers will differ for each individual. But the most important thing is that you’re asking these questions.
While it’s important to consider what your plan is around these questions, it’s most important that you actually have a plan.
The vast majority of investors never really even ask themselves why they do what they do. They never question what their goals are or how to achieve them.
If your goal is to make big returns, you need to invest accordingly. And that points to one part of the market today – for one simple reason…
Recently, when talking about the concept of looking for big market potential, I discussed the opportunity emerging in the area of special purpose acquisition companies (“SPACs”).
The simple version of this story is that we’ve seen more than a decade of private-equity investment in growth companies that haven’t been able to go public. This is because all of the smaller investment banks – who would do smaller deals – have been gobbled up.
Today, SPACs present an opportunity to get involved in this wave of growth companies while partnering with top investors.
As I shared in DailyWealth last week, this is an area where a company’s big earnings potential can strongly correlate with big upside potential of its stock.
Ask yourself this question – would you rather make 10%, 100%, or 1,000%? Of course, the answer is easy…
But remember that it’s much easier for stocks of smaller companies to go up 1,000% than those of bigger companies. It’s just basic math.
We can start with the fundamentals. Again, I believe that stock prices are generally tied to the earnings of a business.
If a company is earning $100 million of net income or $1 of earnings per share (“EPS”) and it goes to $1 billion of net income or $10 of EPS – then that stock is going higher. As I said last week, we ultimately don’t know the timing and magnitude of the stock move… but it’s going up.
Likewise, if that company’s market cap is $1 billion, then it needs $5 billion to $10 billion of incremental buying to get to a $10 billion market cap. Those are big numbers… but it’s doable.
Now look at huge companies like Facebook (FB), Alphabet (GOOGL), Amazon (AMZN), Microsoft (MSFT), and Apple (AAPL).
The average revenue of these companies is more than $200 billion. Their average net income is more than $40 billion, and they have an average market capitalization of more than $1 trillion.
It’s going to be a lot harder for these companies to grow their revenue, earnings, and marketing by 10-fold from current levels.
To make big returns, you need to focus on companies that have opportunities to see big growth in their markets and earnings.
Today, this is the opportunity in SPACs. It’s a chance to break into a group of growth companies that have been increasing in size for a decade… and are now finally open to the public markets.
Regards,
— Enrique Abeyta
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Source: Daily Wealth