Yea, that got your attention, right? No one of us wants to fail, yet most businesses go bankrupt / close shop after 5 years and most investors actually lose money.
This week we’ve seen quite some market turmoil. There are now immense buying opportunities but many founders will not be able to take advantage of it, because they are way too fearful. Here are the top 5 reasons why founders often fail as investors:
#1 Reason Why Founders Fail As Investors: Don’t Get Their Priorities Right
A very common mistake founders make is that they try to day-trade market movements and then are caught with their pants down by market corrections. Rookie founders who are also investing must understand that day-trading the markets “as a side-business” is not possible, nor does it make much sense since you should be focusing on your core business and not on some meager earnings from stock trading.
Yes, there are definitely a few successful day-traders, but they practice a zen-like robotic trading approach and have lost anywhere between 20,000 and several hundred grand before they finally made it big. Zen-like trading is simply not possible for you and me unless you pursue day-trading full-time and practice it every day. If you have a business to run you can’t pursue day-trading on the sidelines to make some money – it will never work out. But what works especially well for founders is value-investing, growth-investing with a long-term strategy (5 to 10 years). So get your priorities straight!
#2 Reason: Don’t Analyze The Markets, Companies (Right / At All)
As a founder you will already know how to read a balance sheet. You will know the early warnings signs: Low cash on hand, high debt to equity, speculative turnarounds, etc – the list goes on.
With that knowledge you should be able to make very rational, very analytical, very calculated investing decisions.
Analyzing the market and companies correctly is absolutely crucial. For example, right now the commodity sector is beaten down but in just a month there could be an unprecedented run on commodities like oil, silver and gold. Debt is spiraling out of control and a rate hike is inevitable. Although we are “taught” that a rate hike is generally bad for commodities (due to decreasing inflation rates) like gold and silver, the contrary could be true now: When the FED increases interest rates it basically is a signal to the markets that inflation has hit a level that requires the FED to step in to guarantee a strong dollar.
Many banks are forecasting a dollar/euro parity in early 2016 and I’d have to agree. In essence, right now is a time to be bullish on commodities, but most investors are fearful.
Disclosure: I am not investing in commodities at the moment, this is merely an observation.
#3 Reason: Are Unable To Spot Market Misconceptions
The only way to make money as a founder and investor is by spotting market misconceptions. As a founder you have to constantly find niches with an unmet demand. Investing is similar: You need to spot companies that are currently mis-priced.
One easy way of spotting mis-priced companies is certainly tracking M&A activity. Often the market does not take M&A into account until a transaction has closed. That gives ample room for savvy investors to position themselves long before a company takes off due to a successful merger / acquisition.
Another very easy way is to find companies that currently have a very low profit-margins, but have the potential to significantly increase them. One such example is (was) gaming company Electronic Arts. Back in 2012 their profit-margin was very low due a downturn in the economy that put pressure on consumer companies and a low interest in mobile games. People were simply not spending much money on digital goods and not enough on mobile games and in-game purchases. In 2014 and 2015 consumers have spent record amounts on digital goods and consequently EA was able to increase their profits.
Last but not least, you should become familiar with the hype-cycle. Often, certain sectors are over-hyped and will be incredibly overbought only to come crashing down. After the crash they often outperform the market to a great extent and may even far exceed the initial over-bought prices. Examples of this include: Renewable energy and IoT. Stay away from over-hyped sectors and only invest in them at REASONABLE prices.
#4 Reason: Are Unable To Understand The Concept Of Buying In Tranches
Buying in tranches is Investing 101 but some just seem to understand it. In essence what it means that you should never invest your entire stack of money into a company and expect a decent return. Stock markets don’t work like that. You will never in your life successfully predict the bottom price. It just never happens so don’t even try it. Instead buy smaller positions.
#5 Reason: Too Much Fear When They’re Supposed To Be Bullish!
The biggest mistake of all: You are too fearful when you should be bullish and you are too bullish when you should be fearful.
Although the markets are over-heating a little, the recent correction was very healthy. A recession may be coming, but there are still many tremendous value plays.
Investing Ideas For Long-Term Investors
There are tremendous buying opportunities in the markets you simply have to open your eyes.
Below I am listing a few companies that I have on my watchlist. Please note I am not invested in any of these companies nor do I intend to open any position within 72 hours:
- BLUEBIRD BIO
- HSN INC
I believe all of the companies above will appreciate in value by 2020 and are great buys.
Keep investing fellow founders, keep growing, keep rocking the markets!