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Early Investing Webinar with Republic CEO

We know that many of you were unable to attend our webinar with Republic’s Chuck Pettid last week. So if you missed our discussion about crowdfunding real estate and video game investments, here’s a link to the video so you can watch it at your leisure (you can also read more about the webinar below).

Chuck wonderfully explains the opportunities and risks associated with investing in real estate and video games on Republic’s Compound and Fig investment platforms. And he also explains what investors like you and me can expect in terms of returns.

It was a terrific conversation, and we hope you enjoy it.

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AngelList Access Funds Show Promise

Let’s talk about AngelList Access funds. These funds allow you to make a single investment and get exposure to the hundreds of top startup deals that take place on AngelList. I wrote about them back in January. Now, AngelList has posted some return numbers for their original funds. And it’s looking very good so far.

The August 2015 fund had an IRR (internal rate of return) of 17% per year. That’s a return multiple of 2.06 since launch. In essence, the value of the fund’s startup equity has doubled since August 2015. 

Those results look great when compared to the median venture capital fund. AngelList Access Funds have a return that’s 1.46x higher than the Cambridge Associates’ return multiple medium (a large database of VC returns). You can see full results from AngelList’s early funds here.

The beautiful thing about these AngelList funds is that you get exposure to hundreds of the top deals on AngelList, across all different syndicates. And startups raising on AngelList regularly go on to succeed. A few examples include Flexport, Cruise, Brex, and Pill Pack.

The minimum investment (quarterly subscription) is $50,000. So it’s a little out of my range currently. But for any readers who are looking to get access to a huge basket of startup investments, I highly recommend it.

The fund is managed by AngelList’s amazing senior executive team, including Naval Ravikant (co-founder) and Kevin Laws (CEO).

If you’re looking for an “autopilot” startup investment, take a look!

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Roundup: Overvalued Stocks, Gold, and more

This has been a busy week filled with important news and information. So today we’re doing a news round-up — along with brief commentary on each story. Let’s go.

The S&P 500 priced in gold

One of my favorite financial analysts, Lyn Alden, posted the following commentary and chart on Twitter this week:

The S&P 500, as priced in gold, looks a lot less weird than as priced in dollars, since it cancels out some of the stimulus/QE effect.

Ever since U.S. GDP growth peaked in Q3 2018 in rate of change terms, the S&P 500 as priced in gold keeps making lower highs and lower lows.

Index priced in gold

I find it fascinating to look at the S&P 500 as if it were priced in gold (which has been soaring higher this year). This chart shows that while stocks have been soaring higher in dollar terms, when priced in “hard money,” the picture doesn’t look nearly so good.

Gold (and silver) remain my favorite safe haven investments, along with a healthy dose of bitcoin acting as a speculative bet on money printing. For me, BTC serves a similar purpose as precious metals do. They’re both bets on huge deficits, Modern Monetary Theory and QE going forward. Bitcoin has potentially higher returns than gold, but it carries additional risk.

Record percentage of investors say stocks are overvalued

Investors are worried about the stock market. Here’s how CNBC reported the story:

A record percentage of money managers believe the stock market is “overvalued,” according to the Bank of America Global Fund Manager Survey, one of the longest-running and widely followed polls of Wall Street investors.

Seventy-eight percent of investors say the market is overpriced, the highest percentage since the survey began in 1998 and exceeding the levels when the dot-com bubble burst in 1999-2000.

The survey queried 212 mutual fund, pension fund and hedge fund managers. It’s clear that most people seem to realize U.S. stocks are expensive. But with the Fed pumping markets higher, prices may go up even more. And with many bonds yielding nothing, or even negative rates, it’s going to be an interesting next few years. I continue to favor high-yield emerging market stocks over U.S. markets.

Wirecard files for insolvency after revealing $2 billion accounting black hole

One of Germany’s largest fintech companies, Wirecard, filed for insolvency this week. Wirecard has long been a target of short-sellers who have alleged accounting fraud (since at least 2008). The matter finally came to a head this week. And the company’s shares crashed from more than $58 on June 17th 2020, to less than $2 today.

The Wirecard case demonstrates how difficult it is to make money shorting stocks. Even if you were correct in 2008 and bet against Wirecard, you would have gone broke shorting the stock long ago. Read more about this fascinating story in this thread about “winners and losers” on Twitter.

Billionaire Howard Marks fears for stocks if Fed stops ‘levitating’ markets

“What happens if they stop?” That’s the big question today about the Fed. In theory, the Fed can’t prop up the markets forever. Yet I think it’s pretty clear by this point that they can’t stop. The economy would melt down. Legendary investor Howard Marks sums up our current situation well. Here’s an excerpt from Business Insider’s reporting:

Billionaire Howard Marks has questioned whether a market rally that has seen stocks jump from their early pandemic lows in recent weeks is sustainable once the Fed stops “levitating the markets.”

The famed investor, who is the co-founder and chairman of Oaktree Capital Management, told CNBC in an interview this week: “It looks to me and many other people that the markets are somewhat ahead of themselves.”

I don’t see any way out of this situation other than continued money printing. Any weakness in markets or the economy will be met with more. One important question is, how long can it last? That’s very hard to say. But it will likely last longer than we think it should.

Day traders will have fun until they get wiped out

Day Trading generates legendary stories — and lots of heartbreak. From Bloomberg:

A large amount of empirical evidence confirms that most day traders lose money. A very large 2004 study of Taiwanese day traders, for example, found that more than 80% lost money. A tiny number — about 0.03% — earned consistently large profits, but the odds of possessing this kind of skill are slim. Most studies of day traders in the U.S. and Finland yield similar results — a few traders are consistently good, but most lose out.

In this study, 80% of day traders lost money. Be careful out there folks. And if you haven’t read last week’s piece about the dangers of day trading, I recommend doing so now.

Tweet of the week (by Thomas Sowell): 

Advice to the young: You don’t have to listen to anybody. You can learn everything from your own personal experience. Of course, you will be at least 50 years old by the time you know what you need to know at 25.

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Startup Founders Leaning Into COVID-19 Economy

It’s been surprisingly difficult to pigeonhole the effects of COVID-19 on startups. I’ve reached out to many startups to see how they’re doing in the current market. And much to my surprise, many founders have told me that COVID-19 is a “net positive” for their companies. None have said that it’s done more harm than good. And none have even hinted that it will drive their young companies out of business. 

That’s great news. I’m just not sure if I should accept it at face value. COVID-19 sparked an economic recession. Several industries are still floundering — particularly travel, hospitality and entertainment. Capital flows are constrained. And banks are more cautious about lending money. 

But I’ve talked to dozens of founders of  early-stage startups over the past couple of months. And a majority of them have found unexpected ways to forge ahead and even accelerate progress. 

Startups aren’t necessarily as vulnerable as you might think. They have small payrolls. They know how to operate on tight budgets. They can be impervious to supply-chain disruptions because they’re often pre-revenue or software-dependent… All these things make them resilient to economic slowdowns. 

But their biggest superpower is their ability to  tap into powerful trends. All the founders of direct-to-consumer (D2C) startups that I’ve talked to say business is booming. The typical response has been similar to what I heard from the founder of an innovative wine club company: “We gained over 26,700 new customers in March. It exceeded our new customer acquisition goal for the entire year!”

Things aren’t so rosy for every founder I’ve talked to. Some gave me more mixed feedback. One founder, for example, admitted that their company wasn’t able to fulfil two to three weeks of orders because of supply chain disruptions. 

As I continued having conversations, I noticed a pattern. Startups seemed to fall into one of three groups when it came to how they’re faring… 

  1. Startups benefiting directly from pandemic and recessionary conditions. Besides D2C, startups have jumped on other powerful trends. Companies that enable remote workers are a good example. So are companies that make it easier to exercise at home. Then there’s the startups that help doctors and nurses make good decisions in the midst of often chaotic hospitals. A good example of this is a startup we recently recommended to our First Stage Investor members. This startup offers the latest treatment information on COVID-19 (and hundreds of other ailments) through a mobile-friendly app. 
  2. Startups benefitting indirectly from the recession. These startups are a diverse bunch. The founder of a company that grows through acquisitions said COVID-19 and the recession have driven acquisition prices down a good 30%. A drone-enabling company said investors are more interested than ever before in solving last-mile delivery problems. And a company that helps truck drivers find gigs said the recession is driving truck companies out of business, which increases the need for his services. The pandemic has helped a multitude of startups like these in unexpected ways. 
  3. Startups hurt by the pandemic or recession. I’ve also spoken to plenty of these founders. Most come from the brick-and-mortar retail and restaurant worlds. But not all of them. A founder of a company that brings more transparency into the global recyclable materials market said there’s been a drop in demand because buyers and sellers aren’t able to close deals person-to-person. 

Companies in certain industries are hurting right now. And startups in those industries are no exception. But the real takeaway from my conversations is how many startups aren’t just surviving. They’re accelerating their growth. The best startups are incredibly nimble. They see emerging issues, so they repurpose technology and existing products in response. And more importantly, COVID-19 has brought into sharper relief many of the problems that startups were already addressing. 

The demand these startups were projecting for their products has shifted from the future to the present. Instead of hoping for demand to materialize, they’re seeing it in real time. The path forward for these companies is suddenly clear. And the risks are much lower. 

They also make the most compelling investing opportunities for early-stage investors. 

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Online Angels Have an Advantage Over VCs Right Now

Traditional startup investors (VCs and angels) tended to do deals in person. It’s a slow and inefficient method. But it’s the way things have always been done.

During this crisis, everyone has been forced to operate remotely. But from what I’m reading and hearing, many VCs are still not comfortable investing over video calls.

Those of us who are used to investing remotely have an advantage today. I’ve been investing in startups from home for 6 years now. I am now completely comfortable deploying capital without meeting the founders. And I’ve had enough success that I believe remote investing consistently works.

One interesting thing about investing remotely is that you can focus more on the company’s fundamentals and potential rather than how charming the founders are. I suspect there might be an overall advantage to NOT meeting the founders in person.

The key thing for online angels like us is to look for deals on high quality platforms, like AngeList. AngelList’s syndicate leads are experienced early-stage investors. You can easily find high quality deals through them. 

As long as we’re investing alongside other quality investors in promising deals, remote investing works. We’re lucky to have the ability to invest in great deals when many traditional VC firms are essentially frozen. 

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Don’t Fall for Day Trading

Day trading is back in a big way. 

Robinhood, the original free stock trading app, has seen a huge influx of users this year. And I  have a strong feeling most of them are new to investing. From Barrons:

“Free trading app Robinhood has added more than three million accounts in 2020, and now has over 13 million. The median age of its customers is 31. The Covid-19 lockdowns and the plunge in markets in March persuaded millions of new investors to open accounts. Some of the action appears to be from people who would otherwise be gambling or betting on sports—both of which were shut down.”

There are stories of people making (and losing) huge sums of money on options trades all over the web, particularly in communities like Reddit’s Wall Street Bets.

I’m here to caution you against day trading. Back in January I wrote a piece titled Trading Too Much Hurts Returns. And in it, I highlighted a study which showed that investors who trade more often make a lot less money on average.

“We divided investors into five groups based on how actively they were trading. Our prediction was that the more active traders, who are also likely to be the more overconfident traders, would trade too much and end up with lower performance after paying their trading costs. And that’s exactly what we found.

We found that the buy-and-hold investors, after trading costs, were outperforming the most active investors by about six or seven percentage points a year.”

Those results are stunning. The investors who traded the most underperformed by a whopping 6-7% per year.

 

Story Time

Like many investors, I had to learn this lesson the hard way. I tried my hand at day trading for a period around 2005. At the time, I had recently gotten my Series 7 (stockbroker) license. I thought I was ready. 

On my very first trade I made a profit of $1,700. That was the worst thing that could have happened. Because then I was hooked. I continued to trade short-term, sometimes using leverage, for a few more months. 

Over those months I lost around $15,000. I basically wiped out my trading account. It was an expensive lesson. But I’d do it again. It allowed me to learn day trading wouldn’t lead to success when I was still in my twenties. 

Since that time I have focused on long-term investments. And the difference has been profound. I believe buy-and-hold is the only way that most retail investors will make money in stocks over the long-term.

Charlie Munger, co-founder of Berkshire Hathaway, describes why this is the case perfectly when he says, “The big money is not in the buying and the selling, but in the waiting.” 

This is so true. I held the stock investments that really moved my portfolio for 4-15 years first. The power of compounding over many years can be truly incredible. Another huge benefit is that you get to take advantage of long-term capital gains, which are taxed at a much lower rate.

 

Resist The Temptation

Today, the lure of day trading is stronger than ever. Stocks are being driven higher by the Fed. And trades are free on almost every big U.S. brokerage. It’s a dangerous combination.

So if any of you out there have recently started day trading, I urge you to be cautious. Try paper trading first. Or at least set aside a small portion of your overall portfolio (5-10%) and only use that for short-term trades. Let the rest sit in great stocks or index ETFs for the long-term. 

And unless you’re a professional, I strongly recommend avoiding options and leveraged ETFs. They are truly dangerous in an environment like this. For every story you see about someone making huge options gains, there are at least three to four huge losses you didn’t hear about.

 

Swing for the Fences in a Smarter Way

If you’re eager to swing for the fences, consider utilizing a long-term approach by investing in startups. Private startups are illiquid. Once you invest, you’re in it for the long-haul. Buy-and-hold discipline is enforced automatically. There’s no risk of panicking and selling too early. It’s one of the reasons I love early-stage investing. Just be sure to research investments properly before you pull the trigger. 

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Investors Should Avoid Getting Hertz

Hertz is the latest example of baffling investor behavior. 

On May 22nd (the Friday leading into Memorial Day weekend), bankruptcy rumors caused the car-rental company’s  stock to drop 7.5%. The rumors turned out to be true. Hertz officially filed for bankruptcy that night. And by the time the markets reopened, their shares had further plummeted down to an abysmal 41 cents. 

Then something quite remarkable happened. 

In a five-day span from Wednesday, June 3rd, to the following Monday, June 8th, Hertz’s shares took off. They topped out at $5.53. But the zaniness didn’t end there. A week later Hertz announced it was seeking to raise $500 million through a new stock offering. The judge unenthusiastically approved the request. He said it was unclear whether the stock will be worthless by the end of Hertz’s bankruptcy proceedings. 

That’s not exactly a compelling reason to buy. Perhaps Hertz hopes that the same investors who pushed its stock up the week before will now purchase $500 million worth of new shares. 

I suppose that with a struggling economy and overpriced stock market, investors in search of big gains feel like they can’t be choosy. Hertz is not an impossible bet (though also not a good one). A bankruptcy filing doesn’t mean the company is going out of business. Instead, it can be thought of as a lifeline. It’s a chance to restructure its woeful finances and heavy debt obligations and begin again. 

This isn’t the first time Hertz has tried this. It declared bankruptcy on the last day of 2014. And it came back, listing again in mid-2016. The company says the bankruptcy process will give it “a more robust financial structure.” 

That’s great in theory. The problem is the economy (and, arguably, the company itself) is much worse off now than it was in 2015. It’s not hopeless. But it sure ain’t the smartest way to invest. 

If you’re looking for the thrill of striking it really big on a single investment, at the very best — and if everything goes Hertz’s way — investors might make up to 10X. For a public stock, that’s amazing. The chances of it happening with Hertz is extremely slim. But that slim possibility is what’s fueling demand for Hertz shares at a rather hopeless time.

To say investors are overreaching for big gains is an understatement. There’s a much better way to buy low that doesn’t involve investing in bankrupt companies that are grappling with existential threats, bloated work forces, an excess of supply and a bunch of competitors. 

I’m talking about crowdfunding. Hertz belongs to yesterday’s transportation era. If you want to invest in the thriving transportation companies of tomorrow, go to the startup space. You’ll find drone companies solving problems of last-mile delivery and passenger drones capable of taking people to destinations up to 100 miles away. You’ll find a number of software startups contributing to the technology of self-driving cars. You’ll find startups seeking to improve your flying experience. 

The list goes on! The hottest technologies in the transportation industry (and the companies with the biggest upside) aren’t public companies. They’re private startups. And many of them will at some point raise money from you, the everyday investor. The upside for transportation startups that bring real disruption to the space is 30X to 50X. And I guarantee some transportation startups will do much better- hitting 100X or more. 

Unlike Hertz, these startups aren’t household names. If you’re not familiar with the portals they list on (like Republic, SeedInvest, Wefunder, MicroVentures, NetCapital, and StartEngine), they’re tough to find. And once you find them, you still have to do some research. Not all startups are equal. Some are much better than others. (If you don’t have the time, simply become a First Stage Investor and get our twice-a-month recommendations.)

The choice between Hertz and promising transportation startups is a no-brainer. Hertz is bankrupt. And even the healthier transportation stocks  have very limited upside these days. And that includes Uber. (Meanwhile, startup investors got rich investing in Uber. Another reason to sign up for First Stage Investor.) 

Hertz would be a stretch even if there weren’t a much better way to make big gains. But there is. You can easily access top-quality startups online and invest affordable amounts. Investing in Hertz is nuts. Funding startups is the smartest and most effective way to realize big gains.

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Startup Investing in a Recession

The U.S. stock markets are nearing all-time highs. But all is not well with the economy.

A huge portion of small businesses are struggling to pay bills. Big corporations are faring better, but they have their own issues that need to be addressed — too much debt, overpaid CEOs, and profits spent on buying back their own stock.

In my view, we’re still in a serious recession. It seems as if the Fed thinks so too. They’ve said they won’t consider raising rates until 2022.

And while you may not be able to see the ongoing recession through the lens of the stock market, it’s clearer in the early-stage private investing world. 

Startup deal volume is way down. A lot of young companies won’t survive the coming months. 

This is not necessarily a bad thing. Things were getting a little too hot in the startup world in my opinion. VCs were investing far more than any time since the 2000 bubble. Money was relatively easy to come by. 

Now, things are harder. And this makes for a better investing environment. Founders have to get serious about being profitable. Non-serious founders are often screened out by this type of market. Valuations appear to be dropping in most sectors. 

One of my favorite angel investors, Jason Calacanis, says that “Fortunes are built during the down market, and collected in the up market.”

This isn’t always the case, of course. There are great startup investments to be found in any market. But I believe it’s probably easier during recessions. Just as it is usually more profitable to buy stocks during a downturn. 

There will be fewer deals out there. But on average, they will be higher quality at a lower price. That’s good news for investors like you and me.

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The Fed is Reflating the Bubble

This market is crazy. We’re in the middle of a severe economic crisis. The Nasdaq Composite index recently cracked the 10,000 mark for the first time and hit a new all-time high. Even the broader S&P 500 got back to even for the year before falling back.

And earlier this week something very strange happened. Bankrupt companies like Hertz, Whiting Petroleum, Pier 1, and JC Penney, all saw their shares jump higher for some reason.

Here’s how CNBC’s reported this unusual phenomenon.

Hertz, Whiting Petroleum, Pier 1 and J.C. Penney, which all declared bankruptcy amid the pandemic, saw their shares surging at least 70% each in Monday’s trading alone, some of which more than doubling.

As I write this, these bankrupt stocks are coming back down to earth (and are likely headed to zero). When companies declare bankruptcy, the common stock is usually wiped out. So it’s strange that they all soared so much to begin with.

These moves appear to have been driven by retail day traders. Such irrational market behavior is not a good sign. It means that stocks are once again being driven higher by the Federal Reserve, which is attempting to reflate the bubble.

Reflating The Bubble

It’s clear to me that the U.S. stock markets are experiencing a Fed-induced mania. The Fed has already lowered interest rates to near zero this year and pumped trillions of dollars into the economy. I don’t think it’s a coincidence that asset prices have soared in response.

And this week Fed Chairman Jerome Powell said they’re not even “thinking about thinking about raising rates” right now. And they don’t plan on raising rates until 2022.

This is a dangerous time for investors. We don’t know how long the Fed can keep markets elevated at such high prices. This bull run could go on for another year. Or it could have already ended.

The key thing for me is that this market move is not based on anything remotely fundamental. The economy is struggling. Profits are dropping. Yet prices are soaring. It’s a mania.

The market pulled back sharply on Thursday. The Nasdaq fell 5%. The S&P 500 fell almost 6%. And the Russell 2000 dropped more than 7%.

Many investors will instinctively buy the dip in U.S. stocks. But stocks are still very expensive. So I am being more cautious and am focused on precious metals (and miners), cash, startups, bitcoin and emerging markets.

Be careful out there. And try not to get caught up in any FOMO. Just because U.S. stocks have responded well so far to the Fed’s actions doesn’t mean they will do so forever.

Here’s some further reading about how the Fed can influence stock markets.

Good investing,

Adam Sharp

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Bringing Inclusion to Startup Investing

Crowdfunding can’t fix the social ills of this country by itself. But it can be part of the solution. New companies — with 99% of their growth ahead of them —  are the economic engine of the U.S. 

Per dollar of revenue, they hire more people than any other group of companies. They provide a pathway for entrepreneurial citizens of any background and race to participate in our economy and reap the profits that come with entrepreneurial success. Crowdfunding helps provide capital to the most deserving startups — especially those beyond San Francisco.

I think of crowdfunding as the younger, hipper and fairer cousin of venture capital investing. Especially these days, the fairness part means something.

As an outsider to the tight-knit circle of Silicon Valley investors, crowdfunding resonates with me. It was purposely set up (in the JOBS Act of 2012) to democratize startup investing. Congress rightly decided that everyone should have the ability to invest in startups. 

In the decades leading up to 2012, that was far from the case. Startups had made hundreds of Americans enormously wealthy. But it was a very insular community. It was mostly  white men in Silicon Valley investing in startups begun and operated by white men in Silicon Valley. 

The vast majority of Americans were shut out. And that included minorities, who were underrepresented among both VC firms and among startups seeking money from those firms. 

Crowdfunding has been much better. Nine of the last 15 startups we’ve recommended counted minority founders in their ranks.

I didn’t set out looking for startups with minority founders. In fact, I don’t keep track of this. It happened organically. 

And that’s the power of crowdfunding. When I recommend a startup to invest in, it’s based solely on the merits of the startup… not on gender, ethnicity, age or geography. 

Fairness and inclusiveness are built into the DNA of crowdfunding. Crowdfunding democratizes access to capital. And it gives me the freedom to be objective and discerning in selecting the best startups for Early Investing’s community of investors. Diversity comes naturally.

That’s not to say I’m not concerned about this country and the direction it’s going. Of course I am. 

But I believe in American exceptionalism. I believe foremost that Americans are exceptional entrepreneurs and innovators. That they have a knack for creating amazing companies. And crowdfunding aims to leverage this exceptionalism. It assumes that no one group has a monopoly on how to build a dominating company. So we have to keep the process as inclusive as possible. 

Based on my experience, crowdfunding has done a good job of advancing financial and economic inclusion. Can the crowdfunding space do better? Absolutely.

Investment platforms need to do a better job of reaching out to minority entrepreneurs and letting them know crowdfunding is a viable option.

And companies that research and vet startups, like Early Investing, need to do a better job of reaching out to minority investors and letting them know how lucrative startup investing can be.

Fortunately, the inclusive nature of crowdfunding has already started this process. As the pool of capital from everyday investors expands, it attracts more and more founders eager to tap into it. 

My job, as I see it, is to make sure those everyday investors lend their capital to the startups that have the best chance of providing outsized gains. Everything falls into place from there: Big returns attract more investors. More investors grow the capital pool. That draws in more startups, which leads to greater inclusion. 

Crowdfunding needs to get a lot bigger to make a really meaningful impact. But I’m a patient man. I’m not going anywhere. 

This is just the  beginning. And things are falling into place.

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