Warren Buffett often shares this pearl of wisdom:
“You only find out who is swimming naked when the tide goes out.”
Meaning, you don’t really know how well or how poorly a company is doing until it’s faced with a major challenge.
Well, given the challenges the world is facing right now, the tide is certainly out.
And now some companies — and their investors — have been caught swimming naked.
So today, I’ll reveal a simple strategy to make sure you never get caught like this…
A Cup of Steaming Hot Fraud
One of the first companies caught swimming naked this year was Luckin Coffee (NASDAQ: LK).
Luckin is China’s homegrown version of Starbucks…
Last year, its stock went on a tear:
In just seven months, its share price shot up from just $21 to $50.
But then it was revealed that the CFO and COO had grossly manipulated the company’s books…
Imagine Losing Your “Entire Life Savings”
After the accounting scandal came to light, the stock collapsed:
It’s currently down to just $2.58 per share — a 95% loss.
Investors have lost a fortune…
As MarketWatch reported, Lone Capital lost an estimated $367 million on this single trade.
And an individual investor like you claims to have lost his “entire life savings” of $250,000.
Imagine losing your entire nest egg on a single trade? That would be gut wrenching.
So let me show you how to make sure this never happens to you.
The Key to Protecting Your Wealth
To set the stage here, let’s say you have $100,000 to invest.
First of all, you wouldn’t want to put all that capital into the stock market…
Instead, you’d want to diversify across different asset classes like stocks, bonds, and “alternative” investments like real estate and startups.
This diversification can help protect your wealth, and at the same time, it can help increase your overall returns.
But you wouldn’t just want to diversify across asset classes — you’d also want to diversify across individual investments…
Don’t Bet it all on Black
To explain what I mean, let’s dive deeper into your allocation to startups.
Let’s say you allocated 10% of your portfolio ($10,000) to pre-IPO startups.
And then let’s say you invested in Facebook, back when it was still a tiny startup.
Well, Facebook’s earlier investors turned every $1,000 they invested into $2 million.
The thing is, to get “winners” like Facebook, you can’t just invest in a few startups...
Startup “Math” in a Nutshell
To get the odds to work — for the “math” to work out — you need to invest in many of them.
You see, multiple studies have shown that portfolios of start-ups follow a similar pattern:
- A third of the investments will go to zero.
- A third will break even.
- And a third will return 1,000% or more.
So, how many investments do you need to make so those numbers work out?
A Truly “Diversified” Startup Portfolio
Statistically speaking, over time, you should aim to make 25 to 50 startup investments.
With that many swings, you’ll have your share of strike outs…
But you’ll also have plenty of chances to hit home runs like Facebook.
This is how you’ll never go broke, like those unfortunate Luckin investors.
And this is how you can build a large nest egg — even with a relatively small amount of money.