Peter Lynch was a rock star of a stock picker.
During his 13 years at the helm of Fidelity’s Magellan Fund, he racked up 29% annual returns.
To put that in perspective, a $50k investment would have grown to $1.4 million.
How did he accomplish this feat… and how can you copy him to become a rock star start-up investor?
Follow The Kids
Lynch had some unique tricks for uncovering investment opportunities.
As legend has it, he’d send his teenage daughter to the mall with some spending money. After seeing which stores she bought from, he’d analyze the stocks of those companies.
Makes sense: kids intuitively know “what’s cool” and “what’s next.”
They can perceive things about brands and products that the average financial analyst (a middle-aged guy, wedged into his Dockers and cubicle) glosses right over.
But the “Follow The Kids” strategy doesn’t just work for publicly-traded stocks…
It works for investing in start-ups, too.
Let’s take a look.
Doing The Macarena
Facebook recently paid $2 billion for Oculus, a maker of virtual reality headsets.
Last month, Apple bought a headphones maker called Beats for $3 billion.
And Time Warner, the old-school media company, is angling to buy a stake in Vice Media at a $2.2 billion valuation. Vice is currently the cool kid on the block, with a tattoo-covered founder and an uber-hip Brooklyn headquarters.
In each of these examples, you’ll see a common pattern:
A well-established, cash-rich company gets nervous that it’s missing the boat. It realizes that it doesn’t know how to appeal to the next generation.
It’s still dancing a waltz – and meanwhile, it hears that the cool kids are doing The Hustle now… or is it The Macarena?
Fearing for its life, it goes on a shopping spree.
M&A to the rescue!
Buying a Ticket to the Next Generation
There are many reasons bigger companies buy start-ups:
It gives them access to top-notch management teams…
It helps them stave off potential competitors…
And it’s faster to buy something than to build it.
But acquisitions like Oculus or Beats fit a different M&A profile:
They get acquired because they deliver youth.
The dinosaurs are buying a ticket to the next generation.
They’re buying the chance to fight another day.
“Cool” For a Moment
So as you look at investment opportunities on equity crowdfunding sites, ask yourself, “Would kids and teenagers use this product? Are they using it already?”
Better yet: ask your kids or grandkids if they think it’s cool. Ask your nieces and nephews.
If history is any indication, it might be a very profitable question.
Is this a foolproof investment strategy?
Hahaha! (Or as the kids would say, “LOL.”)
Unfortunately, there’s no such thing.
Kids are a fickle bunch. Before long, they move onto the next thing.
But even when a start-up is only “cool” for a brief moment in time, as long as it can attract rich suitors, it can earn big profits for its early investors.
Look at MySpace, one of the early social networks:
In 2005, chasing a younger audience, News Corp bought it for $580 million.
But it wasn’t long before kids ditched it. After it fell out of favor, it was sold in a fire sale for just $35 million.
In 2008, AOL bought an “up and coming” social network called Bebo. They paid $850 million in cash for it. Its founders and early investors made a fortune.
But like MySpace, the kids soon got tired of it. Eventually it went bankrupt. Bebo’s founder bought it back from AOL for just $1 million.
Bring In The Cool Kids
Maybe the story will play out differently for Oculus, Beats or Vice. Maybe these companies will stand the test of time and become the new dinosaurs.
Or maybe they’ll just be flashes in the pan.
Either way, you can reap big rewards by being an early-stage investor – you’ll own equity in a start-up before it’s acquired.
So keep an eye out for start-ups attacking or attracting the youth market…
If they can figure out how to bring in the cool kids, profits might be waiting for you.