Don't make this fatal investing mistake

By Wayne Mulligan, on Thursday, December 3, 2015

Like you, I’ve lived through my fair share of bull markets:

Junk bonds...

The dot-com boom...

The housing boom.

And if you know how to play these markets, you can walk away with a great deal of money.

But most investors lose money in these situations.

That’s because they make a fatal mistake—a mistake that can crush your portfolio every time a “hot” new market pops up.

They look at the situation, and they tell themselves:

"It’s different this time."

The Most Dangerous Phrase Ever Spoken

What makes this state of mind so fatal to investors?

To help explain, let’s look at a market that’s red hot at the moment: start-up investments. In fact, let’s look at a specific high-flying start-up:

Since its founding in June 2012, this company has raised $275 million from private investors.

And during that time, its valuation has grown from just a few millions dollars to $2 billion.

Those are exciting numbers. Even more exciting is that you could have the chance to invest in this company right now, and it’s not even public yet. I’ll explain how in a moment...

But here’s the thing:

If you decide to invest in this company just because it’s one of the hottest start-ups in one of the hottest markets... you might be making a fatal mistake.

On-Demand... Rip-Off?

The company I’m referring to is called Instacart.

It’s an on-demand grocery delivery company.

The way it works is simple:

Place an order on Instacart’s website, and within an hour or two, your groceries will be delivered to your front door.

To make money, the company charges a “markup” on all your groceries, as well as a $5 delivery fee.

With operations in 19 cities, it generated over $100 million in gross sales in 2014.

At first blush, that $100 million number sounds impressive—but for many of us who remember the dot-com days, this whole situation seems eerily familiar...

A Major Dot-Bomb

About 17 years ago, a company called Kozmo launched to much fanfare.

It promised the same thing as Instacart: one-hour delivery of anything you could imagine, right to your door.

Within three years, the company had raised $280 million in funding, and had opened outposts across the U.S.

(Is this starting to sound familiar?)

But before long, the company burned through all its cash, laid off its staff, and shuttered operations.

Look: Instacart’s supporters are pounding the table and telling you that their company won’t end up like Kozmo, or Webvan, or others just like it.

They’ll tell you (mistakenly): "It’s different this time!"

But here’s why I disagree.

"It’s NOT Different This Time"

For starters, Instacart loses money on every delivery it makes.

The company might argue that this is a sound customer acquisition strategy; it might argue that it can eventually raise prices once it has a foothold.

That’s great—as long as Instacart’s customers never do the math.

You see, if they actually took out their calculator, they might decide they’d rather take a quick walk to the grocery store to get that gallon of milk themselves.

For starters, customers generally pay a 20% markup for all items—and sometimes more.

So if you order $50 worth of groceries, you’d pay $10 extra.

THEN you pay a $5 delivery fee...

And THEN you tip the delivery person—it’s automatically added to your order.

In total, that means you’d be paying 40% extra.

That might be ok when the market is at an all-time high and you’re feeling flush...

But if you need to tighten your belt—at the same time Instacart raises prices—this could spell trouble.

The Most Important Question to Ask Before Investing

Instacart shares are currently available for purchase on a platform called Waverley — you can learn more about it here »

Who knows?

You may decide to ignore my advice...

Perhaps you’ll agree with the folks who’ve already invested in Instacart...

Folks who believe "it’s different this time."

But before you ever make an investment like this, you need to answer a critical question:

Why now?

In other words, why will this start-up work today, when it didn’t work five or ten or twenty years ago?

If there’s no good answer, let me tell you something:

It’s not different this time.

Happy investing.

Best Regards,
Wayne Mulligan
Wayne Mulligan


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