Last week, Wayne showed you a simple way to double your investing profits.
As he revealed, the trick is simple:
Avoid making “losing” investments!
Over the years, we’ve discovered a number of ways to identity these profit-killers.
But one strategy is simpler and far more effective than any other…
And today, we’re going to share it with you.
Avoid the Frauds!
You’ll never be able to completely eliminate the risk of making a losing investment.
That’s just not realistic.
But if you can screen out the worst ones, you can stack the odds in your favor.
And as you’re about to learn, screening out the worst ones is actually pretty simple — because the worst ones are outright frauds and scams!
To identify these frauds in advance, we’ve developed a simple three-step process.
We call it “DTP” — and it can help you spot the next Enron or WorldCom a mile away.
Step 1: Domain Experience
The “D” in DTP stands for “Domain Experience.”
Domain Experience refers to a CEO having direct and relevant experience in the industry of his or her company.
First of all, there’s an enormous body of evidence linking domain experience with the long-term success of a company.
One reason for this, as noted in the 2010 study, Factors Affecting Survival, Closure and M&A Exit for Small Businesses, is that executives “with prior experience in the industry know the dynamics of the industry, key players, and drivers of success.”
That means, for example, that they already have key relationships in place to help them build their company faster, and they won’t waste time pursuing unprofitable business lines.
This rule also applies to the Board of Directors. That’s because the Board provides oversight of the company’s management team on behalf of the shareholders.
Simply put, if the Board comes from “inside” an industry, they can call out the CEO on false claims that are being made…
They’ll keep the CEO honest!
Step 2: Proven Traction
The “T” in DTP stands for “Traction.”
Traction is another way to describe measurable progress.
The reason it’s so important is because it’s very hard to fake.
For example, if a company has actual sales — if users are willing to pay for its product or service — that’s evidence that it’s created something real and valuable.
You can also identify traction through other ways…
For example, to gauge progress in a sector like biotech (where it can take many years for a drug to come to market and start creating sales), you can look for interim milestones.
These milestones include patent awards (not just filings), Phase I or Phase II clinical results, or “peer-reviewed” publications where independent experts can support or refute claims.
Of course, plenty of companies without traction will be perfectly legitimate — but if a company doesn’t have any traction, you should avoid it anyway!
Step 3: A Clear and Simple Plan for Success
And lastly, the “P” in DTP stands for “A Clear and Simple Plan.”
A company’s plan might change over time. But having no plan is a red flag.
A plan should have three elements:
- Use of Funds: This is a roadmap. It lays out how the company will use its capital to accomplish its goals.
It should be a specific. For example, “Over 12 months, we’ll spend $2 million on marketing, $1 million on salaries, and $1 million on rent, software and travel.”
If there’s no Use of Funds, perhaps the company’s leadership is thinking about how to put that $4 million into their own pockets.
- Milestones: A company should have a step-by-step plan for achieving success.
For example, with its $1 million marketing budget, perhaps it aims to acquire 100,000 customers. This shows us that the executives understand the nature of their business, and have a realistic roadmap for how to build it.
If a company is pitching you on an audacious goal like “sending a man to the moon” or “curing cancer,” but has no milestone-based plan, it could be a scam.
- Future Funding: A startup should know when it will need to raise more money.
If an executive is saying he can send a man to the moon for $1 million, that’s a red flag.
Either he’s out of his mind, or it’s a scam — but either way, it’s not worth the risk!
A “Real-World” Example
Today, you learned about a simple three-step process to avoid making “losing” investments.
This is a proven way to dramatically increase your investment returns.
And tomorrow, because this is so important, Wayne will go even deeper:
He’ll be showing you how to apply this process to a “real-world” company.
So stay tuned!