Bet On The Future, Today

By Wayne Mulligan, on Thursday, April 3, 2014

Last week, I introduced you to “Private Alpha,” a powerful investing strategy.

In brief, Private Alpha uses information about private companies to make a killing in the public market.

I showed you how top-tier hedge funds have used this strategy to generate winning investment ideas – “trades” that have returned anywhere from 100% to 900%.

Then I showed you how to use a similar approach for your portfolio.

While this is an effective and exciting approach, one of its limitations is that it limits you to single trading idea.

Today, I’m going to show you a way to get around that limitation...

Today, I’ll show you how to take the early-stage research we feature each week at Crowdability, and turn it into several stock trades.

Better still, this is an approach you can use to place bets on either side of the market: you can leverage a single, private market trend to take bullish or bearish positions.

Let’s get started...

Private Alpha Method #2 – Destroy vs. Destroyed

Storied economist Joseph Schumpeter once coined the phrase, “creative destruction.”

Essentially, creative destruction is when something new destroys something old.

Much of the technology industry is predicated on this very concept...

Amazon destroyed Barnes & Noble.

Airbnb is destroying the hotel industry.

And Uber is destroying local livery cabs and taxi services (we wrote about both examples here and here).

We like to think of ourselves as sympathetic human beings, but as early-stage investors, we try to invest in the companies inflicting the destruction… not those being destroyed.

However, when we apply this framework to the public markets, we can create profitable trading strategies from the “winners” and the “losers.” Let me explain...

Bet on The Future, Now

When we’re looking for opportunities around “creative destruction,” we only focus on massive trends, or really big shifts in technology. Shifts that could have an impact on huge industries.

So I can properly illustrate my point, let’s look at a somewhat extreme example...

Several months ago, I wrote about a crowdfunding opportunity that may have sounded “insane.”

An early-stage company by the name of Terrfugia was raising money to build a flying car.

A flying car!

One could argue that the vision is a bit far-fetched and not ready for primetime – but  nevertheless, the implications for a technology like this are tremendous.

Although only accredited investors could participate in Terrafugia’s financing… anyone can invest in the stock market:

If you believe that somehow, someday, flying cars will become a reality for the mass market, you could create a portfolio of publicly traded stocks to profit from this idea.

Specifically, you could create something we like to call an “Idea Portfolio.”

Creating an “Idea Portfolio”

In order to create an “idea portfolio,” I find it helpful to ask myself the following questions:

1.  What’s the big idea? In this case, it’s that flying cars will, one day, become a common form of transportation.

2. Which industries will benefit if this comes to fruition?

3.  Which industries will get hurt?

If you wanted to make a long-term bet that flying cars will go mainstream, you could go long insurance providers.  Reason being, this new mode of transportation could potentially drive up insurance premiums. “Flyers” will need new types of – and more expensive – coverage.

Then simultaneously short airlines and light aircraft manufacturers. Customers will opt to use these services less as personal air/ground travel becomes more convenient.

Keep in mind: these are long-term trades. Even if a start-up came along tomorrow and had the best flying car you could imagine, it would still take a long while before the incumbents experienced a significant decline in their business.

The primary benefit of this strategy is that it gives you a systematic way to think about (and potentially profit from) the evolutionary process that occurs when markets get disrupted.

Private Alpha Method #3: “Publicly Traded Startups”

I realize that a “publicly traded startup” might sound like an oxymoron. Next week, in our final issue on “Private Alpha,” I’ll explain exactly what I mean.

In fact, I’ll show you a portfolio of publicly traded startups that was up over 83.2% in the first 10 months of last year alone.

Until next time...

Best Regards,
Wayne Mulligan
Wayne Mulligan


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Tags: Equity Crowdfunding Crowdfunding Private Alpha

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