- We can use profits to fuel our new investments…
- Is buying warrants a good strategy?
- Why I prefer Amazon over Google…
Dear Reader,
Welcome to our weekly mailbag edition of The Bleeding Edge. All week, you submitted your questions about the biggest trends in technology.
Today, I’ll do my best to answer them.
And as one more reminder, my America’s Last Digital Leap presentation was this past Wednesday evening. Thank you again to all who attended. And if you missed out on the airing, I encourage you to go right here to catch the replay.
That night, I discussed an important shift happening right now… a digital leap, where an entire industry goes from analog to digital – just like when streaming service Netflix erased movie rental powerhouse Blockbuster from the map.
And right now, the massive $11.9 trillion health care industry is making its first moves toward going digital. That’s why it’s so critical to get in position before this digital leap ramps up.
This leap is about more than just digital medical records or even the new telehealth services that are available.
This trend is much, much bigger.
And if you want to learn all the details… and how to play this health care digital leap… then please be sure to tune in to the replay before it goes offline.
And now let’s turn to our mailbag questions. If you have a question you’d like answered next week, be sure you submit it right here.
Is it OK to take profits on doubles?
Let’s begin with a question on taking profits:
Jeff: Happy April! I hope your day is going well. I am a subscriber to all of your services, and as such, I have built up a pretty large portfolio of your recommendations across all of them. I know you don’t give individual investing advice, but I have a question regarding overall strategy.
The skewed ratio of buy recommendations to sell recommendations across your services causes a shortage of capital to deploy on new purchases. I understand the asymmetrical investment thesis and fully subscribe to it, but without taking some gains where appropriate, a continuous injection of new capital is required to keep up. Wouldn’t it be prudent to take some gains on your recommendations that, say, hit a double?
Anyway, I really appreciate all you do. Your insight across the spectrum of technologies is truly impressive! My lifetime subscription has been paid back more than tenfold in a year, so thank you. Wish I had met you 20 years ago! Keep kicking ass!
– Don D.
Hi, Don, and thank you for being a lifetime subscriber. I’m very pleased to hear that my research services have been profitable for you – and I’m confident we’ll have even greater gains to look forward to this year and beyond.
As you noted, I can’t give personalized advice, so I’ll just provide some general comments.
With each of my research services, I plan to hold our portfolio companies to maximize our gains.
With Exponential Tech Investor and The Near Future Report, this often means holding at least a year for long-term capital gains. The key to outsized returns is to let the investment thesis play out. Sometimes that is just a matter of months, and sometimes that takes years.
And in Blank Check Speculator, it can potentially take up to 24 months for our special purpose acquisition corporations (SPACs) to announce a reverse merger with a private company. This, however, would be a very unlikely scenario since most high-quality SPACs tend to find an exciting company to merge with in less than a year.
With Early Stage Trader, our timeline is shorter – usually a period of months rather than years – but we’ve also seen some longer holding times recently due to the clinical delays caused by the COVID-19 lockdowns last year.
As we return to a normal environment post-COVID, I expect average holding times to shrink back to five to six months.
Altogether, I understand that the recommendations in my services can add up. So I want to encourage investors to use my research in a way that works for their personal situations.
In this case, subscribers who are relying on profits to fund new trades can always consider selling half of each position once it hits the 100% gain threshold. Doing so also takes all the risk off the table for that one position and provides capital to invest in new positions.
Another option is for investors to simply hold their existing positions until we close them out for profits and then reallocate to new positions.
While that might mean not investing in each and every new recommendation that I send out, investors will already have a fantastic portfolio of high-growth, high-potential return stocks.
And if there is one thing I am sure of, I will always have new and exciting investment opportunities to recommend in the future.
Growing our wealth is a process, and stacking the deck in our favor is a way to maximize that growth. We have so much to look forward to.
And as a reminder, I’ll always send sell alerts when it’s time to take our full or partial gains off the table for a position.
Using warrants strategically…
Next, a reader wants to know more about using warrants with SPACs:
I have another question about SPACs. Exponential Tech Investor had us buy [this SPAC] because we already knew the target was [this private company]. I decided to buy some warrants, and I traded them and worked my average price down to $1.74. Is it a good strategy to buy these?
– William H.
Hi, William. Thanks for writing in. I’m sure you’re not the only reader trying to be strategic with these investments.
I’ve removed the name of the company you referred to out of respect for paid subscribers, but I’m happy to answer your question. As I mentioned above, I can’t give personalized advice.
In general, using warrants to lower your cost basis is a perfectly fine strategy. And as I’ve written about before, warrants can sometimes offer even better returns than shares.
I would offer some cautionary notes about buying warrants, however…
As a reminder, a warrant gives you the right – but not the obligation – to buy a share of the stock at a certain price within a certain time frame (usually five to seven years).
When you exercise a warrant, you’re buying another share of stock from the company for a pre-determined price (often $11.50 a share for most SPACs).
But buying warrants can be a higher-risk play than simply buying shares. Warrants work somewhat like long-term call options. And like options, warrants can expire worthless. It is possible to lose 100% of your money if the price of the stock is below the $11.50 strike price when the warrants expire.
The advantage of warrants over something like options is that time is on our side.
Because warrant expiration is years away, it gives the underlying company time to execute its strategy and grow in valuation. In this way, warrants tend to pose a lower risk than trading options with shorter time to expiration.
Generally speaking, I do recommend that investors are rational about position sizing. For example, it doesn’t make sense to purchase more warrants than the amount of shares in the company owned.
To help put things in perspective, when we invest in SPAC units shortly after a SPAC IPO (as we do in Blank Check Speculator), our units tend to come with 1/4th or 1/5th warrant coverage. That means we’d receive one warrant for every four units, or we would receive one warrant for every 5 units, respectively. The warrants provide us with some additional upside when an attractive business combination is announced.
The tech we let into our homes…
Let’s conclude with a question about Amazon’s technology:
Why are you so excited about the new Amazon robot technology that you want to place in your house? On one end, you are worried about security and don’t recommend using Google or Microsoft or Amazon. On the other, you’re inviting this technology into your house.
– Kathryn W.
Hi, Kathryn, and thanks for sending in this question.
I wrote recently about Amazon’s planned home robot codenamed Vesta. With the help of Amazon’s AI assistant Alexa, Vesta will be able to carry objects, play audio, and integrate with other devices like Ring security systems and Echo home speakers.
This is a natural extension of Amazon’s product line into the home. And it’s exciting to watch home robots develop beyond the popular Roomba vacuum cleaners. I’m eager to see the ways home robot technology will add convenience to our lives going forward.
But you bring up a valid concern. We don’t want to bring technology into our homes that will surveil us in order to sell our data or worse.
However, there’s a clear difference between a company like Amazon and others like Facebook and Google.
As I’ve written before, Facebook, Google, and others of their type are not good stewards of our data. Why?
Because their entire business model is built on advertising. They generate revenue by providing advertisers access to our data.
I canceled my own Facebook account over eight years ago when I understood what it was doing with my data and how it was monetizing my information at my expense – and great risk.
And when I tested out Google’s Nest Hub smart home system after its launch, I could see the impact of its data-focused business.
The Nest device wanted me to give Google complete access to all of my data before I’d be able to use it. The software blocked me at every turn when I tried to do something as simple as just join a Google Meet call.
To contrast this, companies like Amazon and Apple are much better custodians of our data because their businesses are not primarily based on advertising.
And in the case of Apple, its business is not based on advertising at all. Apple sells products and services that are entirely unrelated to advertising. The company isn’t perfect, but I would choose it over Google and Facebook any day.
And we can see this in Amazon’s product design as well. Amazon’s smart home products are seamless and deliver great value. They set up quickly. And most critically, they don’t require consumers to share all of their contact information, the contents of their file folders, photos, and their email inboxes.
Instead, Amazon simply makes great, convenient products people will want to buy rather than demanding access to all our data.
That’s why I’m much more comfortable bringing Amazon and Apple devices into my home… and why I’m excited to see these more trustworthy companies developing their home robot product lines.
At the end of the day, every individual consumer has to make that decision between convenience and privacy.
Imagine what we would have to do to be “off the grid.” We’d have to give up our smartphones, have no connected devices in our homes, buy an old car without GPS in it, only use an old flip phone for communications, and stay entirely away from any kind of computer.
Can we imagine doing that? I know that I certainly couldn’t do my work for my subscribers in that kind of environment, so I have to sacrifice my privacy in order to be productive. That’s a choice that I made.
We do have the option to opt out, but it is a painful decision. And it’s one that would add a lot of friction to our lives.
Thanks for the question. Your skepticism is very healthy and certainly warranted.
That’s all we have time for this week. If you have a question for a future mailbag, you can send it to me right here.
Have a good weekend.
Regards,
Jeff Brown
Editor, The Bleeding Edge
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