Weekly Mailbag: These Businesses Are Viable, Not Investable

Dear Reader,

Welcome to the weekly mailbag edition of The Bleeding Edge. If you have a question you’d like me to answer in a future edition, write to me by clicking right here.

In some of your introductory letters, you gave us your qualifications for recommending stocks. Thank you for that. I wonder if you would do the same regarding recommendations for the Day One portfolio. Though there is certainly overlap, the skills for making an exceptional startup recommendation would be different from making a stock recommendation. Please give us your qualifications for making exceptional Day One investment recommendations. Thank you.

– Steve G.

Thank you, Steve. Great question.

Nearly every deal I’ve looked at in the past few weeks is a direct-to-consumer (DTC) brand with a website selling goods or services. This is exactly what I’ve been doing for 15 years.

I’ve personally built and coded dozens of websites from the ground up – and successfully exited (sold) four of them. Just this week, I was looking at a Day One recommendation that used an API that I have first-hand experience with.

Virtually every company has a website component – and in some cases, it’s the main source of traffic/revenue. Having lived and breathed the website business my adult working life, I know when a company has something and when they are “faking it to make it” (which is often the case).

Every great tech venture capital (VC) investor I know directly and indirectly knows how to code. I wouldn’t trust a doctor that simply studied the surgery I need from a book – I’d want one that has actually performed it.

Website coding is something I’ll never stop having a passion to learn. Just this last week, I was demoing Amazon SageMaker – a machine learning/AI application tool for developers.

Another Day One investment I was looking at was going to take the investment money and purchase online ads through Google and Facebook. I have spent over $275,000 of my own money buying ads on these services. I can use my first-hand knowledge and the tools I pay for to analyze the competition and ROI of ad campaigns these companies intend to run.

This space has changed rapidly over just the past six months with ChatGPT/Bard absorbing traffic that would have traditionally gone to search engines. To this day, I have ads running 24/7 on Google, Bing, and Facebook.

A third Day One deal I was looking at was an eCommerce website. I first started buying and selling baseball cards on eBay in 1999. Since 2016, I’ve sold over $1.2M on Amazon and eBay. I’m familiar with warehousing, purchasing, sourcing, wholesaling, manufacturing, and retail goods. Today, I have a brand I built from scratch selling the only “Made In USA” product in the collectible coin niche.

In the areas where I lack knowledge, the entire team that was making Day One recommendations is still in place. I will rely on and value their expertise in every decision.

If I need to find an outside consultant, my 15 years of being an entrepreneur have allowed me to cross paths with many trusted mentors. This includes a former NBA owner, an early investor in Tesla and SpaceX, and a collectibles pioneer who has a series on Netflix.

To be clear, I was very comfortable in my life as an entrepreneur – not to mention having one of the largest personal finance channels on YouTube. I took this role because I know I can make a difference in other investors’ lives. Virtually every deal I’m looking at is a DTC brand selling something through a website. I have 15 years of experience doing just that.

I’ve enjoyed your first few writings. In today’s Bleeding Edge, you alluded to NFTs, the Metaverse, internet-of-things (IoT), and wearables as “fads” that come and go with news cycles. Were you really calling these four things “fads,” meaning they are not viable long-term and will cease to exist? Please elaborate so we as your readers can better understand.

Much appreciate your answers and what you’ve shared with us thus far.

– Rick B.

Rick, thank you very much. Great questions about “fads” like NFTs, Metaverse, IoT, and wearables. My reference should have been clearer. I’m referring to these as “investing fads” that only catch the attention of investors for a short period of time. I’ve seen similar trends with alternative meats, 3D printing, medical marijuana, and others.

While these businesses are viable in the long term – being investable is another story. I think history shows that truly innovative ideas are durable and can deliver strong investing results for a decade – or longer. Investing fads tend to fizzle out quickly, and timing is far more important in those cases.

Colin, I want to give you a gentle reminder that many of us investors are investing for the first time and are not sure of some of the words you are using. Specifically, what does this mean? “Going forward, every new stock recommendation will have an entry price, exit/target price, and a hard stop loss.” Not sure what the entry price, exit, target price, and stop loss mean. Would you mind explaining? Kindly,

 – Elaine P.

Elaine, thank you. I really appreciate your reminder, and I promise to get better at this. To your question specifically:

Entry Price: This is the price I’m recommending buying the stock at. Typically, I will suggest this as a range. So for example: Buy XYZ stock between $90-95.

Exit/Target Price: This is the price I want to take a profit at or exit (sell) the stock at. For example: XYZ stock is $90 today. My target price, based on the analysis, is for the shares to reach $115. I will send an alert when the stock approaches $115 with a recommendation to either sell some of the shares to lock in some profit or sell all of the shares.

Hard Stop Loss: This is where I recommend selling the position entirely. A hard stop loss can be entered into your broker account so if/when shares cross that price threshold, the shares are sold.

I hope this helps. The videos I attach to the portfolio publications will illustrate this on the price chart itself, which you might find helpful to view if you have time. Otherwise, I will express it more clearly when the recommendations are made. If you ever need anything clarified, please reach out and I will respond.

Hello Colin,

Welcome to your new position… glad you’re here. My question is about the Biotech/Pharma portfolio. I have more than a handful of recommendations from this service that are sitting at an 80-95% loss and have been languishing there for over a year. They just don’t seem to be rebounding whatsoever. While I would love to get them off my books, I just can’t swallow that kind of loss.

Am I a fool for thinking that, because the science and cash runways of these companies still look fairly positive, I should hang on to them in the hopes that recovery may still come in the future? Or should I cut my significant losses and chalk it all up to an expensive education?

Your thoughts on this would be much appreciated. Thanks.

With warmest regards,

 – Ross I.

Ross, thanks for the message. My sell recommendation on the Biotech/Pharma portfolios comes from the simple fact I tried to invest in Biotech/Pharma many years ago and found the sector to be incredibly difficult to forecast. I quickly made a rule to never invest in individual Pharma names and haven’t looked back.

What I would say about a stock that declines 90%… It would need to rise 900% just to return to even. That’s a steep mountain to climb for any stock.

I too have invested in stocks that went down 80-95% – so believe me, you’re not alone. To this day, I keep shares of a company I invested in that went down to $0.19 in my broker account on purpose to remind me how important risk management is.

My recommendation was to close out that portfolio entirely. We’ll clean it from our books and move forward with a fresh start.

In the future, all my recommendations will have a stop loss predetermined. It won’t be exciting sending the alert to close the position – but it will be the right thing to do from a risk management standpoint.

Regards,

Colin Tedards
Editor, The Bleeding Edge