When the Story Is Better than the Stock

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.

Geoffrey Hinton is NOT the “godfather” of AI. Colin needs to read Our Final Invention by James Barrat to get a true understanding of who the real thought leaders are in the space going back to the 1980s. Not a good way to earn our trust.

– Tim E.

Thanks for the message, Tim! The media certainly likes to use the term “the godfather of AI” in reference to Geoffrey Hinton and he’s providing lots of great quotes about AI these days. He clearly is accomplished in the field and has some interesting thoughts. It’s been a while, but I read Our Final Invention many years ago. He also has some good content and interviews on YouTube.

I went down the AI rabbit hole many years ago when IBM made Watson available to developers. The idea that it’s a threat to humanity is great for headlines and probably worth considering from a social perspective. But until AI machines can reproduce on their own and the energy required becomes infinitely available I’m not sure it’s even possible the doomsday AI scenario can materialize.

My question/comment pertains to Colin Tedards’ June 20th Exponential Tech Update. In that update, it was recommended to basically wholesale sell entire portfolios of holdings, all of which are down double digits, many of which are down over 90%.

I think some more thoughtful guidance on the actual state of the current portfolio, with detailed information about why we should sell companies. These were previously touted as some of the most promising early-stage companies in the country when they are down 80%, or 90% or more, rather than simply being told to “rip the band aid off” would have been appreciated.

– Jeff G.

Jeff, thanks for writing in. I certainly didn’t take this decision lightly. The primary reason I don’t invest in biotech stocks is because the story is almost always better than the stock. In the rare case the company actually brings a product to market – you can often be diluted many times over. Another likely outcome is a large pharma company comes in and buys the company before the upside is fully realized. In other words, the downside is the stock goes to zero and the upside is often capped at what big pharma is willing to pay.

That’s a terrible risk reward. Some investors are willing to take that risk, but it’s not a strategy that I recommend. Regardless of sector, a stock down 90% needs to rise 900% just to get back even. I wish there was something I could do to make that reality different.

The good news is the technology sector is set to experience exponential growth due to investments into AI. Companies with existing products and revenue will only expand as new AI products come to market. Chipmaker AMD is a great example of this.

In an engineered bear market like this one, enterprise valuation can be easily thrown out of the window. I learned over the years that reading non-GAAP insights accurately makes a significant difference to one’s long-term stock portfolio. I would be curious about your experiences in this aspect and hopefully look forward to learning something new.

– Wai L.

Thanks for the message, Wai. Good question. I examine all non-GAAP results on a case-by-case basis. Most tech companies’ largest non-GAAP adjustment is stock based compensation. In that case it’s added back to operating cash flow. Where I get frustrated with companies is when they don’t grow revenues but aggressively use stock-based compensation to make the results seem better than reality. Twitter was probably one of the best examples of that – and one reason the stock consistently underperformed peers.

Onetime non-GAAP adjustments I take more seriously. Restructuring, litigation, and unrealized losses are worth stripping out as they occur. In general, the main financial metrics I focus on are operating profits, revenue growth, and operating cash flow. If these are all moving in the right direction, the stock’s performance tends to follow. Hope that helps; feel free to reach out if you need further details.

I bought QID, which is down 50%. Did I miss the sell signal on this one? Should I sell or do we still expect more of a downturn in the market?

– Nicole W.

Thanks for writing to Nicole. I will never recommend a product like QID and suggest selling immediately – even if I expected a downturn. That is a product that should only be held for a very short period of time – usually 24-48 hours at most. The leverage resets daily – which means the performance won’t mimic the performance of the market.

For example, even if the markets trend down – but many sharp up days happen in between – you might actually lose money. In the case of a market downturn, our stops will be hit and we’ll look to get back in when the technical charts indicate it’s time. My only regret as an investor is I didn’t buy more stocks during the market crashes I’ve experienced, so I actually look forward to them.

Can you provide a compendium and update on the current positions in the Day One Investor portfolio similar to the Exponential Tech Investor publication?

Could you please update our investment in Digital Eclipse?

– James M.

Hi James. I have been reaching out to all companies and will have updates from each as they become available. Lots of exciting things are coming to Day One Investor.

I am a member of The Near Future Report and also of Unchained Profits. I am wondering if you could explain how you will continue to handle Unchained Profits. I have been a member for about a year and a half and have been most disappointed in the information we have received.

It could be my own inability to read between the lines, but there hasn’t been much information in the last months. I am wondering if you will be changing your strategy for the crypto market also. So far I am a bit disappointed and hope there will be an influx of enthusiasm in this area with Brownstone Research.

– Nancy S.

Thank you Nancy, good question. I have added a crypto expert to the team to help with Unchained Profits. I will be adding my risk management rules to the selections so the risk reward makes sense. We’re not going to ride these positions down 50% + because that creates bad habits that carry over into equity investments. But I recognize the gains that can be had in crypto as I’ve experienced them myself. I look forward to providing more information about this very soon.

Good morning, I can’t help but believe there won’t be a better time (higher price) to close these trades out. Looking at the price targets by the ratings companies many are 50% plus higher. Myself like many others have been killed by these portfolios. Is there any reason we should close these out now? Thanks for your time and input.

– Shannon K.

Hi Shannon. Thanks for the message and it’s a good question. It honestly wasn’t an easy decision to post the sell alerts. If it was one or possibly two stocks that were struggling among a well diversified portfolio – I could see an investor wanting to hold out hope that things will recover. This was nearly an entire portfolio of biotech stocks that were down amounts that far exceeded levels that are likely to recover.

The most likely outcome for most of these stocks will be a dilutive fundraising round if shares recover or a reverse split if they continue to fall. I’ve seen this over and over in this sector which is why I don’t think it’s even investable.

Trust me, every investor has found themselves in this spot – including myself. You aren’t alone. The key going forward is I make clear my investing rules – which include only investing in sectors I know I have a clear edge in and defining the risk/reward for every recommendation. That means I post a buy price range, a hard stop loss and a target price we’re going to take (at least some) profit. Wish I had better news, but I promise to work hard to help recover some of these losses.

Colin seems to be very bright and I am looking forward to hearing hi recommendations. He mentions banks as a possible investment. It seems hard for me to believe that banks would be a good play in this climate other than perhaps a short term basis but I am ready to listen!

– Andrew L.

Andrew, you’re too kind, thank you. I suppose we’ll find out next week when we see some of the bank earnings are announced! Seriously though, I think a well diversified portfolio should have some financial/banking exposure. I tend to center around the gigantic banks which are raising dividends and buying back the shares. Certainly the regional and smaller banks wouldn’t be on my radar – not to say there’s not opportunity there, but too much risk for my liking.

The primary reason bank stocks are on my radar is studies show they can augment more than 50% of the business with AI. We already see it with fraud detection. More often that’s being caught before it goes through. It’s being used in loan origination – but it’s early days for that. And clearly on the customer service side it can be a huge cost saver.

I will be going through all the big money center banks’ earnings when they cross over the next two weeks – purely because it’s a window into the consumer and economy in general. If there’s an opportunity there I won’t hesitate to make a recommendation, but it’s likely something that comes later since they have compliance and regulatory hurdles to cross before AI really hits the bottom line.

Welcome Colin. I must say out of the gate I’m impressed. Just finished reading your article on RISC-V and I’m eager to find out if there is a way besides the Taiwanese exchange to invest in this company. Looking forward to reading future articles.

– Samuel L.

Thank you, Samuel, for your kind words. RISC-V is an open source instruction set … there might be a company named RISC, but I wouldn’t be certain if they are actually using RISC-V. Public companies using RISC-V include Meta, Qualcomm, Western Digital, Alibaba, and even Apple.

There’s still nothing I would call a flagship RISC-V product yet. Most of these companies are using it for embedded use cases and non-public facing functions. What’s holding it back is the software. That’s where Nvidia, AMD and Intel have a huge advantage. Google announced support for Android, which would rapidly accelerate the public use cases in Android devices.

Jim Keller, formerly of AMD and Apple said at the conference I attended that RISC-V will be everywhere soon. I think he’s right. That’s not to say AMD, Intel or Nvidia are in trouble by any means, but particularly in lower-end devices it just makes too much sense to use RISC-V versus a licensed design from ARM or Intel.

My question to you: when you say “target price,” do you actually mean the buy up to price?

– Leonard S.

Thank you, great question! My target price is where I see shares trading before it meets resistance or selling pressure. I base this on the chart patterns, which not everyone relies on – but I feel it takes away the emotion of when to buy and sell. It’s where I’ll recommend taking some profits, even if it’s a small amount. It creates a good habit and the reason we do this is to make money – so I’m always going to take that opportunity.

When my recommendations come later this month I will have a “buy up to price.” With the existing recommendations that we’ve kept, I’m simply recommending to hold.

Hi Colin,

Thank you for your clear and transparent writing. I am looking forward to your thoughts and recommendations on a weekly basis.

However, I also thoroughly enjoyed the “brief to the point” developments in technology by your pre-successor. It may be about developments years away from any investment opportunity, but it was nice to see where science and technology were heading.

Are you going to follow this news-flow?

Another query I have is if you are devoted to Brownstone full time or you are still active with other endeavors i.e. your investment channel?

Good luck with your new challenge.

– Arjang A.

Thank you very much. I believe the daily newsletter will evolve over time. I think it’s important for me to express my point of view and explain the immediate opportunities the best I can. I promise you I will get better at that as time goes on. Certainly when the opportunity comes, I will explore less immediate tech news and info. That is something I’m looking forward to.

As for my other endeavors – I still post on YouTube. This is primarily because I’m going to read, for example, the JP Morgan earnings report, so doing a video where I talk through it is extremely beneficial.

Colin Tedards
Editor, The Bleeding Edge