It’s true: I can be a little argumentative sometimes.
It’s also true that I enjoy a lively “debate.”
Oh, and I love to take a joke too far.
But those aren’t the reasons my friends hate me right now.
They hate me because they’ve been glued to their computer screens for weeks, hoping and praying their tech stocks and the Nasdaq turn positive...
... and meanwhile, I’ve been out strolling in Central Park, enjoying the cherry blossoms and sweet spring weather.
Today, I’ll show you why I’ve been so relaxed during the recent tech meltdown – and I’ll show you how you can be relaxed, too.
The Bloodletting to Date
Some of the biggest names in tech have taken a hit recently…
Last month, Amazon, Facebook and Netflix were all down by more than 10%.
But year-to-date, the NASDAQ is off just 3%. And it’s down just 7% from its March high. It’s doubtful we’re seeing a repeat of 2000.
In my opinion, this is nothing major… just a little spring cleaning.
Where To Focus
Don’t get me wrong. I own some tech stocks, and I lost a few bucks recently.
But here’s why this downturn isn’t getting me down:
I get most of my exposure to the tech sector from start-up and early-stage deals.
This allows me to combine my long-term approach to investing with exciting (and hopefully profitable) early-stage ideas.
And as it turns out, a downturn in the public markets can be a good thing for private, early-stage opportunities.
Let me explain...
Fill Up The Cart?
A downturn in the public markets can impact private company valuations.
Today, a start-up might be valued at $10 million. If the market stays choppy for a few more months, that company’s value might drop to $8 million… maybe even less.
Why?
Once a start-up gets big enough and successful enough, the ideal endgame is that it goes public. If it gets acquired before then, that can be great, too. Investors can still do very well. But an IPO is the ultimate prize.
But when the market for publicly-traded tech stocks gets choppy -- like it is now -- new companies find it harder to go public. And that affects private-company valuations: If a company's outlook for going public seems impaired, it'll be worth less today.
Private-market investors use that knowledge to negotiate better deal terms and valuations.
The thing is -- and this is one of the reasons I’m out smelling the cherry blossoms -- lower valuations can also lead to better returns.
Like my partner Matt wrote about yesterday, most early-stage companies don't IPO. When they're so fortunate as to be successful, they get acquired instead -- and they get acquired for south of $100 million.
If most acquisitions are under $100 million, and we're trying to earn a 10x return, we should be investing at valuations of $10 million or less. These occasional downturns (and the associated decrease in valuations) make that scenario more likely.
I’m paraphrasing Buffett here… but imagine you walked into the grocery store and found that your favorite cookies were on sale for 50% off.
Would you turn around and look for a more expensive supermarket?
Or would you fill up your cart and high-five the check-out guy?
Brighter Days Ahead
As you’ve probably learned over the years, the market doesn’t move up or down...
It moves up and down.
The tech market will eventually turn around. When it does, it’ll pay to own a basket of high-quality companies that we bought at bargain prices.
So don’t stay glued to your computer screen.
Go out and smell the buds on the trees.
Maybe one of them will blossom into the next Facebook.
Happy investing!
Best Regards,
Founder
Crowdability.com
