Happy holidays from the whole team here at RiskHedge.
Our offices are closed this week while we spend time with family. So today we’re doing something a little different…
Instead of the usual weekly essay, I’m sharing a lively “behind the scenes” conversation I recently had with RiskHedge Chief Investment Officer Chris Wood. He’s the smartest guy I know when it comes to investing in early stage disruptive companies.
Below, we chat about what it really takes for a small disruptive company to grow into a large one… discuss which disruptive stocks you should avoid… and divulge early details of a unique project we’re working on.
Enjoy your holidays,
Stephen McBride
Chief Analyst, RiskHedge
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Stephen McBride: Chris, our readers hear from me every week. They probably don’t know we have a whole team of talented people working here at RiskHedge. Tell them who you are.
Chris Wood: Yeah Stephen, you really hog the spotlight! I’m only kidding. As chief investment officer here at RiskHedge, I do two things. First, I co-manage the RiskHedge Fund with you, which all of RiskHedge’s founders are personally invested in.
Second, I specialize in finding “early stage disruptor” stocks.
SM: Which are what, exactly?
CW: As you often say, disruptive companies literally invent the future. The true disruptors aren’t out there making small improvements. Instead they’re blowing up norms… taking down the entrenched players… creating or transforming whole industries.
I specialize in finding these stocks years before you’ll ever read about them in the Wall Street Journal. By getting into these tiny disruptors early, you give yourself a real shot at very large gains—often 1,000% or more. Sometimes a lot more.
SM: Give our readers an example.
CW: Take a company like Adobe Systems (ADBE). Its “PDF” software changed how we read things. Most American professionals use it a dozen times a day without giving it a second thought. Adobe’s software was a driving force behind the whole “going paperless” trend that swept through American offices.
Had you got into Adobe stock early on, when it was an early stage disruptor, you’d be sitting on gains of over 130,000%. That’s enough to turn even a small stake of a thousand bucks into well over a million.
SM: A lot of skeptical folks will assume you’re cherry-picking with that example.
CW: I know, a gain that big is hard to fathom for most investors who have never seen anything close to it. But the fact is, there are dozens and dozens of examples of early stage disruptors achieving tremendous gains.
One your readers know well is Netflix (NFLX). I know you’re no fan of Netflix’s (NFLX) stock—and its certainly nowhere near “early stage disruptor” status today.
But think back to 2007 when it was just getting off the ground. Its disruption of the movie rental business was only getting warmed up, right? It would go on to disrupt not only Blockbuster video, but the whole American cable TV business.
Today, Netflix is bigger than networks ABC, CBS, NBC, and Fox. And as you know, its stock has handed early investors something like 47,000% gains.
SM: So which stocks you buy is only half the challenge. The other half is when you buy them.
CW: Right. You have to get in well before the crowd catches on. Like you, I have zero interest in owning Netflix today.
SM: You’re known for recommending both Amazon (AMZN) and Google (GOOG) way back in 2012, long before they became two of the so-called “FAANG” stocks. Any interest in owning them today?
CW: They’re both great businesses. But they’re gigantic already. Its mathematically impossible for either of them to grow, say, 10X over the next few years. The best you can really hope for is a double.
I only want to buy tiny businesses taking on very large markets. The ideal early stage disruptor is a tiny, little-known stock on the cusp of transforming a big industry. That’s how a company can realistically set itself up to grow 10x–100x, which leads to a soaring stock price.
SM: And finding these gems is much easier said than done. Its not something an investor can do part-time or on the side.
CW: Right—and that’s why we set up RiskHedge. As far as I know, we’re the world’s only investment research firm 100% focused on disruption.
I want to mention one more big advantage to investing in early stage disruptors. If you identify the right stocks, you don’t have to time your buys and sells precisely.
Take Adobe. As I said earlier, you’d have made something like a 130,000% gain if you got in and out at the right times. Of course, no one can consistently nail the timing. But with gains that big on the table, you’re afforded plenty of leeway. Even if you totally botched the timing and made only 1/20th of the available gain, you’d take home a profit of 6,500%.
SM: Okay, let me shift gears a little bit. You’ve been a professional investor for 15 years, and you know as well as I do there are a whole lot of what I’ll call “pretend” disruptors out there. For every truly disruptive stock, there are a dozen others that claim to be the next big thing but are really just capitalizing on hollow hype.
Tell our readers the unique way you pinpoint true winning disruptors when there’s so much “fool’s gold” out there.
CW: You’re talking about my CHAOS Formula. It’s my proprietary tool for evaluating the profit potential in disruptive stocks.
I like to explain it like this. Finding early stage disruptors with 1,000% or greater profit potential is like finding a needle in a haystack. My CHAOS Formula is like a powerful magnet that homes in on truly disruptive stocks and discards all the others.
SM: Why “CHAOS”?
CW: It’s an acronym. Very briefly, it evaluates a stock based on five criteria—Change, Hype, Acceleration, Ownership, and Size.
I’ll only invest in a stock that passes all five. Its sets the bar high—only about 1 in 85 stocks I feed into it earn a passing grade.
SM: I’m sure readers are wondering where they can get your CHAOS Formula picks.
CW: I’ve always kept them confidential. The challenge, as you know, is these stocks are often tiny. They typically have a market cap of around $100 million. Which means too many investors buying in a short window would skew the price.
We have a pretty big following at RiskHedge. Tens of thousands of investors read this weekly letter, and millions more read our work in the media. Your recent piece on Forbes was read by, what, 2.5 million people? And that’s just one article. Even if just 0.1% of them followed along and bought a tiny disruptor I recommended, it would artificially inflate the price.
SM: But we’re creating a solution. We’re not quite ready to announce the details yet, but can you give readers a little taste of the special project we’re working on?
CW: Sure. In January, I’ll be launching a new service where I share my early stage disruptor stock recommendations with a small circle of investors. For the reasons I just explained, we’ll only be able to accept around 1,000 members max. I hate to turn folks away, but the stocks I recommend are just too small and under-the-radar to share beyond a small circle of serious investors.
That’s really all I can share for now.
SM: Thanks Chris. Looking forward to hearing more in January.
