311: How to Beat the Market 3: Early Adopters and Holding the Bag

This is the Monday Medley, a newsletter that goes out, you guessed it, every Monday. I republish it here for sharing and referencing, but if you'd like to sign up you can do so right here:

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Happy Monday!

Last week I published Tokenomics 104 on How to Launch a Token.

I've also been experimenting with some Twitch streaming for P&E games. Gimme a follow there if you ever want to watch along.

Alright, on to the Medley.

How to Beat the Market: Early Adopters and Holding the Bag

A couple weeks ago I started this series on how to beat the market (parts one and two).

A significant part of growing your wealth faster than the overall market is by being in the position to sell your assets to someone who will pay more for them than you did.

Every asset is ultimately a game of chicken. You buy it hoping someone else will buy it for more later, or that the cashflow from it will offset any depreciation or non-appreciation.

When you sell it, the buyer has to also believe it will pay off long term, or else they wouldn't buy it. Eventually someone gets it wrong and loses. They're left "holding the bag."

Anyone who bought Netflix or Facebook stock in the last year is holding the bag. Anyone who bought houses in 2007 ended up holding the bag. Anyone who bought the NIKKEI 225 (Japanese stock market index) between 1990 and 2012 was holding the bag.

If you want to grow & retain your wealth, then you want to avoid holding the bag at all costs.

Value flows into assets over time, increasing their value and spreading out the gains among more people. When Facebook was started, 100% of the value was held by 4 people. Over time, that value was spread out across buyers, and aside from a couple drops in 2018 and 2020, pretty much everyone was a winner until this year:

Everyone who bought or held FB since 2020 ended up being exit liquidity for the folks who sold last month. And generally, you wanna avoid this. But at every point in the buying cycle, you risk being exit liquidity. You risk holding the bag. Someone has to be the last buyer who loses, and it could always be you. I don't think Facebook is done, obviously, but it COULD never retake that high. Big established companies are not some safe haven from this, if you held IBM at all over the last decade you've been bleeding (and I see no reason to believe you'll stop bleeding):

That doesn't mean trying to buy smaller market cap, earlier stage things is a sure bet either. The benefit of established assets is they have some lindyness to them. But if you can identify trends, you can often position yourself to be an earlier buyer of those trends, to later sell them to laggards who thought this decade's new tech all the kids are into will surely be the first one to actually go nowhere, unlike mobile, web, telecom, personal computers, portable music, etc.

If you can become an "Early Adopter," your interests can naturally pull you in directions where you're able to enter markets at more advantageous times. Late enough for them to be somewhat established and de-risked, but early enough that there's still a massive amount of slower capital behind you to buy from you at a higher price.

Being an early adopter with good taste is probably more profitable long term than being an innovator. An innovator can strike it rich, but it's much higher volatility. An early adopter who makes lots of small bets and improves their bets over time can do exceptionally well with, in my opinion at least, lower volatility than the innovators themselves.

Being an Early Adopter is not exclusively about technology. If you recognized the forces pulling people to Austin 5 years ago, you could have made a killing in real estate. There are emerging trends in any industry, and being someone who recognizes them and can capitalize on them can be extremely lucrative.

How does one become an Early Adopter though? It is not necessarily a factor of age. Many of the best angel investors are in their 40s, 50s, 60s. If I had to distill it to one element, it might be your relationship with time.

The Late Majority and Laggards (aka Exit Liquidity) have a slower paced relationship with time. They prefer stability, distrust new solutions to old problems, and don't want to endure constantly learning new ways of living.

If you can become comfortable with change and with adapting your assumptions about reality, you can more easily embrace new technology. You can treat new ways of living as exciting experiments instead of annoying inconveniences. If you aren't comfortable with that faster pace style of living, that's fine, you just shouldn't try to spot or bet on emerging trends.

I've always found it funny when Late Majority or Laggards criticize new tech. The same people who weren't early on Facebook, or iPhones, or Teslas, now think they can accurately assess Crypto or other emerging trends. Despite living through decades of new technology they didn't understanding turning into trillion dollar industries, this is the time they've got it right and it's just a silly fad that will go away.

There's nothing wrong with being a Laggard. It's certainly a more relaxed way to live. But if that's you, then probably stick with safe Laggard investments like index funds.

On the flipside though, if you have the ability to be an Early Adopter, you should use that to your financial advantage. Find a way to gain exposure to emerging trends and bet on the ones you believe in. Your bets will get better over time.

Have a great week,

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