Updated on March 28, 2017
Get me GoPro!
It’s late 2014, shortly after the IPO of GoPro, Inc., the maker of the popular HERO mobile video recorder. “Get me GoPro!” she said, excitedly. “Everyone is using it – on the water, snow, bike trails – I see it everywhere. I want that stock!”
We should all be so enthusiastic about capitalism. Technological innovation and new product development are the lifeblood of new revenue streams, and, if managed well, increased profitability and a rising stock price for the companies that deliver them. However, her statements gave me pause. A popular product does not necessarily equate to a profitable business over the long-term (see: Twitter, Fitbit, Palm, Blackberry). What is GoPro’s capital structure, profit margins, expense and revenue forecasts, user growth rates, and new product strategy? Technology changes faster than Lady Gaga at the Superbowl. Without a diversified product line, one bad product launch or missed technology trend could sink the company; not to mention the endless cash that a tech behemoth like Google, Apple, Amazon, Microsoft, etc. could throw at its own competing product if the market opportunity looked attractive.
Not wanting to dampen her enthusiasm, I said, “If you really like that company, take a small amount of money and invest in it, but don’t invest more than you are willing to lose. Treat it as entertainment, not as a core investment. It could end up being Apple, but it could also be Enron.”
Fast forward to March 2017, following two bad quarterly results, a botched product launch of its new drone product, Karma, and a combined 470 job cuts in a move to dramatically cut expenses. GoPro stock has fallen as much as 94% from its valuation peak in October 2014.
Granted, the anecdote could just as easily have been Facebook and its meteoric rise. It’s a reminder that picking individual securities is just buying risk. Instead of concentrating your bets on a few securities, we counsel the lessons embedded in Modern Portfolio Theory (MPT): diversify across and within asset classes. There are so many recent innovations in finance, creating asset classes never before available to retail investors. From a risk perspective, that’s exciting. It means you don’t have to find the next Facebook and avoid GoPro. The real trick? Defining available asset classes, their return drivers, and how to combine them in a way that suits your risk tolerance.
Get me MPT!