🧠 The Key to Profiting from Unprofitable Stocks

Friends,

Despite being down 65% from all-time highs, Shopify remains one of the best investments you could have made over the past eight years. Since January 2016, shares are up 2,000% — turning $10,000 into $200,000.

All three of us have been holding Shopify for several years. Yet, at the time of our initial purchases, Shopify was producing large bottom-line losses. So, why did we all decide to invest?

It all rests on one important factor: Shopify was building a moat. Once a business started using Shopify, it became really hard for them to switch to another provider. We could all see that Shopify made its platform stickier over time as it added new services. Merchants can now use Shopify to handle dozens of mission-critical tasks, such as managing the website, collecting payments, advertising, and arranging fulfillment.

The chart below shows Shopify’s gross profit and operating expenses over time. You can see management intentionally spent just a little more than it took in to grow faster, capture market share, and widen the moat.

Chart by Stratosphere*

That’s a core reason why each of us decided to invest. Shopify was growing at an astounding rate and building a moat simultaneously. When combined, we could see that Shopify had the ability to generate massive profits in the future. Management was playing the long game and winning. That’s not easy to do.

This post isn’t to gloat about our early investment in Shopify. Rather, it highlights an important dynamic: pursuing a money-losing strategy can make sense if a company is in hype-growth mode and successfully building a moat. They must do both simultaneously, all while not losing too much money. It’s a delicate balancing act.

Of course, for every success story like Shopify, dozens of other unprofitable growth companies flamed out. Management teams must produce strong growth and prove they are building a moat to justify a long string of losses. Most profitless growth companies fail at this delicate balancing act, causing their shareholders to suffer.

However, if you can invest in just a handful of the hyper-growth companies that nail this delicate balancing act and hold for a decade or two, you’ll have all the money you need to meet your financial goals.

Wishing you investing success,

– Brian Feroldi, Brian Stoffel, & Brian Withers

P.S. We are hosting a free webinar, How To Analyze Unprofitable Businesses, next Thursday, October 12th, at noon EDT. Click here to register instantly with 1-click.

Together with CNBC Pro

We recently gained access to CNBC Pro. If you’re an investor, there’s a lot to like about this site.

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One Simple Graphic:

One Piece of Timeless Content:

Waiting for the perfect market conditions to invest? A recent Charles Schwab study looked at an investor with a lump sum to invest and compared five different investing styles and the results. Long-time investors may not be surprised that the study confirmed the old adage, “It’s time in the market that matters and not market timing.”

One Thread:

Investors can be their own worst enemy. This great thread by MnkeDaniel breaks down five biases that cause investors to make terrible decisions.

Daniel

@MnkeDaniel

Daniel Kahneman is an outstanding psychologist who won a Nobel Prize in Economics.

He wrote the best book on human misjudgment I have ever read.

Here are the 5 Biases that mislead our Investment Decisions the most and how to Avoid them👇🏼