👼🏻 How To Start Your Angel Investing Journey

What’s on the Menu 🍴

Growing your dough happens faster when you juice up your returns…

And today we’re talking about some ways to do that with angel investing and a core & satellite strategy.

Let’s get rolling:

•  What To Watch This Week 👀

• How To Start Your Angel Investing Journey 👼🏻

• Want To Outperform The Stock Market?
  Try A Core & Satellite Strategy 🛰️

Today’s newsletter is a 5 minute read.

 What To Watch This Week 👀

It was risk-on mode in financial markets last week as stocks, crypto, crude oil, bonds, and gold all pushed higher.

Inflows into spot bitcoin ETFs hit new records:

Meanwhile AI stocks rallied once again, and late Friday it was announced that hot AI stock SMCI will be added to the S&P 500 index.

Could it be more fuel for the current rally in tech?

This week will be busy with macro data releases, retailer earnings, and company presentations at the Morgan Stanley TMT conference.

Federal Reserve chairman Jerome Powell will be speaking in front of both houses of US Congress, and the ECB will make a decision on interest rates.

Last week’s data looked pretty good overall with inflation continuing to fall in Japan, Germany, France, Italy, Spain, and elsewhere in the EU.

The market doesn’t expect the ECB to cut rates yet, but keep an eye out for moves in the bond market.

This week we’ll get the February unemployment report in the US as well as the following:

• US Services PMI (Tues)

• Canada PMI (Wed)

• Bank of Canada rate decision (Wed)

• US JOLTs job openings (Wed)

• China trade balance (Wed)

• Germany trade balance (Wed)

• ECB rate decision (Thurs)

• US unemployment report (Fri)

• Canada unemployment report (Fri)

• China inflation (Fri)

Defensive sectors such as utilities and staples have been underperforming lately as investors take on more risk, but it’s important to watch out for any major shifts.

We’ll be keeping an eye on the following assets & sectors:

📈 Rising Recently:

• Semiconductors (SOXX / NVDA / SMCI)

• Crypto (BTC / ETH / WGMI)

• Cleantech & Solar (TAN / PBW)

• Biotech (XBI)

• Gold & Miners (GLD / GDX / GDXJ)

• Retail (XRT)

• Homebuilders (XHB)

📉 Falling Recently:

• Regional Banks (KRE)

• Staples (XLP)

• Utilities (XLU)

How To Start Your Angel Investing Journey 👼🏻

Over the past 11 years, I’ve sat through hundreds of startup pitches, had two exits, and learned a TON about the angel investing space…

So, if you are passionate about helping the next great entrepreneur build a billion dollar unicorn, then angel investing might be for you.

Before you set sail, let's chart the course to navigate the exhilarating yet unpredictable waters of angel investing:

Understanding Angel Investing

Angel investing isn’t just about throwing cash; it's about betting on the underdog, the next big disruptor.

Expect the rollercoaster: big wins, hard losses.

Angel investing involves providing financial backing to early-stage companies in exchange for equity or convertible debt.

Unlike venture capitalists, angel investors typically use their own funds.

The allure? The potential for outsized returns. A study by the Angel Capital Association highlighted that the average return for angel investments is approximately 2.5 times the investment over a five-year period.

But this journey is not without its perils. The same study notes that up to 50% of angel investments may result in a loss.

Gaining Access to Deal Flow

Access to quality deal flow is the lifeblood of angel investing.

This means leveraging personal networks, joining angel groups, or attending pitch events.

Today, platforms like AngelList and SeedInvest democratize access, allowing investors to discover and invest in startups online.

Renowned angel investor, Naval Ravikant, co-founder of AngelList, once said, "It's never been easier to start a company, and it's never been harder to build one."

This rings true in the digital age, where opportunities are plentiful, but competition is fierce.

What to Expect

The journey of an angel investor is fraught with highs and lows.

Many startups fail, but the few that succeed can offer substantial returns. A report by NESTA found that the most successful 10% of investments generate 85% of all returns.

It's a game of outliers, and as Paul Graham, co-founder of Y Combinator, puts it, "In startups, the big winners are big to a degree that violates our expectations about variation."

Angel investors often bring more than just capital to the table. They offer mentorship, industry connections, and strategic advice.

This not only aids the startup's growth but also aligns the investor's success with the company's trajectory.

Diversification and Risk Management

Diversification is crucial. Spreading investments across multiple startups can mitigate risk.

A comprehensive study by the Kauffman Foundation recommends angel investors allocate at least 10% of their portfolio to early-stage investments and diversify across a minimum of 20-30 companies to improve their chances of a successful outcome.

The Emotional Rollercoaster

Investing in startups is not merely a financial decision; it's an emotional one.

The journey can be exhilarating, watching a fledgling company you believed in soar to new heights.

But it can also be heart-wrenching when a startup you're passionate about fails.

As Reid Hoffman, co-founder of LinkedIn and an experienced angel investor, advises, "You have to be ready for hard work and frugality or you'll go broke."

Who Should Invest?

The people I’ve seen be successful as an angel have two qualities:

1. They LOVE startups, founders, and the entrepreneurial spirit

2. They have high discipline, patience, and confidence when it’s time to pounce

I’ve seen guys who’ve been investing for decades (and have a portfolio of DOZENS of investments) that have never had an exit and only lost money as an angel.

The reason I’ve had positive returns is because I was willing to watch hundreds of pitches before cutting my first check, and wasn’t hesitant to jump in when I found the right opportunities.

So, if you think you’d enjoy being an angel investor, seek out an angel network in your local area to get plugged into the startup scene!

Want To Outperform The Stock Market?
Try A Core & Satellite Strategy 🛰️

“You can’t beat the stock market, just invest in index funds and call it a day”.

You hear this a lot these days… and for most people, yes, it’s true.

But, if you’re reading this newsletter, you probably love the markets and individual stocks or crypto just like we do.

You’re probably looking for a way to have an “edge” and boost returns.

At the same time, we want to balance risk (and stress!).

Introducing the “Core & Satellite” portfolio.

It’s a way to increase risk adjusted returns with passive and active investing strategies.

Your portfolio CORE = passive funds like ETF’s or mutual funds that give you diversification and “average market returns”

Your portfolio SATELLITE = individual positions like individual stocks or even cryptocurrency like Bitcoin.

Buying individual stocks is a practice shamed by a lot of people… but, if you focus on high-quality stocks as your satellite, the data doesn’t lie:

Here’s a model portfolio comparing a 100% investment in the S&P 500 passive ETF against a core and satellite portfolio of:

90% SPY (S&P 500 index fund as your “passive”) + 10% total mix of AAPL, AMZN and META as your “core”.

The core & satellite portfolio with just a 10% allocation to these high quality individual stocks has clearly outpaced returns of just the S&P 500 alone. Risk adjusted returns measured by the sharpe ratio also favor the core & satellite portfolio.

Take a look at the same portfolio but with 85% SPY and adding in a 5% Bitcoin allocation for a total of a 15% core position.

(I had to use the Grayscale Bitcoin Trust (GBTC) which has recently turned into an ETF. It has the most price history that I could add to a model portfolio.)

Even though using GBTC gives amplified returns because it has had larger percentage gains vs. the actual Bitcoin price, it still drives the main point home that it would have added positive risk-adjusted returns to the overall portfolio.

Where people run into trouble trying to create a core & satellite portfolio is picking the right stocks for the satellite.

This has always been the hard part. The trick is to stick with quality that is already trading within the top holdings list of the index or indices that your passive funds are tracking.

If you’re want to add small and mid-cap stocks to the satellite, that can end up being riskier (but can also be very profitable if you pick them right).

You’ll need some stock picking skills here. More specifically, you’ll need fundamental analysis skills.

That’s the ability to review an individual stock and tell if it’s showing value worth buying and has a high chance of future growth.

Of course, we have all of these resources for you to refine this skill in our Wealth Building Community.

Now, a core and satellite model portfolio can be built many ways to show how returns could look. I suggest you building out your own model with stocks you’re interested in to see how the returns would play out. The example I used with AAPL, AMZN and META, are just common names people want to own.

The point is… the data shows that a properly structured core & satellite portfolio can be very fruitful.

So, the next time someone tells you not to buy individual stocks… you can hit them with the data.

Food For Thought 🧠

“To survive, everyone must convert their work into assets that are scarce,
desirable, portable, durable, and maintainable.”
- Michael Saylor

DISCLAIMER: We are not investment advisors, and this content is for educational purposes only. We don’t offer financial, legal, or tax advice. Nothing we say is a recommendation to buy or sell any assets. Trading and investing are extremely risky, so please be careful and do your own research.