Strategy for making 6000% Return on Your Investments – How Smart Investors Makes A Killing.

February 25, 2014

Strategy for making 6000% Return on Your Investments –How Smart Investors Makes A Killing.

Greetings from Hitesh! Market is abuzz with the stories of mind blowing return made by Venture Capital firm Sequoia on its investments in WhatsApp. Let us see the facts as given by Bloomberg.

Sequoia Investments:-

Sequoia paid about $8 million in 2011 and another $50 million in a later investment for a stake of more than 15 percent in WhatsApp, according to a person with knowledge of the deal. The holding is valued at $3 billion to $3.5 billion after Facebook’s offer. In other words for investments of USD 58 million, it made USD 3.5 billion!! 60 times or 6000% which ever way you want to see.

To put things in perspective for an Indian mind let us convert the same in Indian Currency. At Rs.62 per USD, Sequoia invested Rs.359.60Crs (USD 58 million at Rs.62).  Today the value of its stake is Rs.21700Crs.(USD 3.5 billion at Rs.62). 6000% gain in just 3 years!!

How Venture Capitalist Works?

As the name suggest, they infuse capital in a venture, normally a new one.  Depending on the opportunity, they generate funds from their investors and invest in a venture. Since there are few who are ready to invest in NEW Venture, they get the early movers advantage in terms of price and in terms of % of Company’s shares.

Their logic is simple. If they invest in 10 such ventures….they may get 1-2 super duper success….where they make 10 times or more. 1-2 may get them their capital back and rest 6 will lose 100%.

Now, let us say Sequoia had Rs.3600 Crs and they invested Rs.360 Crs in each of the 10 ventures like WhatsApp in 2011. Just one Venture made them 60 times….will they care for the other nine now?

Their strategy is simple…..they are ready to lose 50-60% of their overall capital with the bet that 40% can make them 1000% to 10000% return on overall capital !! (Read Twice)

Nassim Taleb calls this as Optionality:-

“According to him Optionality is the property of asymmetric upside (preferably unlimited) with correspondingly limited downside (preferably tiny).” 

Venture capital, when practiced properly by a top tier firm, is a classic example of a business that benefits from optionality. All you can lose financially in venture capital is what you invest and your upside can be more than 1000X of what you invested. 

Another example of optionality is cash held by a disciplined patient value investor with the temperament to not buy until Mr. Market is fearful.  As just one example, Warren Buffett did exactly this during the recent financial panic and earned $10 Billion by putting his cash to work. 

“If you ‘have optionality,’ you don’t have much need for what is commonly called intelligence, knowledge, insight, skills, and these complicated things that take place in our brain cells. For you don’t have to be right that often. All you need is the wisdom to not do unintelligent things to hurt yourself (some acts of omission) and recognize favorable outcomes when they occur. (The key is that your assessment doesn’t need to be made beforehand, only after the outcome.)”

How a Small Investors in India can Practice This Strategy?

As a small investor you have two options……follow Value investing approach for long term gains or follow options trading strategy for short term gains. You must be aware about Value Investing for Long term. I am just sharing an example of Options Trading. Just read.

Options Trading:-

In India we have Options Trading facility. In which you can buy and sell options on Index like Nifty and Bank Nifty and also stock specifics like Infosys or Reliance. In Options trading you pay the premium, normally a small fraction of the value of the Index or the stock.

E.g. Say you are buying Nifty Future Call Options for 7100 index for the month of May 2014. Nifty has a lot of 50. Let us assume we are buying 2 lots i.e. 100 Nifty Futures call at Rs.100. Your investment in this case is Rs.10000 and if Nifty do not move towards 7100, you will lose 100% i.e. Rs.10000.

But If NF moves to 7100 by April end or Mid May, your option may have a value of Rs.200 plus. In other words, you make 100% profit!!

If you want to buy 100 units of Nifty Future at Rs.7100 each, you will have to invest Rs.7,10,000. But here you are investing just Rs.10000.

In this case your loss is fixed (like Venture Capitalist) and you may multiply your money 2 times or more. If you see Nifty Future going towards 5100, you can buy Put Options also.

My Personal Call:-

At Destiny Management, we are following the strategy of Optionality from day one. You can contact us for Your Personalised Optionality Strategy and make tons of money.

Have A Great Investment Experience.

Follow me on Twitter @hiteshmparikh Or on Whatsapp - +91-9869425399.

Live With Passion…Invest With Passion.

Hitesh Parikh.