A welder named Juan Hernandez just became a millionaire last week.
He didn’t win the lottery. He didn’t stumble onto an oil field or goldmine. He didn’t even successfully run for office and get rich from insider trading.
Instead, Hernandez, who immigrated from Mexico years ago, landed a full-time job at SpaceX in 2015… which gave him stock in the company… which he held onto for the next 10 years as he rose through the ranks to become a supervisor.
Hernandez recently switched jobs to work for Jeff Bezos’ rival company, Blue Origin. But he still became an official millionaire from Friday’s initial public offering (IPO) when his shares ballooned in value to $1,046,175.
Maryellyn Musselman, just 27 years old, has a similar story after working aboard a SpaceX rocket recovery vessel. She bought up even more shares than originally allotted, and – while she won’t say how much she amassed altogether – now apparently has enough money to start up her own business.
It’s important to recognize that these stories are best-case examples of early-in “shareholdership.” Yet they’re not completely isolated.
Nearly 70 years ago, a small grocery store company called Food Town opened in Salisbury, North Carolina. Brothers Brown and Ralph Ketner joined forces with Wilson Smith, funded by $62,500 raised from locals who believed in them.
Source: www.dncr.nc.gov
I sincerely doubt that any one of them saw the store turning into the empire now known as Food Lion. Yet that’s precisely what happened anyway.
And as it grew, the grocery chain turned those early-in, stick-with-it investors into millionaires and even billionaires today.
The Food Lion story is significant
At the time of Food Lion’s founding, the Ketners and their backers simply saw a small-town opportunity. They wanted to build a better grocer with quality, affordable offerings.
So they did just that.
Eventually, however, their neighborhood dream turned into a broader philosophy known as LFPINC: Lowest Food Prices in North Carolina. And then it outgrew that vision, too, expanding across 10 states with over 1,000 stores now.
Even back in February 16, 2012, Salisbury Post wrote that:
The Food Town/Food Lion story is filled with various tales of investors who loyally stuck with the company as it struggled in its first decade, and others who sold their stock before Food Town sales took off with [Ralph] Ketner’s low-price strategy.
Each original investor [of which there were 122 besides the Ketners and Smith], if he had held his stock until the end of 1991, would have become a millionaire thanks to the stock’s splitting 12,960 for 1. As of Dec. 31, 1991, an original $10 share was worth $353,160.
As with the SpaceX story, the original backers were mainly ordinary people: housewives, teachers, druggists, millworkers, mailmen, doctors. Yet they ended up holding stock advanced investors could only dream of.
Salisbury Post continued with:
In its heyday, Food Lion outperformed Walmart 12 to 1 and Warren Buffett 5 to 1. In 1999, Microsoft founder Bill Gates was labeled Entrepreneur of the Millennium by Entrepreneur magazine because $10,000 of original Microsoft stock had grown in value to $4.8 million.
Ketner, the magazine’s 1990 Entrepreneur of the Year, quickly reminded the story’s author that an original investment of $10,000 in Food Town was worth $355 million – 73 times Microsoft’s growth in stock value.
That’s not to knock either Microsoft (MSFT) or Walmart (WMT). Both also created thousands of millionaires as they grew. The same holds true of early-in Home Depot (HD) investors and those who backed the likes of Amazon (AMZN) and Google before it became Alphabet (GOOG).
None of these companies began as billion- or trillion-dollar businesses. They became that way because entrepreneurs, “little people,” and larger backers gave them a chance.
Many of whom were very richly rewarded as a result.
Wide Moat Research still doesn’t do IPOs
Absolutely none of this information changes the cautionary story Wide Moat Research has taken on SpaceX. I want to make that crystal clear.
The company is still intensely overpriced – and getting more so by the day – considering its continuing unprofitability. Buying into its initial public offering, while understandable, was not investing.
It was speculation, pure and simple.
As I’ve said over and over throughout the years, I don’t recommend investing in IPOs or newly trading companies at all. My reasons are varied, including:
These companies rarely have much history to review, making it difficult to truly analyze their future capabilities.
IPOs are literal marketing machines too often driven by hype rather than facts and figures.
Anything can and often does go wrong shortly after an IPO, as reality sets in and enthusiasm wanes.
That’s why I’m so highly focused on established companies with strong track records of excellence. They might take longer to make millionaires out of shareholders, but they’re also much more reliable in reaching that goal.
For instance, remember the Facebook IPO from 2012? Bloomberg estimated after the fact that retail investors lost around $630 million on that appallingly handled launch. There were billions in total losses, and it took over a year for those (few and far between) who stuck with it to break even.
The Meta Platforms (META) of today is a much safer, smarter, more profitable play.
Hopefully, that will be the final story for newly launched data-center real estate investment trust (REIT) Fermi (FRMI) as well. Unlike Facebook, its IPO last October went off without a hitch, with shares jumping 19% that first day.
It took two months for the company – which had no operating assets and no active revenue at the time of its market debut – to fall out of favor after reporting that its anchor tenant would no longer be funding $150 million toward its continuing construction. It’s been nothing but suffering for shareholders ever since, serving as a sad reminder of why Wide Moat Research says no to IPOs every time.
The rare success stories just aren’t worth the gamble.
Early-on investing is a smarter way to go
Despite the success stories I listed before from SpaceX, Food Lion, and the like… pre-IPO, early-in investing is fraught with dangers as well.
We’re very happy it worked out for Juan Hernandez and Maryellyn Musselman. Truly. But for every one of them, there are dozens if not hundreds of startup shareholders who lose out.
After all, about a quarter of companies have to close within their very first year of operating. And the data gets even more depressing from there, with up to 90% shutting down by year five.
Funding dries up. Glitches turn into irreparable issues. Blueprints become unmanageable. Employee enthusiasm dies down.
There are dozens of reasons why most startups turn into “end-downs.” Yet the results are the same, with real people losing real money.
Careful research of the management, resources, and markets each one involves does narrow down that loss potential, but only by so much. In fact, Elizabeth Pollman, professor of law and co-director of the Institute for Law and Economics at the University of Pennsylvania Carey Law School, has found that at least 75% of even venture-backed startups fall apart.
That’s why you need a strategy: one that involves careful research of hundreds of companies, narrowing them down to no less than 10 that look the most promising.
You’ll also need money. Startup investing isn’t for the low on cash any more than the faint of heart. If you’re going to do it safely – or at least as safely as possible – you’ll want to put money into all 10 of those promising companies, if not more.
Finally, you’ll need time and patience. While it’s fun to think about being in Hernandez and Musselman’s shoes now, keep in mind that SpaceX wasn't a corporate giant back in 2005 when it opened.
Many people thought Elon Musk was wasting his fortune on the venture, especially when his initial efforts failed repeatedly. Even 10 years later, the newly employed Hernandez didn’t think much of holding stock. The way he saw it back then, it was just part of his pay package.
If you’re prepared to put that kind of time and money into a carefully researched startup strategy, then let me know. I’m currently considering launching such a service, and I’d love your feedback.
The results, as we’ve seen with SpaceX, can be amazing when they turn out right.
Happy SWAN investing!
Brad Thomas
Editor, The Wide Moat Daily
The Wide Moat Show
Source: ChatGPT
Do you know there are more companies to invest in than SpaceX (SPCX)?
Moreover, they’re well-priced with real profits and long histories of sustainability to boot. Those are qualities that, with all due respect to Elon Musk, SpaceX simply cannot claim.
Join Nick Ward and me in last week’s Wide Moat Show, where we explored the consumer discretionary sector – particularly seven stocks that are trading at stunningly low valuations.
Catch the full episode right here.
