An absolutely incredible and little-noted essay last week in the Wall Street Journal - Understanding the Terror Threat by Paul Campos – should be required reading for anyone in a position of authority in this great country of ours.

Campos main point:  - in both business and politics we have become a nation of  “irrational cowards," and of Chicken Little "sky is falling" doomsdayers. 

And in so doing, we have done a grave dishonor to the sacred heritage of our country. A country built by risk-taking immigrants, by pioneers and action-driven leaders like George Washington, Teddy Roosevelt, and Martin Luther King.

Campos makes his point via citing the actual statistical probability of being a victim of an act of terrorism:

•  In the decade of the 2000's, only one out of approximately 25 million passengers was killed in  a terror attack aboard an American commercial airliner (all on 9/11)

•  To put this in perspective, a person has about a one in 500,000 chance each year of being struck by lightning.

•  Deaths from terrorism on airlines were at least five times less common in the 2000s than in any decade from the 1940s through the 1980s.

Campos does point to the one exception in the back of everyone's mind - the threat of nuclear terrorism. He agrees that this is a statistically real serious threat to which an intense, global policy response is very warranted.

Beyond this, though? Fuggedaboutit! The probability of any of us being the victim of a "terrorist attack" is for all practical purposes zero.

Now the pure flip side of fretting over terrorism is, as Teddy Roosevelt so famously said, is to be “in the arena,” to be a "doer of deeds" and to spend oneself in a worthy cause.

And in 21st Century America, it is our nation’s entrepreneurs who are most purely in the arena. It is they that are most courageously pursuing the opportunities that make America fly and thrive.

And you know what else? In terms of public perception, entrepreneurs suffer the opposite problem from terrorists. People think the odds of bad things happening to them (failure, bankruptcy, etc.) are worse than they really are.

For example, while most people think that 9 out of 10 businesses fail within one year, the real statistic is that only 1 out of 2 actually do.

Or while the media portrayal of entrepreneurs and small business is usually one of too much work and too little reward, less reported is how on almost all career satisfaction rankings being an entrepreneur ranks at the top of the list.

Or my favorite – most people consider investing in start-ups and small companies as the riskiest class of equity investing out there. This is anecdotally true but by no means collectively true.

As I pointed out in a recent blog post, over the past 10 years early-stage private company investing was the ONLY asset class other than gold to outpace inflation.

My favorite line from Mr. Campos' essay - Cowardice is among the most shameful of vices.
 
Washington and Roosevelt and King (to say nothing of the Wright Brothers) would turn over in their graves at the sight and sounds of the irrational fear-mongering that passes as public discourse in this great country of ours.

His advice and mine: Fight back.

In ways large and small, a good place to start is by learning the real odds. 

And when you do, you will sleep easier on that next red-eye to JFK.

And you will rekindle your faith in the power of the American entrepreneur.

I look forward to your attendance and feedback.

Jay Turo
CEO
Growthink, Inc.

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Of all of the variables to evaluate in handicapping the likelihood of success of a business, by far the most important is its  "human DNA" - that killer combination of people smarts, vision, creativity, integrity and work ethic present in all great companies.

Here are 7 qualities to look for in a management team worth backing:

#7. They Are, In Fact, A Team. Great companies are not simply the byproduct of a visionary and/or charismatic founder and chief executive, but rather of a multi-disciplinary, multi-faceted, and well-meshed leadership team.

Great companies have cultures of achievement.

The tone of this culture might be, and usually is, set by a charismatic founder. But its enduring success is dependent on how it can replicate and maintain that culture as the company grows, and as its founder's role becomes less pronounced.

#6. It Is Clear Who Is In Charge. This may seem contradictory to the above, but all well led companies have clear and final points of decision making. There are many effective styles of leadership, from greatly autocratic to fundamentally consensual, but all of them share the fact that in them there is one person at whose desk the "buck" truly stops.

#5. They Have Small Business Discipline. To paraphrase Guy Kawasaki -- the worst folks to run a start-up or an emerging company are a group of ex-Microsoft executives. Entrepreneurial companies are first and foremost small businesses. As such, their management must a) fervently guard cash flow and manage it with a cult-like intensity and b) always make decisions with the mindset that they only have so many "arrows in the quiver" in terms of time and capital to pursue initiatives.

#4. They Are Risk-Takers. The proper goal of an entrepreneur with outside investors is not to run a small business in the common sense of the term. With the fear of sounding harsh, the best managers are minimally concerned with protecting their own "middle-class" lifestyles. Rather, they understand that to achieve greatly requires daring greatly.

For investors, a flame-out failure is not the only bad outcome. As damaging is "a muddling along" driven by too conservative decision making influenced by the desire to "protect hides."

Companies that run this way, in fact usually require MORE money, and counter-intuitively can often be riskier than their harder-charging brethren.

#3. They Are "Goldilocks-ish." While there are certainly outliers in this regard, the significant majority of the best entrepreneurial managers are not "too hot" nor "too cold." Again, not a hard and fast rule, but look for leaders where the key people are between the ages of 30 and 50 have had a few past successes and maybe a failure or two.

They are now in that sweet spot between youthful hunger and middle age wisdom. They know what they know, yet they still have the intellectual and emotional flexibility and curiosity to change and grow.

#2. They Are Technologists. All successful 21st businesses are, at their essence, technology businesses. This does not mean that they all would be considered classic "emerging technology" companies (though the majority of them, in fact, are).

Rather, well-run modern companies leverage technology -- from CRM and ERP to SEO and SEM to scenario-planning and simulation to "best practice" their business models. Their managers understand that information technology is not just the domain of a geeky guy to call when computers can't boot up, but is rather the drumbeat of their business.

#1. Their Work Ethic is Off The Charts. More than anything else, successful entrepreneurs work hard. As in very, very, very, very hard. They work nights. They work weekends. They take short vacations, if any. They work when they're sick. They work when they're tired. They work and work and work and then to paraphrase the great (and famously hard-working) golfer Gary Player, "The harder they work, the luckier they get."

Look for this quality above all else. It is almost always the best predictor of success.

Look to the right for a fantastic chart that tracks investment returns for various asset classes over the past 10 and 20 years.

A few points immediately jump off the page: 

• Angel Investing Outpaced All Other Asset Classes. Obviously, at the top of the list is the gigantic gap between returns for angel, or early-stage private company investing, and all other asset classes. I will elaborate on this more below.
• Gold Had a Very Good Decade. While I personally loathe gold as an investment (see my blog post from last month - "Gold is great - But It Is Not an Investment"), for better or for worse the "00's" were a very good decade for gold. Though I must add that gold's investment return since 1980, on an inflation-adjusted basis, is actually NEGATIVE. 
• Inflation Was Consistently Low.  Inflation has been relatively consistent for the last 20 years, in the 2 and 1/2 percent annually range. 
• The Stock Market Performed Awful. As discussed in my worst investing decade ever post last month, the U.S. stock market - the Dow Jones, the S & P, the NASDAQ - had a historically abysmal decade, with all major indices posting both real and inflation-adjusted NEGATIVE returns (first time that has EVER happened).
• Real Estate - Same Old, Same Old. The great real estate collapse of 2007-2009 brought the decade's real estate returns into its long-term historical average, about 1% ahead of the rate of inflation.

So that is past.  What will the next 10 years hold?  Here are three predictions:

• Cash is VERY Dangerous. Not shown on the chart but of interest is today's average money market fund yield of a comically bad 0.03% (that is $3/year of interest per $1,000 invested). When viewed against either the current inflation number (1.8%) or the massive risk of long-term inflation brought on by the unprecedented federal budget deficits, dollar-denominated cash deposits today offer a downwright frightening risk-reward ratio.
• Only By Blind Luck Can One Expect To Beat the Averages in Public Stocks. The dirty little secret that the mutual fund and brokerage industry wants to hide is that there has been no scientifically valid study in the last 20 years that has demonstrated an actively managed stock portfolio offering better risk-return than simple index investing. And as global trading and real-time information-sharing continues to intensify, expect this trend to deepen. So for better or for worse if you're invested in U.S. public stocks in the decade to come, by far your most likely outcome is the market average.  
• Angel Investing Returns - Too Good To Be True? Now the 1st line in the chart, showing 10 year angel investing returns of over 30% annually, just feels way, way too high. How on earth could any asset class so outperform all others over such an extended period of time? And more importantly can and will it continue?

My answer - yes but.  Yes - because the 2 key factors that drive angel investing outperformance remain the same. One, returns have to be very high as compensation for illiquidity - most angel investments are in private-held, small companies years away from a sale or an IPO. And two, returns are high as compensation for the EXTREME variance of the asset class.

Now for the but.  While the asset class returned an average of 30%+, it was attained via the sum of a very, very few winners (aka Google), and lots and lots of losers. 

Quite simply, a few investors made a killing, and a giant many got killed.

But here is where it gets interesting. The one thing that has and will continue to drive angel investing returns  - namely technology advancements - now allows investors, for the first time, access to smoothed-out returns (i.e. higher likelhood of hitting the 30% average versus the extreme highs and lows).

I look forward to your attendance and feedback.

Jay Turo
CEO
Growthink, Inc.

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Barring a massive rally between now and the end of the year, the "00's" will be the worst decade in the history of the stock market.  

As reported in the Wall Street Journal today, since the end of 1999 stocks traded on the New York Stock Exchange have lost an average of 0.5% per year.

Let's put this in historical perspective.

The 1990's were the best calendar decade in history for stocks, with an average investment return of 17.6% per year.

Even in the 1930's - the era of the Great Depression and usually considered the gold standard (pardon the pun) for bad markets, investors did better - with stocks "only" losing 0.2% per year.

And, as the Journal goes on, the news is even worst when we take into account inflation.  Since 1999, on a inflation-adjusted basis, the S & P 500  has lost an average of 3.3% per year.  

How bad is this? Given that the 1930's was a period of deflation, stock actually gained, in real terms, 1.8%  per year during that decade. Even the 1970's - a period of both a bear market AND inflation, did better than this last decade, with stocks only losing 1.4% after inflation.

So before moving to the "what does this mean" and "what do we do now" discussion, let's take a moment of pause to reflect on just how tough an investing decade this has been

Very, very tough. Trillions lost. Retirement plans delayed. Heartache and heartbreak.  

Perhaps most gallingly, while most suffered, there were those that did very well while really having no business doing so.  Hedge fund managers.  Derivatives traders.  Bank executives.

I think we can all agree on a hope for the new decade  - that the financial rewards in the next 10 years go more to the creators of value and less to the speculators on value.

Here are three more:

1. May Venture Capital Rise Again. Venture capital firms, for the first time in their history, lost money over a decade-long period.

Given the amazing and world-changing advances in human productivity and connectivity over the last 10 years, may the venture capital industry, and correspondingly the world of emerging technology - re-find its return footing.

2. May, on December 31, 2019, The NASDAQ and Dow be trading at, respectively, above 10,000 and above 30,000.  Even getting to these levels will mean a return of less than 5% annually from 1999 to 2019.

This falls into the category of the equity markets being "due" for a big returns decade. A simple, but defensible premise.  

3. May The Nation's Entrepreneurs Lead The Way.  Never has there been more productive, focused, mature, and cause-driven entrepreneurs alive in the world than there are today.

Take a look at the below list of the top performing stocks of the past 10 year (1999-2008): 

Symbol               Company                                             10 Yr. Cum. Return
GMCR..............Green Mountain Coffee Roasters................7,895.4%
HANS...............Hansen Natural........................................6,504.1%
BYI...................Bally Technologies..................................6,394.2%
SWN................Southwestern Energy.................................5,108.4%
CLH..................Clean Harbors.........................................4,456.0%
DECK...............Deckers Outdoor......................................3,669.5%
AMED...............Amedisys................................................3,669.2%
TNH.................Terra Nitrogen..........................................3,611.5%
BOOM..............Dynamic Materials......................................3,519.4%
QSII.................Quality Systems.......................................3,497.2%

As Tim Hanson points out, these companies have three qualities in common - they were mostly ignored and obscure when they began their meteoric rise, and they were SMALL.

And you know what?  Come 2019 there will be TEN DIFFERENT obscure and small companies that will make this list.

Noone knows who these companies will be. But to attain alpha, you MUST find them.

One thing is for sure - a few investors WILL find them.

The more interesting question of course is - will you be one of them? 

I look forward to your attendance and feedback.

Jay Turo
CEO
Growthink, Inc.

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