In 1981, I read a fascinating book that explored the question of why some countries were rich and others weren’t. The name of the book was Wealth and Poverty and its author’s name was George Gilder. For an economics book, it garnered a surprising amount of buzz. It was kind of the Capital in the Twenty-First Century of its day.
In 1984, George Gilder came out with another book called, The Spirit of Enterprise. Since I liked Wealth and Poverty, I jumped all over his newest offering.
Sadly, The Spirit of Enterprise was a bit of a let down. It was good, but it didn’t get my juices flowing like Wealth and Poverty. And the only reason I bring it up now is because it mentioned two obscure companies doing amazing things in electronics and computers. The names of the companies were Intel and Microsoft.
The Mind of an Investor
Back in 1984, I didn’t have the mind of an investor. I had the mind of a besotted frat boy. So the idea of foregoing a thousand bucks worth of beer and New York Islander tickets so I could take a flyer on either Intel or Microsoft never crossed my mind. What a pity. Here’s what Intel and Microsoft cost when I became aware of them.
Intel: Around $0.60 a share in late 1984.
Microsoft: Didn’t become publicly traded until in 1986. In May of that year, it was selling for $0.10 a share.
And here’s what $1,000 would have grown to if I had invested it in either of these stocks in the mid 80s and held onto that investment until I retired in 2016.
I don’t remember who coined the phrase “castle in the sky” in reference to stocks. It was either Benjamin Graham or Burton Malkiel. I’m pretty sure it was Graham, but I could be wrong. Anyway, a castle-in-the-sky is a stock that captures the imagination of the masses because the masses have come to believe that it, or the industry it represents, is the “next big thing.” And sometimes the masses are correct. Intel and Microsoft were very much integral to ushering in the digital age. But the trick is to get in on these castles before they’re a blip on the general public’s radar. Buy-and-hold investors who bought Microsoft at $0.10 a share made a hell of lot more money than buy-and-hold investors who bought Microsoft at $50 a share.
In 2012, I was a much more sophisticated investor than I was in 1984. I had a Roth IRA, a 401(k), and a brokerage account. I also had nine years of immersing myself in the fundamentals of personal finance. I knew all about compound interest, dollar-cost-averaging, and the need to be “greedy when others were fearful.” But more important than my investment accounts and my PF knowledge were three additional qualities that made me perfectly suited to castle-in-the-sky investing.
- I was curious. I was always poking around websites such as Real Clear Science, the MIT Technology Review, and DARPA. I was also reading anything I came across in my local library that was futuristic (e.g., Wired for War, Race Against the Machine, and Big Data). So I was always finding little-known companies that were doing interesting things.
- I had a sizable net worth. So I had some money to gamble with.
- I had a memory. I knew about Intel and Microsoft way before they became household names, and the sting of missing out on those castles hurt.
I’ll never forget our first castle-in-the-sky investments. I came across an article about 3D printing on Real Clear Science, and the article mentioned two obscure companies: 3D Systems and Stratasys. I then googled the companies and found that they were publicly traded. Next, I brought my “research” to the attention of Mrs. Groovy and she agreed that 1) 3D printing might be the “next big thing” and 2) both companies were worth a try. “Should we invest $2,500 in each?” I asked. “No,” said Mrs. Groovy. “Invest $5,000 in each.”
Mrs. Groovy has a lot of moxie.
The Groovy Track Record for Castle-in-the-Sky Investing
The Groovy castle-in-the-sky investing strategy basically lasted from 2012 to 2013. All told, we invested in six little-known companies that we felt would soon capture the imagination of the masses. We were right on five and a half of them. Here are the results.
|Company||Field||Discovered Via||When Purchased||Share Price||When Sold||Share Price||Profit/Loss|
|3D Systems (DDD)||3D Printing||The website Real Clear Science||Around March 2012||Around $16||Around November 2013||Around $75||368%|
|Stratasys (SSYS)||3D Printing||The website Real Clear Science||Around March 2012||Around $36||Around November 2013||Around $117||225%|
|AeroVironment (AVAV)||Drones||The book Wired for War||Around February 2013||Around $18||Around March 2014||Around $40||122%|
|iRobot||Robotics||The book Wired for War||Around February 2013||Around $21||Around March 2014||Around $42||100%|
|Organovo (ONVO) Round One||3D Bio-printing||The website Real Clear Science||Around October 2012||Around $2||Around November 2013||Around $8||300%|
|Organovo (ONVO) Round Two||3D Bio-printing||The website Real Clear Science||Around March 2015||Around $5||November 2017||Around $1.50||-70%|
|Lithium Americas (LACDF)||Lithium Mining||The website Real Clear Science||Bought numerous shares from early 2012 to January 2013||Average share price was $1.71||NA||Current share price is $8.91||420% thus far|
The Groovy Rules for Castle-in-the-Sky Investing
Castle-in-the-sky investing is incredibly risky. You’re not only trying to anticipate the “next big thing,” you’re trying to anticipate the companies that will be at the forefront of that “next big thing.” Crazy.
Our last remaining castle-in-the-sky stock is our lithium concern, Lithium Americas. Right now it’s up over 400%. And electric cars, which depend on lithium-ion batteries, are posed to be the “next big thing.” So we’re going to let our bet ride. Besides, Lithium Americas is a Canadian company that has teamed up with a Chilean company and a Chinese company to develop a lithium deposit in Argentina. What could possibly go wrong?
All in all, castle-in-the-sky investing has been very, very good to me and Mrs. Groovy. We made a lot of money and got out before the investing worm turned (3D Systems is currently trading at $9.36 a share, for example). So if you got a lot of Mrs. Groovy-like moxie, and you want to give castle-in-the-sky investing a try, here are three rules you absolutely need to follow.
- Be curious. Read a lot of books about technology, and frequent a lot of websites that focus on technology. That’s where you’ll find potential castles before anyone else.
- Bet only what you can afford to lose. If you have anything beyond 2% of your portfolio invested in castles, you’re a mental case.
- Hold for at least a year. If your castle has doubled in that time, sell it and take the long-term capital gain. If it hasn’t doubled, give it another year. If it hasn’t doubled after two years, sell it and take whatever profit/loss you have at that point. Your castle is probably not a castle.Quick aside: We’re not following this last rule for Lithium Americas because 1) it has the potential to be our winning lottery ticket, and 2) selling it now would mean foregoing our Obamacare subsidies for the year, which currently amount to over $25K.Another quick aside. To keep abreast of the lithium industry, we follow a guy named Joe Lowry on Twitter and Linkedin. Joe goes by the moniker Mr. Lithium and happens to be the father of someone very big in the FIRE community: Erin Lowry of Broke Millennial fame. Pretty neat.
Okay, groovy freedomist, that’s all I got. Are you curious about castle-in-the-sky investing? Do you think betting a small amount on a company that might be the next Amazon or Tesla might be a worthwhile strategy? Or do you think castle-in-the-sky investing is utterly insane? Let me know what you think when you have a chance.
Have a groovy weekend and enjoy part one of my trash talking with Claudia and Garrett from Two Cup House. Peace.