October 3, 2021

In the previous episode, we talked about what SPAC is whether or not you should invest in it.  In this video, We're going to cover the seven most common mistakes people make when investing in SPACs and how you can avoid them. 

When you're looking at YouTube, there's a lot of hype about new IPO companies & new SPACs that potentially shoot up to the moon. 

It's important to understand the risk and understand what you're getting yourself into.

This is so that you don't cry about it when you're losing money, or maybe you will be able to avoid losses before they even happen which will save you thousands of dollars, if not tens of thousands of dollars.

90% correct transcript

So welcome back to another episode of How to Invest in SPACs. And in this episode, we're going to cover the seven common mistakes to investing in SPACs and how you can avoid them.
So before we get started, I just want to celebrate another three successful case studies, where Fion made 70% from Alteryx in five and a half months, Mike made 103% from Intel in three months, and Brad here did an amazing job where he made 87% from BK in 11 months, 181% from JP Morgan in 11 months, BA Options, 47% in 10 months, BA stocks, 35% in 11 months, and Sabre 72% in eight months. So congrats to Mike, Fion, and Brad. These are amazing case studies and keep up the good work.
So before we go through the seven mistakes when it comes to investing in SPAC, I just want to let you know, I have turned this entire video into a pinup. So I have turned this seven mistake into a PDF file that you can download in the description below. So you can just go to that link. You can download it. Print it out. So then you can use it as a reminder. Stick it on your wall and you can refer to it when you're investing. So this should help you out quite a lot too. And if you're interested in the PDF, then just go to the description below and you can get it and it's free of course.
So in the previous episode, we talked about what is a SPAC and why you would or would not invest in it. And in this episode, I want to help you to understand how you can lose money. And it's seven common mistakes that most beginners would make when it comes to investing in SPAC. Now, obviously when you're looking at YouTube, there's a lot of hype about these new IPO companies, these new SPACs that potentially shoot up to the moon. And it's important to understand the risk and understand where you're getting into. So you don't cry about it when you're losing money, or you're able to avoid losses before they even happen. And that will probably save you thousands of dollars, if not tens of thousands of dollars.
So let's cover number seven, mistaken volatility for an uptrend. So when you're investing in a new IPO company, it is very volatile. Volatility means the stock moves a lot. So it goes up and it goes down a lot. And when you're investing in a SPAC, this is further amplified because you don't know what is the company that is going to go IPO, and there's less regulation revolve around SPAC when it comes to IPO as well. Just because the stock moves a lot, going up and down, it doesn't mean there is an uptrend. In investing this elevator, we focuses a lot on an uptrend because the better the trend, the easier it is to make money. But when you're looking at a SPAC, there isn't a lot of data when it comes to technical analysis. So it was very easy to mistaken, a few weeks of going up or a few months of going up as an uptrend when in fact the company might be poor performance, which means it wouldn't have an uptrend anyways. So that's the first mistake that most people make.
Number six, thinking the party will not end. Now for 2020, there are a lot of SPACs that have done the reverse merger and a lot of stocks gone IPO this way. And you will always find people on Reddit saying that, still go to the moon, go to the moon. It's a rocket ship. And just keep holding onto it only to find out six to 12 months later that the party ended.
So when you're investing in these high risk opportunities, it is important to understand you want to take some profits. It's important to understand that the party will end. And if you are investing in SPAC, you ought to make sure you have some sort of exit plan. When the musical chair game, the music stops, you need to be the one that has a chair and sitting down. You don't want to be the one left hanging and holding the bag.
Mistake number five, investing in companies without a product or without revenue or without product and revenue. So this is actually a very common phenomenon I see when people are investing in SPACs is that they're taking so much risk, that they're just investing in a startup with an idea. Now, when you're looking at various companies going IPO through a SPAC, they are companies that have revenue. There are companies that have strong growth, a good business model and a proven business plan. And there are also companies that are, they don't really have a product. They haven't even made any money yet. And they haven't even gone through any technical testing. And some people will still say, "I believe in that company," but there's nothing to support their business model, product, revenue.
And when you think about a company as a person, if you're investing in a company that doesn't make money, well, it is not going to last very long. And remember, mistake number one, mistaken volatility for an uptrend. And if you're investing in a company with no product, no revenue, then the volatility is going to be even higher. And when you're looking at volatility, it means risk. It means the potential of the SPAC going down is even higher. And when it goes down because it has no revenue, it has no product, it's going to drop even more than companies that have a proven business model, product and revenue source.
Mistake number four, investing in companies with fraud. Now this is actually very common with the recent SPAC IPOs. This happens in America, Canada, Europe, and China as well. So I don't want you to think that this is an isolated incident with China, just because of Luckin Coffee or whatnot. So it's important to look at the entire stock market. Even though there are audited financial statements, sometimes they are fraud, even with companies that have a proven business model with sales as well. And I think in United States, there is a very good example where Nikola, the founder made a lot of false claims to attract investors, to invest in their stock. And obviously Nikola went to the moon and an afterwards, one of the short sellers came in and call on their fraudulent claims. And then afterwards the stock went down significantly.
So if you're ever investing in a SPAC, you understand that you're taking a lot of risk already. So the least you can do is invest in a company that is trustworthy, that has a proven product, business model, and try to avoid investing in companies with fraud as much as possible. And this applies to general investing as well as SPACs. And if you ask me, Eric, how can I tell if a company is fraudulent or not? And the answer is, it's really difficult. And I have been working in the auditing industry for many years and I have visited many companies. I have looked at their financial statements, help fix them, help do a lot of substantive procedures to test them. And I can tell you, it is difficult. It's not easy with the internal access as an auditor to identify fraud. So you can imagine you as a retail investor, without that internal access, without any connection to the company, being able to identify fraud.
So that's why when you're investing in the stock markets, you want to choose more stable and more trustworthy companies for majority of your portfolio. And that actually brings me to the third mistake. So mistake number three, purchasing too much SPAC. Now, when you are investing, you want to have a diversified portfolio and you're diversifying between sectors. You're diversifying between large and small companies, and you're also diversifying between SPACs and not SPACs. So what you want to avoid is having too much SPAC in your portfolio. So easy question to ask yourself is really, well, are you comfortable having a hundred percent of your portfolio in SPACs? Because I have seen some individuals or subscribers that I have where their portfolio is a hundred percent SPAC and just a couple of months ago there is a correction for SPACs. So basically their entire portfolio is wiped out 50, 60, or even 70%. So you don't want to be that person.
Now, if you ask me, Eric, what is a good exposure to have in SPAC? I would say less than 30% would be a good idea. Now for myself, I try to have even less than that because I'm a very conservative investor. I target 30%, but generally I would avoid SPACs until they are a lot more proven. And it has been IPO for many years. But if you really want to invest in SPACs, which is why you're watching this video, then I would say less than 30%, perhaps less than 20%. So right now, if I'm looking at my own portfolio, then my percentage of SPACs in my portfolio is only 6%. So you can consider this and go like, wow, that's actually really low in terms of percentage. I would say over 80, maybe 90% of my portfolios are in blue chip, safe growing companies that at a discounted price.
So when you think about that and you can go back and look at your portfolio and ask yourself, are you overexposed in SPAC? Because if there is a correction, which technically it happened already a couple months ago, then you will see a significant drop in your portfolio if you're overexposed in SPACs.
And that brings me to mistake number two, having no exit strategy. So when you're looking at SPACs, like I said, in the very beginning, mistake number six, the party will end. So you need to have some sort of exit strategy. Whether you want to exit at a specific price, whether you want to exit based on a specific technical pattern or whether you want to exit based on some sort of news event or whatnot, you need to have an exit strategy. Now the worst exit strategy I've ever seen so far is that I'll hold it for five to 10 years for that SPAC, but I'm going to panic. And the reason why this is a really bad strategy is because some people, they want to be a long-term investor, but they act like they're a short-term investor.
Now what I mean is this. You plan to hold onto a SPAC for five to 10 years, right? So you're not trying to short-term trade it, but you're looking at the SPAC price on a daily basis. And this conditions your mind to get an update on the market value of that's back on a daily basis. But you're not trying to make a decision within this timeframe. You're trying to make a decision five years from now. So end up what you're getting is that you have the market, Mr. Market's telling you that price this SPAC every single day. And if the market price suddenly draw, let's say you invested in SPAC at $30 and it drops to $10, even though it is a good SPAC, it has good revenue, it has good business model, it has good financials, and you did your research, you would panic. You would end up selling it at a loss. And that's really one of the common mistakes I see people make.
Now, if you don't have an exit strategy for SPAC, then here, I can give you a simple one. Now my exit strategy for my portfolio is a bit more complicated than this, but this is a good rule of thumb. So typically SPACs start at $10. Okay. Now, if you get an early, let's say, hypothetically, you got in at $10. So then the question is really, well, should you get out at 20, 30, 40, 50, 60? Now I think the furthest I have seen in terms of SPACs is that they have gone up to a hundred dollars or a little bit less than a hundred, maybe $80 or so, and then it comes back. So then if that's kind of the range and you can study like the last 10, 20 SPACs to kind of figure out the range, then you want to set up price targets to get out of your SPACs.
So let's say you invested in 20 and you need to tell yourself, okay, what are you happy with? If you're happy with the price going to 30 and you exit, then you exit all or some of it, and then you don't look back. You can either exit more, but you don't jump back in at an even higher price because you're scared of missing out. Remember, the market is always going to be here. It's going to be around. It's not going to go away just because you didn't trade for a month. You're alive. The market is here. There are so many people looking to make a quick buck in the market. You don't need to get rich quick today. There are way more opportunities than you can ever imagine.
So once you get out of the SPAC, because you know it's high risk, then you just let it ride. So if you want to get out your entire position, that's fine. If you want to get out a portion of your position, that's fine. You just need to make that decision and don't feel regretful about it.
Now, the last mistake that I want to cover, it's about timing. And the last mistake is purchasing right after it finished a merger. So this is something very specific to SPACs. And I have been tracking SPACs for awhile. Later on, I'll talk about a story where I invested in SPAC and I made some money. But the last mistake is really about purchasing right after it finished a merger. And this is probably the worst time to invest in a SPAC because after studying a lot of SPAC, I think right after the merger date is when the SPAC starts to drop. So if you want to lose money, then you want to buy right before the merger, because that's when there's the most hype. Right after the merger, the SPAC starts to go down because the hype is cooling down. People are exiting their investments. Investors who are previously holding onto the shares of the private company are off-loading their shares to buy a house, to buy a new car, to buy a yacht. So the worst time to buy a SPAC is right before the merger. Okay?
So those are the seven mistakes do invest in SPAC that you can possibly avoid. So let me just recap here. The first one is mistaken volatility for an uptrend. The second one is thinking the party will not end, but it will. The third one is investing in companies without a product or revenue. The fourth one is investing in companies with fraud. The fifth one is purchasing too much SPAC, which overexpose your portfolio. The sixth one is having no exit strategy. And the seventh one is purchasing it right after it finished a merger, which is the worst time because the SPAC will be dropping.
So those are the seven mistakes. And this is the second episode of How to Invest in SPAC series. So later on, I'll make a couple more videos in terms of my journey, my story, what are the things I have tried, and how you can better invest in SPACs. So if you're interested in learning how I invest in the markets, then you can go to the first link in the description below to visit a free case study, and it is a four-hour training and you can register for it. It's free. Grab two cups of coffee, and you will learn a lot about how to invest and reduce your risk as much as possible. And if you're interested in getting a PDF version of the slide today, which is the seven mistakes when investing in SPACs, you can go to the second link in the description. I have turned this into a PDF so you can download it and you can post it on your wall so you remember the seven mistakes when it comes to investing in SPACs. Okay. I'll see you in the next episode.

About the author 

Eric Seto

Eric Seto is an investor with over 10 years of experience. He travelled around the world to help with auditing, accounting, purchase and sale of companies.

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