The Disruption Investor The Disruption Investor: Owner's Manual

The Disruption Investor
Owner’s Manual
How to Find and Profit from the Biggest

Disruptive Trends Yet to Come
The Disruption Investor Owner’s Manual
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Welcome, and thank you for joining Disruption Investor.
You’ve made a great choice coming aboard.
I’m Stephen McBride, your editor and Chief Analyst. (That’s me to

the left.)
My job is to help you make sense of and profit from our rapidly
changing world.
I know joining a new service can feel unfamiliar. You may have
already skimmed over the latest issue of Disruption Investor, or
the special research reports that came with your membership.
This document you’re reading now is your starting “how-to” guide.
In it, I cover the basics. After reading it through, you’ll be on your way to making money
from disruption. You’ll understand how I think about investing. And you’ll learn the proven
strategies we’ll use to profit in the markets.
Right up front, you should know there’s never been a better time to be a disruption
investor.
You’ve surely noticed that the world is changing… fast.
In just the last five years, humans have invented computers that think… built cars that drive
themselves… developed cures for many forms of cancer… and figured out how to produce
energy efficiently without burning a trace of fossil fuel.
At the heart of every breakthrough is a business. My goal in Disruption Investor is to

uncover the next crop of disruptor stocks that are changing the world and set to hand us
big profits.
Welcome aboard—I look forward to working for you and profiting with you.
If you have any questions, write me anytime at stephen@riskhedge.com.
Stephen McBride
Editor & Chief Analyst
A RiskHedge Publication Page 2

Chapter 1
Why I’ve committed my career

to disruption investing
It’s the number one question folks ask me when I tell them what I do.
“Why disruption?”
It’s not because I’m a technology junky.
As you’ll see, disruption is about FAR more than tech.
And it’s not just because I’m passionate about disruption, although I am.
Let’s take a step back.
Why do we invest?
We invest to build lasting wealth.
We invest so we can live comfortably, send our kids to college, take nice vacations, donate
to worthy causes, and enjoy financial freedom.
And, eventually, live a fulfilling retirement.
Quite simply, taking advantage of disruption is the best investing strategy I’ve found to
achieve these financial goals.
As longtime RiskHedge readers know, disruptors are companies that create and transform
whole industries.
In other words, disruptors invent the future.
And true disruptors aren’t out there making small improvements.
They don’t come in and compete with market leaders. They destroy them.
And most important, disruptors can hand you investing profits you simply won’t find
elsewhere.
For example:
• Southwest Airlines (LUV) disrupted flying when it pioneered discount air travel. It
forced the whole industry to rethink their business strategy and slash ticket prices.
From 1980 to 1999 it handed investors 7,450% gains.

• Starbucks (SBUX) got America hooked on high-end coffee. It normalized paying

$6 for a latte. Although it spawned a dozen competitors, Starbucks still managed to
hand investors 9,050% gains from 1992 to 2012.
• Intuit (INTU) disrupted personal finance. Through its development of do-it-yourself

financial programs QuickBooks and TurboTax, it freed millions of Americans from
having to hire an expensive accountant. Investors who got in around 1993 collected
gains of 2,460%.
Hands down, there are more opportunities for us to make big profits in disruptive stocks
today than ever before.
That’s because we’re living in one of the most disruptive periods in history.
Don’t just take my word for it.
Legendary hedge fund manager Stan Druckenmiller is probably the best investor alive
today. From 1980 to 2010 he generated average annual returns of 30% without a single
down year.
In a recent interview he warned:
“We’re in the most economically disruptive period since the 1880s.”
Disney CEO Bob Iger agrees. He recently said:
“Everything about our world is being disrupted, and faster than ever.”
And have you seen the movie The Big Short?
It tells the story of a few investors who made billions by betting on the US housing collapse
in 2007–8.
Steve Eisman, who was played by Steve Carell, was the mastermind behind the trade.
In a recent interview, Eisman was asked, “What are the biggest opportunities you see
today?”
He said:
“The disruptor vs. disruptee theme. [It] will last for a long time and there’s lots of
way to play that...”
Clearly, the smartest guys around know the big money is in disruptor stocks.
Getting Rich Faster than Ever

iPhone maker Apple has grown into one of the world’s largest companies. At last count it
was worth roughly $920 billion.

Apple was founded in 1976. It took 23 years for it to reach a $10-billion valuation.
23 years is a long time.
Especially when you consider hotel disruptor Airbnb hit the $10-billion mark in just five
years.
Taxi disruptor Uber did it in about three...
And electronic cigarette company Juul Labs, one of the newest members of the $10 billion
club, achieved it in just seven months, according to venture capital database PitchBook.
As you can see below, disruptive companies are growing faster than ever.
Sidestepping Dangerous Bankruptcies

On the other hand, companies that can’t adapt are being disrupted faster than ever.
For example, since 2000, half of all Fortune 500 companies have either gone
bankrupt, been acquired, or ceased to exist.
This is an acceleration of a trend that’s been in place for years: the declining life expectancy
of large companies.
Over the past six decades, the average lifespan of an S&P 500 company has plunged from
58 years to 18 years:

Think about all the iconic companies we’ve seen disrupted in the past two decades...
Retailers like Toys “R” Us and Sears have been forced into bankruptcy.
Printing giant Xerox (XRX) was once America’s 20th-largest company. But as the world went
paperless, it faded into obscurity.
Worse, its stock has sunk from $168/sh. in the late 1990s to below $40 today.
General Electric (GE) was America’s largest company as recently as 2001. Today it’s not even
in the top 50. And its stock has plunged 84% since 2000 as it has struggled to keep up with
the times.
Sail Through Stormy Markets

As I mentioned, our goal in Disruption Investor is to build lasting wealth.
It might surprise you to learn that true disruptors don’t just perform well in good markets.
They can sail through downturns, too.
As you know, the S&P 500 took a beating during the 2008 financial crisis. It crashed 58%,
wiping out the retirement hopes of many Americans.
After the crash, it took five long years for the market to claw its way back to even.
Five years.
Can you afford to earn nothing on your retirement nest egg for the next five years?

Now, look at the performance of disruptor Amazon:
In that same timeframe, its stock more than doubled...
Or consider disruptive DNA mapper Illumina. Its stock shot up over 400% during that time:

And here’s online travel disruptor Priceline:
To put some numbers to it, say you had invested 10,000 bucks in each of these at the
beginning of 2007.
So, $30,000 total.
By the summer of 2011, you’d have over $220,000.
Let me emphasize that…
The period of 2007–2011 was very difficult for many Americans.
Millions lost their jobs. Many lost their houses.
Some had to take low-wage hourly jobs just to put food on the table.
But you could’ve earned seven times your money during this horrible period for the
markets.
I’m not aware of any other investing strategy that could achieve results like that.

Chapter 2
How to flip great danger into your great edge

I’m about to show you three lists.
Please look them over closely.
Together they illustrate one of the most important concepts in investing.
If you can commit this concept to memory… I mean really sear it into your brain… you’ll
enjoy a great investing edge that most investors can only dream of.
This first table shows the 10 largest publicly traded companies on earth, ranked by their
market capitalization, back in early 2001:
Rank Early 2001

1 General Electric (Conglomerate)
2 Cisco (Hardware)
3 Exxon Mobil (Oil & Gas)
4 Pfizer (Pharmacueticals)
5 Microsoft (Tech)
6 Wal-Mart (Retail)
7 Citigroup (Finance)
8 Vodafone (Telecom)
9 Intel Corporation (Hardware)
10 Royal Dutch Shell (Oil & Gas)
You probably recognize most of the stocks on the list.
In 2001 they were the best of the best. The biggest of the big.
They were household names that had conquered their industries and handed investors big
profits.
Now I’m going to add a column to the list.

It will show the same ranking 10 years later—in early 2011:
Rank Early 2001 Early 2011

1 General Electric (Conglomerate) Exxon Mobil (Oil & Gas)
2 Cisco (Hardware) PetroChina (Oil & Gas)
3 Exxon Mobil (Oil & Gas) Apple (Tech)
4 Pfizer (Pharmacueticals) ICBC (Finance)
5 Microsoft (Tech) Petrobas (Oil & Gas)
6 Wal-Mart (Retail) BHP (Oil & Gas)
7 Citigroup (Finance) China Construction Bank (Banking)
8 Vodafone (Telecom) Royal Dutch Shell (Oil & Gas)
9 Intel Corporation (Hardware) Chevron (Oil & Gas)
10 Royal Dutch Shell (Oil & Gas) Microsoft (Tech)
You see what happened?
Within 10 years, seven of the 10 top stocks—all those in red—were displaced.
Only Exxon Mobil, Royal Dutch Shell, and Microsoft survived in the top 10.
And these three “survivors” didn’t even perform well...
Microsoft fell 15% between 2001¬–2011. Exxon and Shell underperformed the average
stock.
But you REALLY did not want to own the stocks in red.
You see, most of those “losers” in red weren’t merely leapfrogged by other companies.
They inflicted big losses on investors who owned their stocks.
For example, from 2001–2018, GE stock plunged 79%... Citigroup collapsed 89%... and
Vodafone fell 56%.
In fact, the seven “losers” in red handed investors an average loss of -11% from 2001–2018.
Meanwhile, the S&P 500 more than doubled.

Now let’s add one more column for late 2018:
Rank Early 2001 Early 2011 Early 2018

1 General Electric (Conglomerate) Exxon Mobil (Oil & Gas) Microsoft (Tech)
2 Cisco (Hardware) PetroChina (Oil & Gas) Apple (Tech)
3 Exxon Mobil (Oil & Gas) Apple (Tech) Amazon (Tech)
4 Pfizer (Pharmacueticals) ICBC (Finance) Alphabet (Tech)
5 Microsoft (Tech) Petrobas (Oil & Gas) Berkshire (Insurance and others)
6 Wal-Mart (Retail) BHP (Oil & Gas) Facebook (Tech)
7 Citigroup (Finance) China Construction Bank (Banking) Tencent (Tech)
8 Vodafone (Telecom) Royal Dutch Shell (Oil & Gas) Alibaba (Tech)
9 Intel Corporation (Hardware) Chevron (Oil & Gas) Johnson & Johnson (Consumer goods)
10 Royal Dutch Shell (Oil & Gas) Microsoft (Tech) JP Morgan (Finance)
This time only two of the 10 survived in the top 10.
And once again… the stocks of many of the losers tanked.
Averaged together, the eight losers lost -17% from 2011 to late 2018.
The S&P 500 gained roughly 115% in that time.
Now, if you were investing back in 2011, there’s a very good chance you owned some of
these money-losing stocks.
Remember, they weren’t obscure penny stocks…
They were eight of the 10 largest stocks on earth!
Unfortunately, many mutual funds, index funds, and retirement plans owned huge
amounts of these giant stocks.
Dangerous to your wealth

Now, imagine a fourth column labeled “2024.”
Based on what you now know about how frequently dominant companies are displaced…
How many of today’s top 10 do you think will still be on the list in 2024?
Wouldn’t you agree that at least seven or eight of those stocks will perform poorly going
forward?
That is a powerful piece of information.
It means most of the biggest and richest companies on earth are typically bad investments!

Glance up at the 2018 list once more. You’ll find it reads like a “who’s who” of the most
popular US stocks today: Apple, Microsoft, Google, Facebook, Johnson & Johnson, J.P.
Morgan, Berkshire Hathaway.
These are the stocks everyone pays attention to. They’re the stocks your barber or your taxi
driver brag about owning.
Yet the evidence is clear: You’re better off avoiding most of the stocks in that column.
Seven or eight of the 10 are likely to tread water at best over the next couple of years.
More likely, they’ll lose money.
In fact, I went back to the ‘60s and studied how often winners stay on top for more than a
few years.
The answer is almost never.
You see, disruption is the rule, not the exception.
Powerful companies wither over time. It’s a fact of markets. It’s been happening for 50+
years.
And this trend is accelerating as the world continues to change faster and faster.
I’ll repeat: Owning the most popular, most talked-about, and largest companies in the
world is a money-losing strategy.
But you can flip this great danger into your great edge.
It all comes down to the lifecycle of disruptive businesses.
You want to sell the tired old giant companies that have already peaked and are sure to fall.
Instead, you want to own the “rising stars.”
You want to own the stocks that will make the list in 2024.
Leading up to 2018, the 10 stocks that top the 2018 list were phenomenal moneymakers.
From 2011–2018, not a single one lost money. And several produced giant gains. Amazon
(AMZN) leapt 870%. Microsoft surged 350%. Google (GOOG) climbed 270%.
Our job is to find the next crop of disruptors that are on their way up.
In Chapter 5 we’ll review five industries that are likely to spawn the next great disruptor
stocks.

Chapter 3
The two key ways to spot true disruptors

As I mentioned, disruptors are companies that transform and create whole industries.
In Disruption Investor, we’ll use two main strategies to identify true disruptors:
Strategy #1: Seek out rule breakers and

game changers
Rule breakers and game changers storm into an industry and transform it by doing things
better, cheaper, or more efficiently than the industry leaders.
For example, in early 2019, my RiskHedge Report readers made a 120% gain on a game-
changing stock called The Trade Desk (TTD).
The Trade Desk is a little company that disrupted the giant online advertising industry.
The online ad industry, as you may know, is extremely lucrative. It’s a fast-growing
$80-billion pot of gold with very high margins.
But powerful companies Google and Facebook hog most of the profits.
Through their domination of the online ad game, they grew into the 4th- and 8th-largest
publicly traded companies on earth. As of mid-2018, Facebook got 98% of its revenue from
selling online ads. Google got 87% of its revenue from selling online ads.
But The Trade Desk managed to accomplish something many analysts thought impossible:
It pried customers away from these two giants with its innovative platform.
In short, it allowed advertisers to place ads that were both more effective and cost less.
This led to the world’s largest 10 advertisers boosting their spending with The Trade Desk
by over 100% in 2018.
Meanwhile, big advertising spenders like Procter & Gamble (PG) pulled hundreds of
millions of dollars from Google and Facebook.

This chart shows the performance of TTD’s stock in 2018–19:
See those circled parts where the stock jumped?
They mark the times when TTD announced quarterly financial results to the market.
From left to right, earnings grew 84%... 3%... 98%... and… 143%.
The last one, on Feb 21, 2019, launched TTD stock to a 31% gain in one day.
This big, consistent growth is a hallmark of a game-changing disruptor.
Strategy #2: Seek out disruptors piggybacking

on megatrends
The other way we find disruptors is to first identify an overwhelmingly disruptive
megatrend.
Then we dig into the companies driving this trend forward.
More often than not, the companies leading the way will hand investors big profits.
For example, every decade or so, wireless cell networks get a big upgrade.

The last big upgrade happened back in 2011 when we moved from “3G” to “4G.”
The cost of building out the 4G network hit $200 billion in 2015. Around 200,000 cell towers
were built to broadcast the 4G signal that blankets most of America today.
A big winner from this spending spree was cell tower operator American Tower Corp (AMT).
Its stock has soared 250% since the 4G buildout started.
But American Tower wasn’t the only stock to surge on 4G. At least 22 different US stocks
soared a minimum of 400% during the 4G rollout!
As I said, the key here is to first identify a disruptive megatrend.
From there you’ll have a pool of potential piggyback disruptors to choose from.
In the next chapter, we’ll discuss how to choose the right ones.

Chapter 4
Five guideposts that point to great disruptors

In this chapter I’ll explain five financial clues that suggest a stock is a disruptor.
Think of these as financial guideposts. The most profitable disruptor stocks usually meet at
least three or four of these criteria. The very best often exhibit all five.
Guidepost #1: Great Disruptors Grow…

and Grow… and Grow
Every disruptor must pass the “growth test.”
It must grow revenue year after year after year.
Consistency is key. Companies that grow quickly then stagnate can make for good trades.
They can earn you a quick buck if you sell at the right time.
But remember, our goal is to build lasting wealth. To accomplish that, we’ll fill our portfolio
with disruptors that can achieve sustained revenue growth.
I like to see revenue grow at least 20%/year. Disruptors that grow at this pace often
reward shareholders with big profits.
Amazon is a classic example. For over 20 years, the online giant found new ways to grow…
and grow… and grow.
In fact, for 16 years in a row, Amazon has grown revenue by at least 20%/year.
That’s an astounding accomplishment. Over time, Amazon’s consistent yearly growth

snowballed. In the last 16 years, its sales have exploded more than 5,000%!
This led to early investors collecting profits of more than 115,000%.
Guidepost #2: Great Disruptors

Make Heaps of Cash
So you’ve found a disruptor that grows consistently.
The next question you must ask: Can it turn growth into profits?
You’d be surprised at how many growing companies have no hope of ever turning a profit.

Generating a billion dollars in sales is great. But if you must spend 1.1 billion dollars to get
there, there’s a good chance your business isn’t viable.
Some unprofitable companies can survive for years on pep talks from a charismatic CEO.
But eventually math always wins out.
The best measure of profitability is net profit margin.
In short, net profit margin tells you the profits a company keeps for every dollar of sales.
A 20% net profit margin means it turns every dollar of sales into $0.20 of profit.
Companies with strong and growing profit margins hold a key advantage: They can reinvest
that cash back into the business to keep growing.
Take Google (GOOG) for example. It dominates internet search, which is a high-margin
business. For every dollar its core search business generates, it keeps close to 25% as
profit.
This keeps a constant stream of new cash flowing into its coffers. It has used much of this
cash to develop and acquire disruptive projects.
For example, Google has plowed billions of dollars into its self-diving car subsidiary Waymo.
Waymo is far and away the world leader in self-driving car technology. Waymo cars have
driven more driverless miles than all other competitors combined.
Google has plowed well over $5 billion into Waymo. Few companies on earth have the
ability to do this without borrowing gobs of money. I expect Google’s investment in Waymo
to eventually pay off big time as self-driving cars go mainstream.
Google also owns Youtube.com—the second most-viewed website on earth. The #1 most-
viewed website on earth, by the way, is google.com.
Google has also made investments in disruptive sectors like artificial intelligence and
quantum computing.
None of this would have been possible were it not for the profit engine at Google’s core. Its
strong margins give Google the opportunity to make disruptive investments that could pay
off tenfold down the road.
Now the truth is, a stock isn’t necessarily a bad investment because it lacks profits. Some
companies, like Amazon, can go years or even decades without turning a profit. Lack of
profits didn’t stop Amazon’s stock from shooting to the moon.
You might wonder why. In short, Amazon achieved such incredible growth that investors
were okay with it not making a profit for a long time.

For disruptors like this, the key is that the company has a path to profitability. The thing
most analysts overlook about Amazon is it could have turned a profit long ago if it chose to.
Instead, it opted to keep selling things for dirt-cheap prices to grow its customer base. This
resulted in zero profits but a soaring stock price.
Guidepost #3: Plenty of Skin in the Game

This one isn’t about financial performance. But it’s just as important.
“Skin in the game” refers to how invested a company’s management is in its success.
When high-ranking executives like the CEO have “skin in the game,” it means their interests
are aligned with shareholders’.
In Chapter 2 we discussed the world’s largest and richest companies. You’ll find many of
them pass the “skin in the game” test with flying colors.
Amazon founder Jeff Bezos owns 16% of all Amazon stock.
Google’s two founders own 10% of the company.
Mark Zuckerberg owns 14% of Facebook’s outstanding stock.
And up until a couple of years ago, the founders of Apple and Microsoft owned huge
chunks of their companies.
Humans are wired to act in their own best interests. A CEO with a big part of his net worth
on the line is likely to make better long-term decisions than one who is simply collecting a
paycheck.
Facebook is a good example. When it was two years old and generating just $48 million in
sales, Yahoo offered to buy it for a billion dollars.
A management team with little skin in the game would likely have taken the money and
run.
But founder Mark Zuckerberg had much bigger plans.
Facebook is now the world’s 8th-largest company, worth over $500 billion.

Guidepost #4: Great Disruptors Break the Rules

When evaluating disruptors, I do not read too much into valuation.
Valuation measures how cheap or expensive a stock is. For traditional businesses, the price
you pay for a stock is very important.
But when it comes to disruptors, valuation metrics can often lead you to incorrect
conclusions.
For example, for most of the past decade Amazon has traded at well over 100X earnings.
By any traditional definition, this is absurdly expensive. The S&P 500 trades for around 20X
earnings.
I know many professional investors who’ve avoided Amazon’s stock because it’s
“overvalued.” They’ve missed out on Amazon’s 2,500% surge over the past 10 years.
Please understand, I’m not saying we completely ignore valuations. My team and I look at
them closely. When we evaluate an expensive stock, we ask: Why is it richly valued? Is the
premium deserved?
If you’re evaluating a stock that has demonstrated it can grow sales 20% year after year, as
Amazon has, an expensive valuation shouldn’t scare you. But when a run-of-the-mill, slow-
growing business is overpriced, you should usually run the other way.
The simple fact is, when it comes to fast-growing disruptors, growth and profitability are
far better indicators of where a stock is headed than valuation.
You’ll find that most disruptive companies trade for high valuations. Markets reward
companies that grow fast.
Avoiding all stocks with high valuations is a mistake. It will lead you to missing out on the
biggest gains.
The inverse is also true. Stocks that trade for low valuations are usually cheap for a reason.
For example, America’s largest car maker, General Motors (GM), trades for just 7X earnings.
Some folks see that as a bargain. To me it’s a red flag. GM’s sales haven’t grown in two
decades. And the stock has been dead money for the past nine years.

Guidepost #5: Hunt for companies

disrupting huge industries
The ideal disruptor is small compared to the industry it’s disrupting.
Earlier I mentioned The Trade Desk, a small company that disrupted online advertising and
handed RiskHedge Report readers a 120% gain.
In 2018, TTD’s sales totaled $477 million.
Yet it was taking on the $725-billion global advertising industry.
As I explained at the time, Trade Desk’s sales could soar 1,500% and it would still own less
than 1% of its target market.
This gave its stock that the potential to double quickly—which is exactly what it did in the
eight months after I wrote about it.
The key is, from there, it still had plenty of room to triple or quadruple again.
At the time, competitor Facebook was more than 50X the size of The Trade Desk.
And competitor Google was almost 100X its size!
Which means Trade Desk could keep growing… and growing… and growing… for years.
Another example: In late 2018, I alerted my readers to a company called Alteryx (AYX).
As publicly traded companies go, Alteryx was small. It was worth just $3.7 billion—too small
for inclusion in the S&P 500.
But it was clear to me that it was quickly becoming a dominant player in the big and rapidly
growing data analytics market. Leading research firm IDC estimated this market would be
worth $81 billion in just three years.
AYX surged 62% in less than four months after I recommend it. Even after that strong rally,
it had plenty of room to double or triple again.
Small or medium companies going after giant markets is an ideal setup. We hunt for
this combination because it can lead to almost unlimited upside in the stock price of a
disruptor.

Chapter 5
Five disruptive trends we’re investing in
1) Internet 2.0:
There’s a quiet revolution happening in how American businesses work.
You see, for much of the past 20 years, computing was “local.”
For example, if a company needed computing power, it built its own server rooms and
hired IT people to manage them.
If you needed a computer program like TurboTax, you bought a physical disk and installed
the program on your computer.
Or if you wanted to protect networks against hackers, you installed anti-virus software in
your computers.
Today, these services are all provided over the internet. When’s the last time you bought a
computer CD? In computing, everything “local” is being left behind.
As I explained in the debut issue of Disruption Investor, “the cloud” is driving this trend.
Today, many of the world’s most well-known companies, including Netflix, Airbnb, and ride-
sharing service Uber, run 100% on Amazon’s cloud.
Instead of buying millions of dollars’ worth of computers to support their growth, they now
“rent” all their computing needs over the internet.
In fact, Uber rents almost every part of its business infrastructure over the internet.
It uses Google Maps to support its location services.
Every text message, phone call, or email you get from an Uber driver flows through
communications platform Twilio (TWLO).
Uber uses PayPal’s (PYPL) Braintree platform to process payments.
And as I mentioned, it rents 100% of its computing power from Amazon.
This allows Uber to focus on its core mission¬—disrupting the taxi industry.
As disruption investors, you and I have many opportunities to make money from this
megatrend.
We can invest in the dozens of companies providing their services over the internet—many
of which are making a killing from the buildout of “internet 2.0.”

We can buy the companies that “rent” these services. They benefit from lower costs and the
ability to grow much faster since they don’t have to buy their own computer equipment.
And we can invest in companies underpinning the entire revolution—like Arista Networks.
2) “America Online” 2.0:

Recent figures from Pew Research show more than 310 million Americans used the
internet in 2018.
And as you surely know, online spending has exploded over the past two decades.
Last year, Americans spent half a trillion dollars online.
But did you know in the US, 90% of purchases still happen in physical stores?
In other words, almost everyone is online… but most of the money isn’t.
In the next decade, internet companies are going to gobble up a far larger share of our
spending.
For example:
• Walmart and Amazon are investing billions in the race to own online groceries.
• PayPal is accelerating the decline of banks by offering quick and easy payment
options both online and offline.
• Internet video services like Netflix (NFLX), YouTube, Disney+, and Hulu are sucking
the life out of traditional cable providers.
E-commerce, as everyone knows, has exploded in the past five years. Many investors see
this and assume they missed their chance to profit from this trend.
They are wrong. Big picture, the trend of commerce moving to the internet is still young. As
I mentioned, only 10% of stuff is bought online today.
In the coming years that will move to 20%... 30%... 40%. Hundreds of billions of dollars in
stock market profits will be up for grabs with the companies that drive it forward.
3) Cash Cow Disruptors:

Which stocks generate the highest returns over decades?
That might sound like a simple question. But I spent more than a year figuring out why
some disruptors ended up being such incredible long-term investments… while others
produced middling returns even though they achieved huge breakthroughs.

My research uncovered a simple but powerful answer.
As you can see in the chart below, you can earn a lot more money investing in the most
profitable stocks.
On average, the most profitable companies outperformed the least profitable ones by
4.3%/year for the past 50 years.
That might not seem like much, but over 30 years it adds up.
For example, $10,000 invested in the least profitable stocks would have turned into
$111,808 over 30-years.
While you could have made $361,175 from the same $10,000 investment by buying the
most profitable stocks.
Why is this the case?
Profitable companies generate cash quarter after quarter. This allows them to reinvest in
their businesses and fend off threats.
I explained earlier how Google takes profits from its search business and pumps billions
into disruptive offshoots like Waymo.
It’s the same for DNA mapper Illumina (ILMN). Illumina turns close to $0.30 of every dollar
in sales into pure profit.

This has allowed it to plow $2.4 billion over the past five years into creating the most
powerful DNA mapping machine on the planet.
Along the way, Illumina helped cut the cost of sequencing a human genome from $10
million in 2007 to under one thousand bucks today!
Illumina’s stock has soared 750% in the past decade.
It’s an extremely powerful advantage when a company can turn a huge chunk of revenue
into profits.
It’s a sign of a well-run business. One that can grow earnings consistently for decades,
without spending too much.
The past 55 years of stock market history show these are the companies we want to put
our money in. Investing in a cash cow disruptor is like planting a money tree and having it
sprout dollar bills for years. It’s the ideal way to build lasting wealth.
4) Autopilot Stocks:
Do you know many of America’s fastest-growing businesses are built on one key principle?
I’m talking about disruptors like Amazon. Thirteen years ago, it launched its Prime delivery
service. Today, there are nearly as many Prime subscribers as there are full-time workers in
America.
Or Spotify (SPOT). Eighty-five million people listen to music on its innovative app.
And Netflix (NFLX). More than half of all American households now subscribe to its video
service.
Amazon, Spotify, and Netflix all rake in cash by selling subscriptions.
Selling subscriptions is a wonderful business model. Instead of charging a one-time fee, a

subscription business collects constant streams of cash from customers.
I call these autopilot stocks—because they rake in cash month after month, as if on
autopilot.
According to consulting firm McKinsey, spending on subscription services has exploded

500% in the past five years.
To understand the power of the subscription model, consider the turnaround of Adobe
Systems (ADBE).
Adobe’s PDF files are the standard way to view most documents online. It also makes the
image editing software Photoshop.

Practically everyone with a job has used Adobe’s software. Yet from 2007 to 2012, its
business stagnated. Sales stopped growing, and its stock was dead money from 2000 to
2012.
Then in 2012 it decided to stop selling one-off products and began selling subscriptions
to its computer programs. Instead of selling CDs, it asked customers for $30 a month to
access its programs on the internet.
Since then, Adobe has exploded for an 1,000% gain and counting.
Switching to a subscription model was like a shot of adrenaline right into Adobe’s veins.
Its net profit has surged 170% in the past five years. And its net profit margin has jumped
from 19% to 25%. Adobe’s profits are growing faster than ever today.
No other business model can match the big, predictable cash flows that a well-run
subscription business can generate.
In Disruption Investor, we’ll be hunting for the next set of companies set to transform into
autopilot stocks.

5) Fifth-Generation Wireless Technology (5G):

America’s cell networks started with 1G in the 1980s.
You couldn’t access the internet on 1G. You could only make calls. And you had to make
them from cell phones the size of a brick.
Gradually, cell networks improved. 2G launched in the 1990s. It allowed us to send and
receive text messages for the first time.
3G launched in the 2000s. It was a big leap in progress that allowed our phones to connect
to the internet.
For the first time, we could surf the web and send email on our phones. Although, as you
likely recall, it was often frustratingly slow.
If you’re reading this report on a smartphone, look to the top of your screen. There’s a
good chance you’ll see a 4G symbol. Today, most cell phones run on 4G networks.
4G arrived in the 2010s and brought us much faster speeds. With that came the ability to
do things that required a lot of data—like watch movies or stream music.
But like 1G before it, 4G has reached its limits... and the great upgrade to 5G has already
begun.
It’s important to understand that 5G is not an incremental upgrade. It’s a huge

advancement.
5G will make your smartphone up to 1,000X faster than it is today. And it’s going to enable
life-changing technologies like self-driving cars, virtual and augmented reality, and robotic
telesurgery.
Global consulting firm Accenture estimates that wireless carriers in the US will invest about
$275 billion on infrastructure over the next few years, which could create up to three
million new jobs and boost annual GDP by $500 billion.
Global information provider IHS Markit claims that 5G will enable $12.3 trillion of global
economic output in 2035. That’s about equal to total US consumer spending in 2016.
As I mentioned earlier, during the 4G rollout, at least 22 different US stocks soared a

minimum of 400%. And a bunch of those—like Pixelworks, Micron Technology, and
Skyworks Solutions—soared more than 2,000%.
5G is sure to create even more stock market wealth.

Chapter 6
Your disruption investor toolbox

In this chapter, I share four useful investing principals we’ll follow to build lasting wealth in
Disruption Investor.
Principal #1: Great Disruption Investors Know

Timing Trumps All
Disruptors invent the future.
For example, Amazon created the online marketplace.
Netflix pioneered video streaming.
And Apple is the main reason 85% of Americans have a smartphone.
Disruptors figure out how to accomplish things that have never been done before.
This often leads to big stock market profits. But it can also lead to irrational excitement.
And irrational excitement can lead to dangerous situations in the stock market.
You see, investors are emotional creatures. They naturally get excited about big new
breakthroughs. Sometimes they get carried away with dreams of riches. Their imaginations
run wild and they can bid disruptive stocks up to the moon.
This makes disruptor stocks prone to hype and wild exaggeration.
Consider Webvan.
In the mid-‘90s, startup online grocer Webvan promised to drop your groceries on your
front porch within 30 minutes of ordering. Investors drooled over the idea it would claim
a big share of America’s colossal $1.5-trillion grocery market. Overeager buyers caused
Webvan’s stock price to leap 65% on the day of its IPO%.
But it turned out to be a complete disaster. Grocer margins are already razor thin. Add in
delivery costs—trucks, drivers, fuel—and Webvan lost money on every transaction.
Webvan shut its doors for good in 2001 and donated all its remaining food to a food bank.
And shareholders lost all their money.

As disruption investors, we must always remember timing is key for making money from
disruptive megatrends. As I explain in this report, groceries are ripe for disruption today.
But back in the early ‘90s, it was simply too early. Many companies were still a good 10–15
years away from figuring out how to profitably do business on the internet.
As a rule of thumb, when you see folks getting overly excited about a company or trend,
be skeptical. And be patient. There’s a good chance it will crash and you’ll get the chance to
buy for pennies after the overeager masses get burned.
Principal #2: Great Disruption Investors

See Domino Effects
The famous astronomer Carl Sagan said, “It was easy to predict mass car ownership but
hard to predict Walmart.”
What Sagan meant was… it was obvious in the ‘30s and ‘40s that cars were the future.
You could see all the signs. The technology was constantly improving. Cars were getting
safer and safer. The cost to buy one was plunging.
And so it wasn’t all that hard to foresee that car ownership would eventually explode, as it
did in the 1950s.
But it was much harder to predict the domino effects of mass car ownership.
One of which was the incredible success of Walmart (WMT).
You see, before every family owned a car, grocery stores usually occupied the center of
town. They had to be located where people could access them easily.
Mass car ownership changed all that.
Walmart’s strategy was to open “big box” stores on the outskirts of towns where land and
rent were cheaper. Its sales exploded 27X from 1965 to 1975 as more and more people
drove to its stores.
Walmart’s stock trounced the S&P 500 by more than 50X during the 1970s.
A more recent example is how the rollout of 4G around 2011 help boost Netflix from a
struggling business into a world-beater.
As you likely know, Netflix began as an online DVD rental service. It mailed movies to
customers in little paper sleeves.
The problem? Postage costs were crippling. By 2010, Netflix’s shipping fees hit an absurd
$600 million.

Because it was coughing up huge sums of money to the US Postal Service, Netflix was
losing money on every movie it rented out.
Netflix had toyed with the idea of offering movies online. But in the mid-2000s, internet
speeds were too slow.
4G changed the game for good. For the first time ever, Netflix could reliably deliver content
to customers over the internet anywhere through cell coverage.
From 1998–2010, Netflix added 20 million subscribers. That’s not bad. But it’s nothing
compared to the 120 million it would add over the next eight years.
And more important, its stock leapt 2,800% in the years after it launched its online
streaming service.
Principal #3: Great Disruption Investors Conduct

Boots-on-the-Ground Research
If there’s one factor that gives my team an edge, it’s that we do tons of “boots-on-the-
ground” research.
We travel around the world to meet industry experts, attend conferences, and investigate
the latest disruptive trends ourselves.
I’ve had dinner with hedge fund managers who control billions of dollars, talked business
with Fortune 500 executives in their own boardrooms, traveled around the world to meet
with digital money experts, and regularly talk with America’s top private equity strategists.
Great disruption investors know you’ll learn more from conducting boots-on-the-ground
research than you ever will sitting behind a desk. That’s why I’ve lived on four continents
and traveled to dozens of countries.
My network often alerts me to little-known disruptive trends months or years before the
average investor catches on.
For example, in early 2013 I met with an investor friend who had just bought some bitcoin.
Keep in mind, Bitcoin was selling for around $90 at the time. And nobody but outcasts in
the dark corners of the internet was talking about it.
My friend explained what it was all about—and convinced me to buy a small stake. In
hindsight, I wish I had bought a large stake! As you probably know, Bitcoin went on an
incredible run and is selling for over $5,000 today.

Principal #4: Great Disruption Investors Know

the “Golden Watch” Era Is Dead
It would be nice to invest like your father or grandfather did.
You buy stock in well-run, financially stable businesses...
You hold it for 30 years and reinvest the dividends every quarter...
And you watch your money compound.
For most of the 1900s, investors built lasting wealth this way.
I call this bygone time the “Golden Watch” era.
Back then, many folks worked at the same company their whole lives. If you worked hard
and showed loyalty, you could reasonably expect good pay, a pension, and a gold watch
when you retired.
Like it or not, the world doesn’t work this way anymore. Things are changing too fast both
in the business world and the stock market.
As I mentioned, since 2000, half of all Fortune 500 companies have either gone bankrupt,
been acquired, or ceased to exist.
And over the past six decades, the average lifespan of an S&P 500 company has plunged
from 58 years to 18 years.
Even some of America’s most rock-solid, longest-lasting companies are struggling to stay
afloat today. Take Phillip Morris. The 172-year-old tobacco giant is now being disrupted by
e-cigarette startups like Juul. Its stock has fallen 30% since 2017.
Or consider 150-year-old Kraft Heinz. Its stock has plunged 60% over the past two years as
Americans have turned away from packaged foods.
At the same time, disruptive innovations are reaching “critical mass” at a faster rate than
ever.
For example, it took the landline phone roughly 40 years to hit 40% penetration in
America…
TV hit the same milestone in 25 years…
PC’s took around 15 years to reach a similar proportion.
The internet did it in under seven years.
And smartphones less than four years.

Your Questions Answered

How do Disruption Investor stocks fit into my overall portfolio?
That depends on your personal financial situation. For example, maybe you’re just getting
started investing and have 30 years left to build wealth. Or, on the other hand, maybe you
plan to retire in two years. Everyone’s different, and I can’t know your personal financial
situation.
That said, most of the stocks I recommend in Disruption Investor are suitable to form the
core of a portfolio. We generally seek medium or large companies in strong financial
positions that are set to dominate for years. We’re not after speculative startups. Disruption
Investor stocks can serve as the foundation of a strong, safe portfolio.
There’s one rule of thumb I strongly recommend you follow: Invest no more than 2% of
your total portfolio in a single stock. This is a smart rule to follow for any stock, not just
Disruption Investor stocks.
All investing involves risk. Despite what you hear on financial TV or from stock promoters,
there’s no such thing as a “sure thing” in the markets. Keeping your position size to under
2% of your portfolio ensures that no single pick can hurt too much if it doesn’t pan out.

What are your criteria for selecting a stock?
As I mentioned earlier, in Disruption Investor, we’re looking for established companies. Not
start-ups.
Generally, I’ll only recommend companies that have a market cap of $3 billion or more.
Why?
Because, while we’re after big gains like doubling our money every few years, we want to
do it safely. Keeping your capital safe while pursing big profits is key to building lasting
wealth.
How do we manage risk?
Every stock I recommend will be accompanied by a “stop.”
A stop is a predetermined price at which you’ll sell a stock. Used properly, stops lock in
gains and limit losses.
Stops are our first line of defense. They ensure we’ll cut our losses and allow our winners to
ride—which is crucial to sustained investing success.
I will usually recommend selling any stock that declines 25%. For example, say we buy a
stock at $50, it rises to $100, but then falls to $75. I’ll likely recommend selling it at $75 for a
50% gain because it fell 25% from its high.
Our second line of defense is our “free ride” strategy.
In short, when a stock we own surges 100%, we’ll typically sell half our position.
If we own a $100 stock and it jumps to $200, we’ll sell 50% of our position.
In other words, if your $10,000 investment grows to $20,000, I’ll typically recommend you
sell half. By doing so we’ll recoup our initial investment and we’ll be “playing with house
money.”
We do this for two reasons. One, you don’t make money until you sell a stock. “Paper”
profits are nice, but they’re not really yours until you lock in the capital gain.
Two, as I mentioned earlier, reducing risk is key to building lasting wealth. By selling
enough of a position to recoup our initial investment, we’re reducing risk in that position to
zero. And if the stock keeps marching higher, we’ll continue to collect profits on the part of
the position we let “ride.”
Do we move stops?
Yes. When a stock we buy rises a lot, I’ll often change the stop to what’s called a “trailing”
stop.

A trailing stop moves up with the stock price.
For example, if we set a 25% stop on a $10 stock, we would sell if it hit $7.50.
If the stock rises to $20, the trailing stop would move up to $15, or 25% below the peak
stock price.
In each issue, I include my exit strategies for new positions. You can find them near the buy
recommendations. And I’ll update you on your moving stops each month.
Do you short stocks in Disruption Investor?
Yes, occasionally. As you may know, “shorting” a stock means betting its price will fall. Most
of my recommendations will be “buys.” But from time to time, disruption will present us
with a short opportunity that’s too good to pass up.
What else do I need to know about buying Disruption Investor stocks?
All Disruption Investor stocks trade on US markets.
You can buy them using a regular US brokerage account. You won’t need to touch anything
exotic like options, futures, or currencies.
When does Disruption Investor come out?
A new issue of Disruption Investor will arrive in your inbox on the first Thursday of every
month.
Where can I find my special reports?
You can access the full archive of special reports here.
Where can I find the stocks you recommend?
We track all past and present recommendations in our portfolio here.
Do you publish mid-month updates?
Generally, we do not publish mid-month updates. However, if something happens between

issues that requires you to take action on a Disruption Investor stock, I will send you a flash
alert.
Is there any way to keep in touch between issues?
The best way to keep up with what I’m thinking every week is to read my free weekly
e-letter, the RiskHedge Report. And you can write me anytime at Stephen@riskhedge.com.
Although regulations prevent me from responding to some emails, I read every one.

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The Disruption Investor

How to Find and Profit from the Biggest

Welcome, and thank you for joining Disruption Investor.

You’ve made a great choice coming aboard.

I’m Stephen McBride, your editor and Chief Analyst. (That’s me to

This document you’re reading now is your starting “how-to” guide.

You’ve surely noticed that the world is changing… fast.

At the heart of every breakthrough is a business. My goal in Disruption Investor is to

If you have any questions, write me anytime at stephen@riskhedge.com.

A RiskHedge Publication Page 2

Why I’ve committed my career

It’s not because I’m a technology junky.

As you’ll see, disruption is about FAR more than tech.

Let’s take a step back.

We invest to build lasting wealth.

And, eventually, live a fulfilling retirement.

In other words, disruptors invent the future.

And true disruptors aren’t out there making small improvements.

A RiskHedge Publication Page 3

• Starbucks (SBUX) got America hooked on high-end coffee. It normalized paying

• Intuit (INTU) disrupted personal finance. Through its development of do-it-yourself

Don’t just take my word for it.

In a recent interview he warned:

“We’re in the most economically disruptive period since the 1880s.”

Disney CEO Bob Iger agrees. He recently said:

And have you seen the movie The Big Short?

Getting Rich Faster than Ever

A RiskHedge Publication Page 4

23 years is a long time.

Taxi disruptor Uber did it in about three...

Sidestepping Dangerous Bankruptcies

A RiskHedge Publication Page 5

Sail Through Stormy Markets

They can sail through downturns, too.

A RiskHedge Publication Page 6

Now, look at the performance of disruptor Amazon:

In that same timeframe, its stock more than doubled...

A RiskHedge Publication Page 7

And here’s online travel disruptor Priceline:

So, $30,000 total.

By the summer of 2011, you’d have over $220,000.

Let me emphasize that…

The period of 2007–2011 was very difficult for many Americans.

Millions lost their jobs. Many lost their houses.

A RiskHedge Publication Page 8

How to flip great danger into your great edge

Please look them over closely.

Together they illustrate one of the most important concepts in investing.

Rank Early 2001

You probably recognize most of the stocks on the list.

Now I’m going to add a column to the list.

A RiskHedge Publication Page 9

It will show the same ranking 10 years later—in early 2011:

Rank Early 2001 Early 2011

You see what happened?

Within 10 years, seven of the 10 top stocks—all those in red—were displaced.

And these three “survivors” didn’t even perform well...

They inflicted big losses on investors who owned their stocks.

Meanwhile, the S&P 500 more than doubled.

A RiskHedge Publication Page 10

Now let’s add one more column for late 2018:

Rank Early 2001 Early 2011 Early 2018

This time only two of the 10 survived in the top 10.