The next big investment movie is in the works. Jennifer Lawrence is teaming up with Adam McKay, director of the The Big Short, for a film about troubled blood testing startup Theranos. It’s a cautionary tale for investors, having reportedly lost up to 90% of its value in the last year. Although APCM doesn’t invest in private equity, reading about the company’s problems reminded me about the importance of due diligence in investing, a principle that is applicable for all investors, not just the venture capitalists who lost out in this story.
Let’s go back to the summer of 2015. Theranos was a Silicon Valley darling, a high profile unicorn with a $9 billion valuation after its latest round of fundraising. The company, founded by a young Stanford dropout, claimed to have developed a revolutionary blood testing technology that would allow it to run multiple tests from a finger prick. Elizabeth Holmes, founder and CEO, graced the cover of Fortune, Forbes, and was mentioned in Time’s 100 most influential people in 2015. It was a great story and it seemed like investors and the press couldn’t get enough of the company.
After securing support from prominent entrepreneurs (Oracle’s founder Larry Ellison), prestigious board members (former Secretary of State Henry Kissinger), and a partnership with Walgreens, a series of critical exposes from the Wall Street Journal in October 2015 caused many to question the validity of the company’s claims. Amid a whirlwind of accusations, the company declined to publish clinical data proving its technology under the basis that the information was proprietary. During the fallout, many investors admitted to never seeing proof that the technology worked. The company is now being investigated by multiple government agencies, including the FDA and the SEC.
Theranos is a private company and its current troubles won’t have a direct effect on your portfolio. However, case studies like this one serve as an important reminder for all investors: do your homework before you invest. There were many prominent and respected individuals and investors who were associated with Theranos, so it would be easy to assume that the company’s claims were legitimate. However, it is always important for investors to independently verify the accuracy and suitability of their investments and not just rely on a hot tip or follow a popular trend.
When evaluating any investment, it is essential to understand the underlying asset and what risks will be associated with it. This is becoming increasingly true in the ETF space. 284 new ETFs launched in 2015. Although more choices and increased competition are ultimately good for investors in the form of better products and lower fees, investors must be aware that these products are increasingly complex and can have a wide variety of risk and return characteristics.
Fee compression within the industry has incentivized many fund providers to offer specialty products. Investors must be able to understand what the fund is promising to deliver, evaluate if it actually accomplishes its investment goals, and determine how it compliments other holdings in a portfolio. Many funds are using derivatives and leverage and this might not always be apparent from the fund name or brief description. Due diligence might mean digging into the prospectus of a fund instead of just skimming over the fact sheet.
APCM does this by rigorously vetting new products before inclusion in client portfolios, as well as reviewing all holdings on an ongoing basis. Investors won’t always get it right, but we can eliminate unnecessary risks by doing the basic research to understand our investments and verify the accuracy of any claims. I’m sure there is a Theranos investor or two who would agree with that statement.
For more about the company: http://www.bloomberg.com/news/articles/2015-12-10/can-theranos-ceo-elizabeth-holmes-fend-off-her-critics-
For more about the movie: http://www.newsweek.com/jennifer-lawrence-play-elizabeth-holmes-theranos-movie-468652
For more about ETF’s: https://www.apcm.net/financial-planning/exchange-traded-funds/