Most psychology professors conduct research on college students. But Cialdini conducts his experiments in the real world of business.

Cialdini spent three years undercover working at used car dealerships, fundraising organizations and telemarketing firms to observe real-life examples of persuasion.

The result was Influence: The Psychology of Persuasion. The book established Cialdini as one of the most prominent social psychologists in the world.

You’ll recognize the footprints of Cialdini’s research in almost every sales pitch you hear.

No wonder thousands of salespeople across the world consider Influence their bible.

I consider it among the top 20 most significant books I’ve ever read.

So what do Cialdini’s insights have to do with investing?

Well, quite a bit, as it turns out.

None other than Charlie Munger – Warren Buffett’s elder and smarter sidekick – credits Cialdini with some of his most critical psychological insights on investing.

During a speech he gave at Harvard University back in 1995, Munger acknowledged Cialdini’s book as having a profound impact on his thinking.

Overcoming your psychological biases is hard work. But identifying them is crucial for improving the quality of your investment decisions.

So here are six “weapons of influence” to be aware of…

Cialdini’s Six Weapons of Influence

1. Scarcity. If you believe something is scarce, you will want more of it. That’s why many offers are available for a “limited time.”

In the world of investing, an initial public offering of a stock is often “oversubscribed.” If you can’t invest as much as you want to, you will overvalue the stock. You may buy more once the stock is listed, even at a higher price.

The lesson? Don’t irrationally chase the price of a stock. Chances are good you will get a second swing at the ball at a more reasonable price.

2. Commitment and consistency. If you commit to an idea verbally or in writing, you are more likely to honor that commitment.

This explains why you will stick with an investment longer if you’ve told your friends about it.

Analysts at top investment firms suffer from the same bias. Having put their reputations on the line by recommending a stock, they will stick with it longer than they should.

The lesson? Don’t “marry a stock.” Look at your investment portfolio every day with fresh eyes.

3. Liking. People are more likely to buy if they like the person selling to them. That’s why salespeople try to be your new best friend.

In his book, Cialdini cites the marketing of Tupperware. If you make a friend at a Tupperware party, you are much more likely to buy the products. Also, the more attractive you find someone, the more likely you are to buy from him or her.

The lesson? Be careful of overly friendly salespeople. Don’t part with your hard-earned money just because you’re both Chicago Cubs fans.

4. Reciprocity. If someone gives you something, you feel the need to return the favor.

Hare Krishnas used to pass out flowers at airports in the 1970s. If you accept an unsolicited gift, you are more likely to donate. That’s why brokers overwhelm you with mouse pads, golf balls and tickets to sporting events.

When I was a fund manager, brokers regularly took us to high-profile events. It’s how I first attended a Wimbledon tennis match. Consciously or unconsciously, I felt obliged to place my trades through these brokers.

The lesson? “Free stuff” is never free. You end up paying one way or another.

5. Social proof. We all look to our peers to confirm our decisions. To see others making the same choice makes us feel comfortable about our own.

Cialdini had one of his associates stand on the street and look up into the sky. Bystanders then looked up into the sky as well to see what the associate was seeing.

The lesson? As a novice investor, you may buy companies that you hear about from a friend or that you see on the cover of Fortune magazine. Don’t do that. Experienced investors are doing the opposite.

6. Authority. We tend to obey authority figures, even when their orders are objectionable or make no sense.

Cialdini cites the famous experiments by Stanley Milgram in the early 1960s. Most of Milgram’s subjects were persuaded to give what they believed to be real electric shocks to Milgram’s associates because an authority in a white lab coat told them to do so.

You may justify buying a stock by citing Goldman Sachs’ “Buy” recommendation. Or justify buying overpriced Tesla (Nasdaq: TSLA) because Jim Cramer said, “There is no ceiling.”

The lesson? Do your own thinking. Question authority.

How Cialdini Manages His Money

Cialdini did not have investors in mind when he developed his “weapons of influence.”

Yet the psychology behind each can impact your investment decisions in far more ways than you can imagine.

How does Cialdini manage his own money, given his insights?

In turns out that he has invested the bulk of his assets in Berkshire Hathaway (NYSE: BRK-B) for decades.

Cialdini entrusts his investment portfolio to two investors – Warren Buffett and Charlie Munger – who he knows have read Influence and understood its lessons.

So if you want to improve your investment decision making, I recommend you read and study Influence: The Psychology of Persuasion.

It will be one of the most important books you’ve ever read.

Good investing,

Nicholas

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And the verdict is in.

For 2021, emerging markets are the place to be.

Bank of America recently surveyed fund managers collectively holding $526 billion in assets.

More than half of leading fund managers interviewed indicated emerging markets – after a decade in the doghouse – are their favorite asset class for the coming year.

As if on cue, the MSCI Emerging Markets Index shot up nearly 13% in November.

Emerging markets equity funds have already attracted almost $14 billion in the past two weeks.

Emerging markets specialist Renaissance Capital was almost exuberant when it advised investors “to buy anything and everything” in emerging markets.

Emerging Markets: The Redheaded Stepchild of Investing

I earned my investment spurs managing emerging markets investment funds.

But if you’re an average U.S. investor, you probably don’t even think about emerging markets.

With the uncertainty surrounding the global pandemic, emerging markets may be the last place in the world you’d want to put your money right now.

But it wasn’t always so.

In fact, between 2003 and 2007, emerging markets were the top-performing asset class in the world.

Consecutive annual returns of 55.8%, 25.6%, 34.0%, 32.2% and 39.4% over those five years were enough to turn a $10,000 investment into $48,304.

Much like technology stocks do today.

Emerging markets represented the future and offered the single best way to make your investing fortune.

Alas, emerging markets have lagged the U.S. markets badly since then.

But experienced investors know that it’s always the most hated and ignored asset class that offers the greatest potential upside.

Emerging Markets: Sentiment-Driven Investing

I could, of course, regale you with the fundamental case for emerging market investing.

But that would be a waste of time.

Much like risky bets on biotechnology, emerging markets are a boom or bust asset class.

If the mood is right, investors pile in and drive stock prices sky-high. When emerging market stocks enter a bull market, they do so in a big way.

Over the long term, stock prices will converge to their intrinsic values.

But stock prices can diverge from their objective values for years – even decades.

So you need to look for a trigger that signals a shift in investor sentiment.

On June 4, I cited SentimenTrader’s study of the remarkable technical strength of emerging market stocks at the time.

The iShares MSCI Emerging Markets ETF (NYSE: EEM) had put together its fourth straight session with a more than 1.7% gain.

That was the iShares Emerging Markets ETF’s longest winning streak since its inception in 2003.

The other five times it saw streaks of at least three days, it averaged an impressive 13.6% return two months later.

Six months later, the average return soared to a whopping 29.9%.

How has SentimenTrader’s prediction fared six months later?

The iShares MSCI Emerging Markets ETF is up 33.98% over the past six months.

SentimenTrader’s analysis was spot-on.

I also pointed out that you could swing for the fences with a leveraged emerging markets ETF.

I recommended two such ETFs.

The ProShares Ultra MSCI Emerging Markets ETF (NYSE: EET) delivers double the daily performance of the MSCI Emerging Markets Index.

And the Direxion Daily MSCI Emerging Markets Bull 3X Shares ETF (NYSE: EDC) is a triple-leveraged version of the MSCI Emerging Markets Index.

How did these three ETFs fare compared with the S&P 500?

The chart below speaks for itself.

So, after such a huge run, is it too late to invest in emerging markets?

Not really.

Emerging markets have been down and out for so long that they have plenty more room to run.

Remember, even after this current rally, the iShares MSCI Emerging Markets ETF is trading below where it traded in October 2007 – more than 13 years ago!

With big money piling into emerging markets, the timing is right for a sustained rally in this asset class.

Time your investment correctly in one of these leveraged emerging market ETFs…

And look forward to monster returns in 2021.

Good investing,

Nicholas

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After languishing since August, Tesla shares rallied 21.2%.

This was on the back of the news that Standard and Poor’s is adding Tesla to the S&P 500 Index.

Tesla will be the largest company to ever join the S&P 500, rocketing into the index’s top 10 holdings from day one.

If you own an S&P 500 index fund, you’ll soon be a Tesla shareholder.

Is this good news for soon-to-be Tesla shareholders?

Or is this the beginning of the end for Tesla, as it was for Yahoo back in the dot-com boom?

Of course, no one can predict the future.

But the analysis below can help you answer that question.

Does S&P Inclusion Signal a Top for Tesla?

Overhyped growth stocks often reach their peaks not long after joining the S&P 500 Index.

Yahoo joined the S&P 500 in December 1999.

The stock price peaked four months later, when Yahoo’s market cap soared to $125 billion.

Fast-forward to 2017, and Verizon purchased Yahoo for $4.5 billion – a 96% discount to its peak valuation.

Will Tesla share Yahoo’s fate?

Time will tell.

One thing is for sure. Tesla’s valuation today is nothing short of silly.

The only thing sillier is the intellectual gymnastics Morgan Stanley’s analysts go through to justify Tesla’s valuation.

Last week, the bank included Tesla’s ancillary services – like its Autopilot software, its home energy products, its insurance and the long-awaited Tesla network – in a valuation of the company.

Meanwhile, back in the real world, Tesla can’t even make any money selling cars.

Tesla’s profits come from selling regulatory credits, rather than selling cars.

Everything else is just promises on a press release.

To grow into its valuation, Tesla would have to achieve record-breaking growth and unprecedented margins, all in an increasingly competitive environment.

It may do that. But it is not a bet any rational investor would make.

Is Tesla Now a “Big Short”?

The Tesla story reminds me of Yahoo in another way.

I’ve written before about one of my favorite trades ever – Mark Cuban’s options trade on Yahoo.

In 1999, Cuban and his partner Todd Wagner sold Broadcast.com to Yahoo for $5.7 billion.

Cuban received 14.6 million shares of Yahoo.

With Yahoo shares trading at $95, he became a billionaire overnight.

Cuban wasn’t alone. The internet bubble made a lot of people rich. But after the bubble popped in March 2000, most of them lost their fortunes.

Cuban, on the other hand, actually got to keep his money.

Because he had the foresight to execute a shrewd option trade to protect his wealth.

Cuban had a feeling that Yahoo stock was funny money. Yet, as part of his deal with Yahoo, he wasn’t permitted to sell his shares immediately.

So he entered a massive options trade to protect his $1.4 billion stake.

For every 100 shares of Yahoo stock, Cuban bought one put contract (strike $85) and sold one (strike $205). The term of each option was three years.

He bought a whopping 146,000 puts and sold 146,000 calls.

The cost of the puts exactly offset the premium of the calls. So Cuban’s trade was practically free.

At first, it looked like the trade was a costly mistake.

Yahoo’s share price shot up to $237 by January 2000 – much higher than the sale price of his $205 call options.

Then the internet bubble burst.

And two years later, Yahoo shares had sunk to $13.

If Cuban hadn’t executed his options trade, he would have lost more than 85% of his wealth.

Instead, he managed to hold on to almost all of his money.

Tesla bears could replicate the same trade today.

The bottom line?

Yes, the news of Tesla entering the S&P 500 is bullish.

Bloomberg estimates that when Tesla joins the S&P 500, index funds will have to buy roughly $40 billion worth of the company’s shares.

But remember, as public knowledge, this news is baked into the share price.

Here’s my hypothesis: Tesla’s admission into the S&P 500 just might signal the end of its historic run.

Put another way…

Tesla is not the next Apple.

It is the next Yahoo.

Good investing,

Nicholas

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This quote from Charles Dickens’ novel set in the time of the French Revolution sums up well investor sentiment in the energy sector in 2020.

The conventional narrative surrounding the energy sector today goes something like this…

We have seen peak oil consumption.

The traditional oil and gas industry is on its last legs.

Big Oil is doomed.

Ditto for legacy automobile companies whose fate has been tied to Big Oil for more than a century.

Meanwhile, the alternative energy sector is just coming of age.

The plan of action for investors could not be more straightforward.

Sell all traditional oil and gas companies.

And pile into the red-hot alternative energy stocks.

Whenever I come across a narrative this one-sided, my contrarian instincts nudge me to consider the opposite point of view.

As the late, great global investor Sir John Templeton observed…

People are always asking me where is the outlook good, but that’s the wrong question… The right question is: Where is the outlook the most miserable?

Traditional energy companies certainly fit that bill.

It turns out that abandoned traditional energy stocks may offer investors even better moneymaking opportunities than today’s darling clean energy stocks.

“It Was the Best of Times…”

The outlook could hardly be better for investors in alternative energy.

After all, electric vehicles (EVs) will supplant gasoline-powered vehicles within the next decade or so.

California plans to ban gasoline-powered vehicles by 2035.

Britain has done something similar this week, moving the date up to 2030.

In many ways, the EV revolution is already here.

Just this past weekend, I noticed the bus I got on in London is made by BYD – the Chinese automaker that technophobe Warren Buffett is betting on.

More importantly, for investors, clean energy stocks have never been hotter.

The First Trust Nasdaq Clean Edge Green Energy Index Fund (Nasdaq: QCLN) has soared 129% this year.

This ETF is a one-stop shop to invest in red-hot EV stocks like Tesla (Nasdaq: TSLA) and Nio (NYSE: NIO) as well as solar plays like SolarEdge Technologies (Nasdaq: SEDG) and Enphase Energy (Nasdaq: ENPH).

“It Was the Worst of Times”

This bullishness stands in stark contrast to the performance of traditional energy stocks.

Energy has been by far the worst-performing stock market sector in the U.S. this year.

Near the market bottom, the combined market cap of companies in the S&P 500 energy sector index almost halved since the start of 2020.

Demand for oil remains far below where it was a year ago. In April, the price of oil even briefly fell below zero.

The incoming Biden administration’s policies on climate change – electrification, limits on methane emissions and opposition to fracking – are also negative for traditional energy companies.

It’s no wonder that, with more than 45% of its holdings in just Exxon (NYSE: XOM) and Chevron (NYSE: CVX), the Energy Select Sector SPDR Fund (NYSE: XLE) is down 39.24% in 2020.

Making Money From Energy Stocks

The chart below compares the performance of the Energy Select Sector Fund with that of the First Trust Clean Edge Fund in 2020.

And for most investors, this chart is all they need to do the obvious: Invest in the First Trust Clean Edge Fund and avoid the Energy Select Sector Fund.

Alas, my contrarian instincts tell me to look in the opposite direction.

“Buy Value…”

Traditional energy stocks are as cheap as they have ever been.

SentimenTrader recently pointed out that 470 out of 663 U.S.-listed stocks in the energy sector have a share price under $5. That’s more than 70% of stocks in the sector!

More than 390 stocks are trading below $2.

In the past 20-plus years, no other energy bust has seen more than 65% of these firms with a share price under $5.

There were only four other times when more than 55% of energy companies were trading below $5.

The Energy Select Sector Fund was up an average of 47% 12 months later. And it was up by 82% and 99.7% within the next 24 and 36 months, respectively.

“Sell Hysteria”

“They never ring a bell at the top of a market” is an old Wall Street adage.

But the announcement of Tesla’s entering the S&P 500 Index at the end of December might be close enough.

By any conventional measures, Tesla is not an automobile stock.

Nor is it a tech company.

No, Tesla is a religion.

After all, Tesla trades at a price-to-earnings (P/E) ratio of 930!

And the First Trust Clean Edge Fund trades at a P/E of 316!

Meanwhile, the Energy Select Sector Fund has a P/E of negative 5.29!

Such disparities in valuation are unprecedented in my investment career.

Based on my reading of financial history, I expect the plot to unfold as follows…

Investors will embrace clean energy as the future with clarion calls of “This time it’s different!”

(Remember the “China Miracle,” 3D printing and, most recently, cannabis stocks?)

Investors will bid up shares in the chosen sector to absurd levels.

Analysts will justify these off-the-chart valuations with newfangled metrics.

Inevitably, the stocks will come crashing back to earth.

And savvy investors will make money on the way up and on the way down.

The bottom line?

As famed investor Jim Rogers advises, “Buy value… and sell hysteria.”

That’s precisely how I intend to play both clean and traditional energy stocks.

Good investing,

Nicholas

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As news of a COVID-19 vaccine broke, “old economy” value stocks like airlines, banks and oil firms soared.

Value investing was back. And that was a welcome change.

After all, value stocks have had a decade from hell.

Just compare the return of the iShares Russell Top 200 Value ETF (NYSE: IWX) with that of the iShares Russell Top 200 Growth ETF (NYSE: IWY).

Growth stocks have trounced value stocks by more than 3 to 1 over the past 10 years.

What’s worse, growth stocks’ outperformance only accelerated after the onset of the global pandemic.

Professional investors know that value investing isn’t a timing tool.

Still, over an entire decade, you’d think that the market would come around.

The trouble is… it hasn’t.

And value investing’s faithful are… well… losing the faith.

A small army of academics and analysts is struggling to explain away value’s lagging performance.

It’s a courageous effort but all too unconvincing in the end.

The four most dangerous words in investing may be “This time it’s different.”

But this time around, it really might be.

Just as Einstein’s theory of relativity superseded the Newtonian paradigm of classical physics…

Value investing should be superseded by a new paradigm but not abandoned entirely.

Let me explain…

The Origin of Value Investing

Value investing boasts an impressive academic pedigree.

In Security Analysis, first published in 1934, Columbia professors Benjamin Graham and David Dodd offered an analytical framework for calculating a firm’s “intrinsic value.”

Value investing was a radical approach for its day.

Remember, investors were still digesting speculative excesses that gave way to the stock market crash of 1929.

Graham and Dodd provided investors the tools to value a stock.

For example, a price-to-book value below 1 means a company is trading below the value of its net assets – that is, its assets minus its liabilities.

That generally made the stock a buy.

Today, thanks to computers, you can identify and analyze value stocks with a few clicks of a mouse.

Graham and Dodd’s approach worked well for many decades… until it didn’t.

And you can chalk up that shift to the rise of “intangible assets.”

The Intangible Difference

In 2017, exasperated value investor David Einhorn declared, “Value investing may be dead, and Amazon and Tesla killed it.”

Here’s why he may be right…

Value investing stems from an era when cash, factories, tools and machinery determined a company’s value.

That’s far from the case today.

Amazon (Nasdaq: AMZN) trades at 19 times its book value. Netflix (Nasdaq: NFLX) trades at 21 times book value. Even a manufacturing company like Tesla (Nasdaq: TSLA) trades at a price-to-book of 24.

In 2020, a company’s value is far less linked to its ownership of physical assets than it used to be.

And that reflects a fundamental transformation of the economy.

Today, contract manufacturers can assemble any gadget or garment.

The value of an iPhone or a pair of Nike’s athletic shoes is its design, not the factory that produces it.

That’s why Apple products say “Designed in California,” even though they are made in China.

Much of the value of today’s companies is in intangibles.

Think of Google’s search algorithm… or Microsoft’s Windows operating system… or a consumer brand like Coca-Cola.

Complex supply chains, the skills of a company’s workforce and even a company’s culture are significant sources of value.

Network effects also upset the value investing paradigm’s applecart.

Companies like Facebook and Netflix enjoy increasing returns to scale. The additional marginal cost of a new customer is nothing.

Yet a dyed-in-the-wool value investor would value each of these intangible assets at zero.

Time to Shift the Paradigm?

Value investing offers mathematical rigor and an attitude of skepticism in financial markets governed by Mr. Market’s mood swings.

But with its inability to tackle intangibles, value investing doesn’t offer all the answers.

So does that mean we should consign value investing to the dustbin of history?

Not so fast.

The history of investing boasts a long line of alternative valuation methods that turned out to be bunk. (Remember when analysts valued internet companies by the “number of eyeballs”?)

My philosophy is to be flexible.

I’m happy to embrace any approach that works… and to abandon anything that doesn’t.

As the economist John Maynard Keynes observed, “When the facts change, I change my mind. What do you do, sir?”

And if Graham – a contemporary of Keynes’ – were alive today, I’d bet the 2020 edition of Security Analysis would look very different from the 1934 edition.

Good investing,

Nicholas

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Today’s pick is a health-focused company that was founded in 1985 in Dallas, Texas.

The company’s third quarter report was full of surprises. It beat consensus estimates of earnings per share by about 19%. Its revenues – $551.6 million – also surpassed expectations. Overall the company ended the third quarter on a strong note and management said it felt optimistic about the future.

But alas, Mr. Market’s mood swings struck again. And when Mr. Market overreacts, swing traders get the opportunity to profit.

Click here to watch today’s video. And stay tuned for more swing trade recommendations.

Good investing,

Nicholas

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And one stands head and shoulders above the rest.

That book is Jack Schwager’s Market Wizards: Interviews with Top Traders (1989).

Schwager’s book inspired a generation to try their hand at trading for a living.

(In second place, you’d have Reminiscences of a Stock Operator, which I have also written about).

I spent this past weekend reading Schwager’s sixth book, Unknown Market Wizards: The Best Traders You’ve Never Heard Of.

These traders are not Forbes 400 billionaires like original Market Wizards Paul Tudor Jones, Bruce Kovner and Stan Druckenmiller.

Instead, Schwager focused on top traders who work in relative obscurity.

And as a group, these traders learned trading the hard way, earning their trading spurs in small proprietary trading firms.

Among them are…

• Jason Shapiro, who turned an initial account of $2,500 into $50 million
• Richard Bargh, who achieved an average annual return of 280% over a 4 1/2-year period
• Peter Brandt, a former ad executive who used classical chart analysis to achieve a 58% annual average return over a 27-year trading span.

Each of these interviews is both inspirational and educational.

The stories of this new generation of market wizards also highlight the eternal truths of what it takes to be a successful trader.

Lessons From Unknown Market Wizards

The 11 traders interviewed in the book each approached the market in a unique way.

Yet their stories offer similar lessons for all traders.

And the secrets of successful trading overlap with those that Schwager found in his original Market Wizards book from 30 years ago.

At first blush, this may be surprising.

After all, today’s financial markets are far more competitive and are driven mostly by algorithmic and high-frequency trading.

As it turns out, the lessons of today’s top traders reflect eternal truths about trading.

And these lessons are worth revisiting.

1. There is no single path to making money in the markets.

There is no holy grail for succeeding in the markets.

The paths that today’s market wizards took to achieve their exceptional performance varied widely.

Some studied at the world’s best universities. Some were college dropouts.

Their strategies ranged from fundamental to technical to a combination of both.

Their average holding periods ranged from minutes to months.

Their trading success was not about their background or finding the single right approach to trading.

It was about finding the right approach for them.

2. You need to find your own trading approach.

You can have access to the best trading system in the world.

But if that system is inconsistent with your beliefs and comfort zone, it won’t bring you success.

Some traders find a single method that works for them. And they stick with it for a lifetime.

Others continually evolve.

I use about five different approaches at the same time in my own trading. This approach fits my intellectually eclectic personality.

No one can tell you what the best approach for you is. You must develop a methodology that works for you.

3. You need to know your “edge.”

Unsuccessful traders invest on a whim or feeling. There is little method to their madness.

Put another way, they lack an “edge.”

If you don’t know what your edge is, then you don’t have one.

That edge can be a quantitative system that generates trades like the one behind Oxford Swing Trader.

Or it can be one that buys and holds Warren Buffett’s Berkshire Hathaway (NYSE: BRK-B) forever.

Knowing your edge is critical to identifying what to focus on among the almost infinite number of possibilities.

4 . Risk management is critical.

Every single successful trader stresses the critical importance of risk management.

Sure, risk management isn’t as sexy as devising a trade entry strategy. But it is essential to becoming a successful trader.

The most critical aspect of risk management is position sizing.

Always calculate how much you’re willing to lose on each bet before you start trading.

You must manage risk in your individual positions.

And you must manage risk in your entire portfolio.

Remember, your primary objective is to live to trade another day.

5. Human emotions are the enemy of successful trading.

Emotions will very often lead traders to do precisely the wrong thing.

Top traders know that they are their own worst enemy.

Your psychology is a never-ending minefield.

You must be on guard against impulsive trades.

Trades motivated by fear or greed usually end badly. Don’t try to make money back in the same market you lost it in. Guard against sloppy trading after big winning streaks.

So there you have it.

Five of the most important lessons from today’s top traders.

Let me add one more thing that all successful traders have in common: Top traders love trading.

They feel they were put on the earth to trade.

And that is perhaps their greatest secret of all.

Good investing,

Nicholas

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But so-called “fintech” companies are slowly chipping away at these traditional businesses. Soon even your local bank branch and ATM may be relics of the past.

“Fintech” is short for the “financial technology” sector. It consists mostly of startups that have developed digital technologies to provide cheaper and faster financial services to tech-savvy consumers.

Fintech services include payment processing, online and mobile banking, online and peer-to-peer (P2P) lending, and even brokerages like Robinhood.

Fintech is still a small part of the overall global banking and financial sector. But it is snowballing. E-commerce and digital payments exploded during the worldwide pandemic.

And judging by the inroads fintech companies have made across the globe, fintech has plenty more growth ahead.

That’s why fintech is one of my favorite big-picture investment themes.

Let me explain…

A Global Phenomenon

Americans think of themselves as being on the cutting edge of technology and innovation.

The remarkable global dominance of the FAANG stocks – Facebook (Nasdaq: FB), Amazon (Nasdaq: AMZN), Apple (Nasdaq: AAPL), Netflix (Nasdaq: NFLX) and Google parent Alphabet (Nasdaq: GOOGL) – confirms this view.

But U.S. tech companies are far less dominant in the fintech sector.

Millions of Brits have abandoned traditional high street banks for “neo-banks” like Monzo, Starling Bank and Revolut. These upstarts offer bill splitting, virtual cards and even stock trading for far lower fees than established rivals offer. TransferWise, a currency-transfer business, has become a household name across Europe.

Fintechs are allowing less developed countries to leapfrog their more developed rivals.

In Latin America, Nubank and MercadoLibre (Nasdaq: MELI) are shaking up the stodgy banking sector.

Most Africans don’t have bank accounts. They use mobile phone payment systems instead.

But no region of the world has embraced fintech like Asia. A group of “super apps” offering a remarkable range of services puts them far ahead of any rivals in the U.S.

The Biggest Fintech You Never Heard Of

The big kahuna in Asia is, of course, China.

This week, China’s biggest fintech business, Ant Group, was expected to list 10% of its shares on the Hong Kong and Shanghai stock exchanges.

Ant had always billed itself as a technology company instead of a financial firm. As such, it avoided the onerous financial regulation its rivals had to undergo. Alas, Chinese regulators cracked down and stepped in to delay the initial public offering (IPO).

Ant had hoped to raise $34.4 billion in cash, making it the biggest IPO ever in terms of money raised. The offering valued the 6-year-old firm at a whopping $300 billion, putting it on par with Mastercard.

Ant’s story is remarkable even by fintech standards.

Ant was founded in 2004 as a PayPal-style payments service for the e-commerce giant Alibaba (NYSE: BABA). But it didn’t take long for Ant to revolutionize China’s financial system.

Today, Ant has more than a billion active users in mainland China. It handled more than $17 trillion in digital payments in the 12 months ending in June. That’s about 25 times more than PayPal, the biggest online payments firm outside China.

The secret to Ant’s phenomenal growth?

Payments are merely a gateway service. Ant has also become one of China’s biggest lenders. It built credit-risk models with more than 3,000 variables, allowing it to make lending decisions within three minutes.

It sells more than 6,000 investment products. It manages China’s biggest mutual fund. It offers health insurance.

As The Economist described it…

Think of [Ant] as a combination of Apple Pay for offline pay, PayPal for online pay, Venmo for transfers, Mastercard for credit cards, JPMorgan Chase for consumer financing and iShares for investing, with an insurance brokerage thrown in for good measure, all in one mobile app.

In short, this fintech startup has built the most integrated fintech platform in the world.

How to Invest in Fintech

So how can you best profit from the fintech revolution?

Well, you can’t directly invest in Ant (yet).

But NYSE-listed Alibaba owns a 33% stake in Ant.

You could also invest in an exchange-traded fund (ETF).

The star among the fintech ETFs this year is the ARK Fintech Innovation ETF (NYSE: ARKF).

As an actively managed ETF, ARK is not constrained by an index. That allows the ETF to make big, concentrated bets.

ARK is also different from its competitors in that it invests only about two-thirds of its portfolio in U.S. stocks. The remaining one-third is spread throughout the world.

ARK’s top 10 holdings include bets on U.S.-based Square (NYSE: SQ), Latin America’s MercadoLibre, and China’s Tencent Holdings Ltd. (OTC: TCEHY) and Alibaba.

Up 82.16% this year, the ARK ETF is a swing for the fences.

And if you’re going to take a big swing, fintech is the sector to do it in.

Good investing,

Nicholas

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