Masayoshi Son, has a net worth of $22 billion but who had ever heard of him?
In 1974, at the age of 17, Son moved from Japan to California. He studied computer science and economics at the University of California, Berkeley. During his time at Berkeley, Son founded several businesses. He sold two of his businesses for a total of over $3 million. He later returned to Japan and set up a software distribution company, naming it SoftBank.
By the mid-1980s, SoftBank controlled around half of Japan’s market. Son started reinvesting his profits into a portfolio of early-stage tech firms. That’s how Son got to know Jack Ma, a Chinese English teacher. In the summer of 1999, at the height of the dot-com boom, Jack Ma set up Alibaba, the business-to-business e-commerce platform. Ma started Alibaba from his apartment in Hangzhou, China, on a budget as little as $2,000 in seed money from his in-laws. Finally, Son and SoftBank, invested $20 million in Alibaba.
Alibaba became extremely successful in a very short time but then investors dumped Alibaba shares after the dot-com bubble burst. SoftBank stuck with its investment, despite losing a remarkable $70 billion in this crash. When Alibaba finally went public in 2014, SoftBank’s stake was worth approximately $8 billion. By 2018, its 25% stake in Alibaba was worth a Staggering $180 billion. Son’s initial $20 million investment had grown almost 9,000 time. That made Son’s investment in Alibaba one of the most successful investments in venture capital history.
Son’s approach is typical of a venture capitalist. He built a portfolio of investments and then he sat back and waited. He knew most of his investments would fail. But he also knew a few would rocket in value. And those few winners were the only investments that really mattered.
The lesson to learn here is that only few “torpedoes” in your investment portfolio can make you rich.
A 2016 J.P. Morgan study showed that the Russell 3000 soared nearly 50-fold from 1980 to 2014. Over this time period, 64% of stocks lagged the overall index. Less than 1/3 of the stocks were solid performers. But 7% of the companies just skyrocket in value. The returns on those 7% were enough to push the entire index up almost 50-fold over 34 years.
The key to making money in the stock market is to invest in a diversified portfolio because no one knows ahead of time which stocks will be the big winners. Like Alibaba did for Son, a single big winner that made all the difference.