Our story begins in the sleepy Sydney suburb of Rose Bay in 2014.
Anthony Eisen — a former chief investment officer — notices his young neighbour working well into the night, most nights. When they meet taking the rubbish out, Eisen asks the young bloke what he’s up to. Turns out Nick Molnar’s an eBay jewellery salesman with a flair for e-commerce.
The two hit it off. And begin a partnership that would shake the global credit industry to its foundations.
These two Sydney lads conceptualised a radical approach to consumer credit: buy now, pay later (BNPL) interest-free.
It was initially Molnar’s idea. An online shopping native, he noticed the frustrations of people who wanted to pay for things over time…but didn’t want the crippling interest on credit cards or the stigma of lay-bys.
What if there was another way?
The two found an engineer in Melbourne, and started spit-balling different options for deferred payment. An initial idea allowed customers to pay 30 days after delivery. Soon that morphed into something else: split payments into four interest-free instalments within 60 days.
Afterpay’s user-friendly, debt-averse innovation was born.
From Molnar’s Sydney kitchen table, they cold-called retailers and created a grassroots social media campaign that generated early traction.
They literally got Afterpay off the ground through word of mouth.
By May 2016, Afterpay listed on the Australian Securities Exchange via a modest $25 million IPO, priced at roughly $1 per share.
The rise from there was mind-bendingly meteoric
This was one we made readers aware of very early here at Fat Tail. Our Australian Small-Cap Investigator advisory recommended Afterpay when it was relatively unknown (and called Afterpay Touch Group) shortly after it IPO’d.
We rode it for gains of 2,324%. But actually ended up exiting the position too early. The bottom-to-top gain was more like 9,000%.
Within a few years, Afterpay expanded to over 7,000 retail partners and more than one million customers, financing hundreds of millions in retail purchases.
Unlike traditional lenders, Afterpay generated revenue by charging merchants a small fee, never charging customers interest, and making the product exempt from Australia’s national credit code due to its short payment terms.
It didn’t just work here.
It worked EVERYWHERE.
One minute they’re cold-calling shoe shops while eating a Chinese takeaway…the next Kim Kardashian is encouraging her zillions of followers to use their product.
These two blokes faced the wrath of regulators. They debated consumer advocates and won. They adapted by tweaking policies. They outperformed traditional credit by increasing retailers’ average basket sizes and repeat purchases. They went viral and made credit cards look old-school, unfair and silly.
Along the way, they captured the world’s imagination. Big institutions took notice and the company expanded into international markets, outclassing competitor lending models and carving out a global BNPL niche.
It was the mother of all Aussie disruption stories.
A true edge-of-the-bell curve, FAT TAIL story…
But as with Fat Tail stories, it was no sure thing. Afterpay could easily have crashed and burned.
Australian Small-Cap Investigator official buy recommendation was at $1.65 in June of 2016.
EXTREMELY early.
The share crossed $7 by 2018. And rocketed beyond $70 in subsequent years. If you bought at IPO…and held on with white knuckles through volatility, regulatory heat and scepticism…you’d have enjoyed rough ANNUAL compound returns of 190%.
Modest initial stakes spun into spectacular wealth…in less than a decade.
As with Fat Tail stories, Afterpay should be considered a true outlier.
What they did is entirely unique and will never be repeated.
But HOW they did it?
Well, that’s more interesting. Afterpay’s story leaves us some clues as to who the NEXT Great Aussie Disruptor might be.
Lachlann Tierney of Australian Small-Cap Investigator is about to nominate his pick.
We nailed Afterpay. Will we nail this one…?
Stay tuned for Part 2 tomorrow…
Regards,
James Woodburn,
Publisher, Fat Tail Investment Research
***
Murray’s Chart of the Day
– S&P 500
Source: Tradingview
[Click to open in a new window]
Finding the right balance between riding trends as far as possible and protecting gains from large corrections is more art than science.
When momentum changes prices can move rapidly.
None of us knows which correction will turn into the big kahuna.
If you blindly hold on through all corrections there will come a time when you will regret it.
The chart above shows the S&P 500 weekly chart since the start of the bull market in 2009.
I have added blue boxes to show you the periods when the 10-week exponential moving average (EMA) was below the 20-week simple moving average (SMA).
You can see that a simple indicator like this was great at helping you avoid the worst of each major correction that has occurred since 2009.
Rather than exiting all positions when the weekly trend turned down you could have a policy of lowering exposure and trading defensively during those periods.
Buying the market when the weekly trend turned up after a correction has been a fabulous trading opportunity nearly every time.
There was only one instance in late 2015 out of ten occurrences when it wouldn’t have worked. Even then the change in trend soon after the buy signal would have gotten you out of your position before a major fall.
The monthly trend has a brilliant record of keeping you long during bull markets and getting you out prior to major falls.
But the longer timeframe means you have to accept larger losses prior to the signal confirmation.
Working out your own risk tolerance and ability to withstand large volatility is the name of the game.
If you are nimbler you may hold onto more of your gains, but will have to accept being more active and perhaps buying back in at higher prices.
If you prefer riding out smaller corrections to give you the chance to ride larger trends, you have to accept that there will be times when you suffer large drawdowns in a rapidly falling market.
Regards,
Murray Dawes,
Retirement Trader and International Stock Trader
The post SPECIAL INVESTIGATION: Who’s the Next Afterpay? (Part 1) appeared first on Fat Tail Daily.
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