Why We Only Buy Tech Stocks That Are Unicorns

One problem with mainstream financial pundits is their tendency to ball all risky tech stocks into a single category. That’s not a good way to manage risk. You cannot equate a pre-revenue SPAC with an enterprise software-as-a-service (SaaS) IPO that has double-digit revenue growth coming from some of the biggest companies in the world. In the same manner, a $100 million company with double-digit revenue growth is not the same as a $10 billion company with the same revenue growth rates. In the world of tech stock investing, the size of the boat affects the motion in the ocean.

Size Matters

The research is crystal clear. Small-cap stocks are more risky than mid-cap stocks and large-cap stocks. While high risk can equate to high returns, small caps require us to sacrifice more risk per unit of return than mid-caps or large-caps. The below diagram shows the Sharpe ratio for each class of stocks – small, mid, and large (bigger numbers are better):

The simplest way to think about the Sharpe Ratio is that it measures the rewards you received for the risks you took (also called a risk-adjusted return). Think about investing all your money in an FDIC-ins