Let me talk about one of my favorite investment theses - a positive feedforward loop. This involves a situation where some improvement in a company's fortunes engender further improvements. All really big stock wins involve this process in some form or another.

So the obvious example of this is the network effect. Some product or service becomes more valuable *to each user* the more people that use it. So $FB is the best example ever likely to exist, but you can see it also in smaller companies.

Another, quite different example is financial risk. Here a good example was a tiny biotech $TRIL, trading at below a dollar at the start of the year, and now around $15. There have been some positive underlying drug developments to justify this gain, but solvency risk was key.

At <$1 there was serious risk it would go under - it got saved by new and better management and by the success of a rival in the space. That enabled it to raise funds and remove much of the immediate financial risk. So largely rescued by an external event.

With stocks like that I often say "Give someone else the first double." By that I mean the risk reward often isn't there for companies that are circling the drain. Instead, buy them when they have escaped the drain, but everyone still thinks of them as still circling.

The same can apply in bigger companies - $TSLA is a good example for me. There was a time last year when it looked to be in a precarious financial picture, with its bond price in serious decline. They pulled out a positive quarter, and that risk declined significantly.

With that risk minimized I actually bought $TSLA stock (but then sold it some months later, way too soon as it turned out). So the key here is that an improving position enabled it to easily raise funds, further improving its position. A virtuous feedback loop.

But notice $TSLA also has a long-term virtuous feedback loop - battery manufacturing for example improves with scale, so bigger is also better. And scale also improves charging station density. So no network effect, but a traditional scale-based positive feedback loop.

Let me add another tech stock with such a virtuous loop - Zoom $ZM . So this was the first stock I recommended at the beginning of the pandemic: https://twitter.com/Biomaven/status/1240355251091312642?s=20

The key here is a big positive shock (remote work and communication) plus a clear network effect - the more people that use it and are familiar with it, the more valuable it is to each user. Those stocks can run a long, long way.

Now biotech stocks don't generally have this feedforward loops - except perhaps when a new technology platform is validated. But those are rare, and even a newly validated platform doesn't smoothly lead to new approved drugs.

So bottom line here is to look for positive shocks that could then lead to a feedforward improvement in a company's prospects. If you find one, be very careful that you don't take your early gains and run, because such stocks can run for a long time.

Note also for the short-inclined, this process can also work in reverse, and it's perhaps even easier to understand. A few decades back there were a lot of biotechs with floorless convertible preferreds outstanding - now fortunately an extinct instrument.

Characteristic here was that the more the stock price declined the more shares were effectively outstanding. So great incentives to short them into oblivion - these weren't called death-spiral converts for no reason. But same applies to any highly-levered financially weak company