Why Kevin O'Leary Is Extra Cautious With This Type of Investment

They're a yellow flag at the very least.

Kevin O'Leary, investor and Shark Tank star, has made millions off his investments. On his podcast and social media accounts, he spreads investment advice. He took to Twitter to share with investors his thoughts on potentially high-risk investments.

This type of investment makes Mr. Wonderful cautious

Kevin O'Leary says, "You can have proof of concept, but as an investor, any product where there's a significant amount of time required to educate consumers makes me cautious."

Generally, financial gurus like O'Leary say this because education is expensive. It's a tax on company profits. Companies must spend limited marketing dollars to convince customers to buy their products.

What's more, a product that requires a significant amount of time to educate consumers is a yellow flag. It means the market may not be ready for the product. History contains many examples of products that flopped because companies launched them too early.

Consider Google Glass, the breakthrough product no one ever bought. Despite the support of Alphabet, one of the wealthiest companies on the planet, it failed to sell. Casual consumers preferred the convenience of a smartphone over the expensive and battery-heavy Glass.

Should you avoid investing in companies that must educate consumers?

Not necessarily. Some companies do so successfully. Take Tesla, for example. Six years ago, hardly anyone drove its cars, and many people doubted the benefits of electric cars. Since then, the share price has more than quintupled, and Tesla continues to gain share of the vehicle market.

Apple is another company that created a product no one knew they wanted, only for that product to become wildly popular. They released the iPod in 2001. It took six years and the release of the iPhone for Apple to kickstart the smartphone revolution.

One thing to keep in mind is that investments in innovative companies can take a while to season. Investors may wait years before seeing returns on these kinds of investments. When investing in innovative companies, prepare to hold them for the long term.

Where can I invest in innovative companies?

The public market is full of innovative companies. The best brokerages offer investors the power to purchase ownership of public companies for low fees and other perks. Do your due diligence before investing in companies that must educate customers; many fail, and products flop.

Kevin O'Leary also plugs a private investment vehicle StartEngine. Investors can invest in private companies through the third-party platform. However, this is risky. Investments can be highly illiquid, and there's no guarantee private companies will ever go public.

Consider sticking to innovative companies in the public market. Invest in an ETF to diversify high-risk investments. By investing a small percentage of your portfolio in more than 25 companies and holding for five or more years, you maximize your chances of earning returns on your investments.