I attended this year’s New Orleans Investment Conference along with Doug Casey, Marin Katusa, and Casey Research’s CEO, Olivier Garret. It was fun to see many old friends among the attendees and other speakers, but the most interesting thing was an experiment I conducted as part of my speech.
You see, there had been a talk earlier in the conference on picking “ten-baggers” (stocks that go up 1,000%). Now, there’s nothing wrong with shooting for ten times your investment in a highly volatile stock. It’s neither a crazy nor a hyped-up claim – we’ve had many ten-baggers in our portfolios, including Silver Wheaton (SLW) and First Majestic (AG). But it’s not easy, and many of the nano-cap stocks that offer that sort of potential do the opposite and drop 90% – if not all the way to zero.
So I asked the audience to raise their hands if they wanted ten-baggers in their portfolios. About three-fourths of the audience put their hands up. I didn’t take time to count the hands, but it was a lot of people – several hundred.
I then explained the realities involved:
- Big, stable, safe companies – almost by definition – do not offer ten-bagger potential.
- Nobody can tell you in advance which tiny, high-risk play is going to be the next ten-bagger. The best one can do is identify a “basket” of stocks with ten-bagger potential, and hope the ones that work out more than cover the losses on the ones that don’t.
- The people who make money using this strategy understand that they will lose money on most of their stocks. Let me repeat that: to go for ten-baggers, you must accept that more of your stocks will lose money than will make you money.
- The math is simple: you can lose 100% of your money on a high-risk stock, but you can only lose 100% – while there is no maximum gain.
So, yes, ten-baggers are possible. Some highly-volatile junior stocks go 50 to 100 to one. (GoldQuest Mining, V.GQC, is a recent example of a 50-bagger.) So, the strategy for pursuing ten-baggers is to buy ten exceptionally high-volatility stocks, write off the three that go to zero, shrug off the three that drop 30% or 50%, accept the three that gain 30% to 50%, and laugh all the way to the bank when the one long shot goes up 1,000% and more than makes the rest worthwhile.
But if you do this, you must realize that until the ten-bagger makes its discovery, transition, or whatever it’s going to do to shoot through the roof, it’s going to look like any of the other mediocre or losing positions. (Only in this context can 30% to 50% gains be considered mediocre – and we do, here at Casey Research.)
In other words, you have to have nerves of steel to do this, or you’ll panic and sell all your “idiotic penny stocks” and wonder what lapse of sanity ever prompted you to buy them. We’ve seen this again and again.
I have to wonder how sick to the stomach those who sold GoldQuest at four cents a couple months ago must have felt when they saw the stock shoot up to over $2 on a fantastic new gold discovery in the Dominican Republic.
After explaining these things to the audience and stressing again that the only way to reliably go after ten-baggers is to accept that one will have more losses than wins (and the wins will more than make up for the losses), I asked for another show of hands.
I kid you not: about three people raised their hands.
This confirms something I had long thought, but for which I had not previously had empirical evidence: most people don’t have what it takes to be high-stakes speculators. Fair enough – if an investing strategy does not suit one’s temperament, one should not try it.
But fortune does favor the bold.
Fear not; I would never try to twist anyone’s arm to buy high-risk stocks. I only pursue this strategy with a small number of alert-service subscribers who understand the math and have the temperament to go with it. That service is on a waiting list at present , because seats are strictly limited.
So now you know; the high-stakes table is not for everyone – and that’s okay. There are different ways to invest, and every investor should carefully assess his or her temperament – and especially tolerance for risk – before settling on his or her investment strategy.
I hope you will all do this important introspection and determine the right strategies to pursue in the volatile and – we’re convinced – highly profitable times ahead.
ThePessimisticChemist says:
I would love nothing more than to build a diverse portfolio, with some high risk stocks in it to help sweeten the deal.
In time. Assuming the world doesn’t go all to doom in the next 4 years I will be able to do just that.
PS: Wish I could have been at the conference.
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8th November 2012 at 3:31 pm
efarmer says:
TPC,
Robert Prechter at Elliot Wave International is predicting the Dow to reach 800 by 2016. If he is right, you have plenty of time to research and find the right stocks.
EF
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8th November 2012 at 3:49 pm
Colma Rising says:
I was going to put some of my speculative spoils into some riskier specs….
But my spoils are dismal in nominal terms and I think I need a root canal.
Fuck me.
I hate being po
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8th November 2012 at 4:01 pm
Eddie says:
Speculation is a fools game. You might get lucky…but luck has something to do with it, most of the time.
Investment seminars should teach people how to control risk and limit their losses. Only after that is mastered can any speculative investment be considered to be more than out-and-out gambling.
This kind of article, like many of those written by the Casey people or Porter Stansberry or Reggie Middleton..or any of the successful newsletter guys…they are a come-on. A tease. An invitation to read the newsletter and put some money down on whatever they are buying. In other words, articles like this one above are a very sophisticated, calculated sales pitch.
They have lots and lots of money, and they only risk a minutely small portion of their stake on any one trade. Just remember that. That’s the most important principle.
Most of us would come out much further ahead by buying some physical gold or silver and keeping it buried in a mayonnaise jar, imho.
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8th November 2012 at 4:15 pm
Eddie says:
Bob Prechter has been wrong so many times I’m surprised he can still sell his books.
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8th November 2012 at 4:17 pm
TPC says:
@Eddie – Any money I spent on such stocks would be “fun” money. I would count it towards my entertainment budget.
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8th November 2012 at 7:09 pm
prtrb'd says:
I’ve had luck with the mining stocks. Some good luck, some bad luck. Overall did better than break even on them. It only took a couple winners like First Majestic to overcome all the losers. A few years ago when I started seeing that the stock market was rigged and the fedgovtaxman was just out to get me I pulled it all and quit. Went below ground, in a manner of speaking. My mason jar has carried the day for me, but I got started in 01. A nuther reason I quit stocks was I got tired of giving dollars to Casey and a few others to speculate with. Like he says lots of them stocks go down, so where does the money to buy come from? Not me anymore.
I still feel the mason jar approach is the most viable way to secure your future at this point in time, just be sure you have a nice piece of land to plant it on. Metal is up, but going way higher if the money they print tells us anything.
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8th November 2012 at 11:57 pm