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As mentioned last week, I attended this year's New
Orleans Investment Conference along with Doug Casey, Marin Katusa, and our 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 main room
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 that 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.
Our BIG GOLD publication, on the other hand, is
focused on much less volatile stocks with excellent upside and leverage to
rising gold. In the International Speculator, we shoot for stocks with
growth on tap that offer the potential for 100% gains. That's plenty of joy,
but the odds are not so long: over time, we win on more of these picks than
we lose.
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.
Sincerely,
Louis James
Senior Metals Investment Strategist
Casey Research
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