When resource markets are on a tear, investment gamblers who think they’re speculators are keen to jump on the next exciting story they hear. Some people are booking huge profits on 10-baggers (stocks that go up 1,000% or more). Yes, that really does happen when commodity prices are booming. I’ve seen it many times in my career. And when it does, everyone wants in. The fear of missing out drives market darlings to ridiculous valuations.
At such times, I’d often start a talk at an investment conference by asking for a show of hands: “How many of you want a 10-bagger?”
Most of the people in the room would put their hands up.
Then I’d ask: “How many of you are willing to make more losing trades than winning trades?”
Only a few hands would go up. One of those would be Rick Rule’s, if he was in the room.
Then came the punch line: “All of you who held up your hand the first time but not the second time aren’t willing to do what it takes to bag 1,000% gains.”
Think about it. If you’re going to swing for the bleachers more often, you’re going to strike out more often. But if you’re good at picking the right balls and executing on your swing, the occasional home runs more than make up for the strikes.
Suppose you speculate $10,000 on higher-risk, higher-reward junior mining stocks five times this year, and get the following results:
As you can see, despite having more losers than winners—even including one total wipeout of 100%—the average result is still a terrific triple-digit gain. The $50,000 invested turns into $142,000.
The math supports swinging for the bleachers if you’re a Babe Ruth among investors. But, obviously, most people are not.
Consider that in the real world, it would be likely that all of my five examples above would be in the red at some point. Stocks almost never take off the day you buy them without ever looking back. But we don’t know which ones will end up winners until after taking substantial losses on the losers.
You have to ask yourself—and it’s vital that you be honest with yourself—if you could stay with the trades if you saw all of your speculations dropping sharply.
That’s what it takes.
If your answer is no, don’t worry. You can still make a lot of money speculating on less risky picks. But you should accept that you’re not as likely to make home runs, because you’re not taking the risk of swinging for the bleachers.
If your answer is yes, that’s fine—but you don’t get to whine about taking losses… a lot of losses. You must accept that you have asked for them. They’re the price you pay for going after 10-baggers.
In either case, I have stock picks in The Independent Speculator portfolio that I think have excellent odds of delivering.
You can, of course, go it alone. Just do so with your eyes wide open about what it takes to land 10-baggers.
Tuesday, February 5, 12:07pm, EDT, 2019