Monday, 18 March 2024

By Ryan Dinse Editor, Crypto Capital and Alpha Tech Trader

[4 min read]

Dear Reader,

The thing about investing is that most people are bad at it.

Or at least they start off bad.

I know I did.

Like most things in life, it takes time to develop your investing skills, to see what works and what doesn’t.

Perhaps more importantly, it takes time to work out what works FOR YOU.

That’ll differ from person to person because we’re all different in how we react to risks, opportunities, information, and social pressure.

It’s no exaggeration to say that it can take decades (yes, decades) to develop a system you have at least some confidence in.

Though in the words of Chinese Premier Zhou Enlai in 1972 when asked about the effects of the French Revolution (two hundred years before!) he famously responded:

‘It’s too early to tell.’

In a way smart investors realise this is also true.

They don’t know everything; they have no crystal ball and all they can do really is to implement their strategy humbly, manage their risks, and cross their fingers.

But as legendary investor, George Soros once put it:

“It's not whether you're right or wrong, but how much money you make when you're right and how much you lose when you're wrong.”

This was a key realisation for me personally in developing my own investing framework.

The concept of asymmetric returns.

I spent the first half of my career working in traditional finance hoping to fast track my learning curve.

Instead, I found it to be an industry that was more concerned with ‘not being wrong’ – rather than in maximising investor profits.

The biggest danger to them was standing out from the crowd so they all invested in the same assets at the same time with only minor differences in returns.

But no one ever got rich striving for average.

Which brings me to the title of today’s piece…

A Framework for Exponential Returns

Retire in 10 years?

Really?

Depending on your age that might not sound too exciting!

But what I really mean is that you can potentially make life changing gains within ten years by following a relatively simple framework.

And yet most people don’t do it because it involves risk, volatility, and uncertainty.

And, even worse, looking silly sometimes too!

But as George Soros also noted, this is the price you need to pay to hit the big time:

‘Outperforming the market with low volatility on a consistent basis is an impossibility. I outperformed the market for 30-odd years, but not with low volatility.’

A lot of people that want to ‘get rich’ from investing want to do it tomorrow.
Good luck if you manage that but in my experience that’s a low probability event.

The framework I’ll share with you here has much better odds.

And it all boils down to three things:

1. A Pivotal Moment
2. Disruptive Potential
3. Exponential Momentum

If you can find a trend that satisfies all three of these criteria, you give yourself a good chance, if you stay the course,  to be a lot better off 10 years down the line.

That doesn’t mean you won’t experience immense ups and downs. You will.

But if you find a trend like this at a pivotal moment and stick with it, then in my experience, you have a real investing gem on your hands.

The good news is finding such ideas isn’t actually that hard.

Take electric cars…

I remember reading headlines like this in 2014, just after I’d quit my full-time financial advice job in an attempt to become a full-time, home trader:

As CNBC reported at the time:

‘If 2013 was the year electric car company Tesla Motors broke through and became the most talked-about automaker in the U.S., 2014 may be the year it takes the world by storm.’

As a trader looking for ideas, this one definitely piqued my interest.

It was clearly a PIVOTAL MOMENT.

And as a threat to the era of the combustion engine and the age of oil, it had huge DISRUPTIVE POTENTIAL.

It also had EXPONENTIAL MOMENTUM.

By this I mean, the technology had the potential to seep into all sorts of different areas beyond the core industry.

In this case, it meant revolutions in batteries, self-driving cars, AI, automation in factories, and even new chip technologies.

Given this happened 10 years ago, I must be retired by now, yes?

Well, unfortunately no!

You see at this time I didn’t have this framework in place (though as luck had it, I did ride a different exponential trend in Bitcoin and crypto for 10 years that has got me a lot closer).

In 2014, despite over a decade in professional investing arena, I was still learning my craft.

Yes, I was already looking for the potential of asymmetric gains. But as a less experienced, more impatient man in my early thirties, I was looking for ‘fast money.’

Mind you, I still did pretty well, trading in and out of lithium stocks in 2016 and 2017.

But I could’ve done better.

What if I’d just bought into a lithium explorer like Pilbara Minerals [ASX:PLS] (one I traded frequently at the time)in 2014 when I read that Tesla headline and simply held?

Well, check out the chart:

PLS finished 2014 at around 4c per share.

Today it’s 100x higher at around $4.

Enough to turn $10,000 into $1,000,000 in just ten years.

You can do this exercise for yourself on any long-time lithium explorer on the ASX and most will have made very decent gains.

All you had to do was work out the connection between lithium-ion batteries and electric car growth.

Even a heavyweight stock like Tesla itself has done a 10x in that time and was once up 30x over the decade from 2014.

You can do this exercise with other big recent trends.

The smartphone, the internet, the digital age…it all seems obvious in hindsight.

But these are the big ideas that  can make fortunes for those who spot them early enough…and ride them far enough.

To be clear, in the moment it’s not always easy to know if a new trend satisfies the three criteria I mentioned.

The Metaverse comes to mind as one recent dud!

And finding the right stocks – not the also-rans – isn’t easy either. It’s always an ongoing process of evaluation as the story plays out.

But here’s the important news for you today…

I think we can all agree, the one stand out idea that is very likely to make a sizeable impact on, not just investment markets, but the entire world, over the 2020’s, is artificial intelligence (AI).

Which brings me to…

Five Stocks to Own Now

As you might know, I’m deep into the reeds of the AI opportunity through my new premium service Alpha Tech Trader.

I run this service with my tech analyst Charlie Ormond and most of the stock opportunities we’re looking at are stateside.

But my colleague Callum Newman has also been looking at this concept very carefully too and he reckons he’s found five killer AI stocks right here in Australia.

He’s definitely worth listening to on this.

Not to pump his tyres too hard (and please don’t tell him this!) but he’s probably been one of our best stock pickers in recent months.

While everyone was bearish in 2023, Callum was more upbeat than he’d ever been.

Since the start of 2023, he’s given his subscribers the opportunity to make a number of impressive double-digit gains. Very decent results considering the wider context of the market and all ASX listed, Aussie stocks.

Of course, not all of Cal’s picks are winners but he’s got a few laggards on his buy list as well. Investing in small-caps carries high risk.

But overall, he’s done the business in a very tough market.

To learn about Callum’s five current AI small cap buys, click here.

Good investing,

Ryan Dinse,
Editor, Crypto Capital and Alpha Tech Trader

Ryan is a former financial advisor who over seven years helped more than 600 clients and had more than $150 million under management. This experience taught him that the mainstream investment industry has no interest in helping clients strive for greatness. He was told to make ‘safe’ investment plays and settle for average returns. It wasn’t good enough for Ryan.

In 2016, he embarked on a renewed mission: to help ordinary people lock onto extraordinary trends before they go mainstream. He’s an experienced small-cap trader and an expert in cryptocurrencies. He first bought Bitcoin [BTC] in 2013, when it was around US$600. Today, it’s around US$30,000.

His crypto advisory is a must for anyone looking to make digital assets a part of their long-term portfolio. Check it out here.

His tech advisory Alpha Tech Trader aims to identify and latch onto strong emerging opportunities in the tech sector, wherever they are in the world. Get more info here.

By Bill Bonner Editor, Fat Tail Daily

[3 min read]

Dear Reader,

Remembering that the descent is the most dangerous part of the climb...

Bill Bonner, reckoning today from
Youghal, Ireland...

Our bet is that we are at or near another great sell-off. Get ready, 2000…2008…here we go again.

Only this time, the Fed will have to put aside its bailing bucket. Because inflation has not been beaten. It is only in retreat. The New York Post:

Wholesale prices in the United States accelerated again in February, the latest sign that inflation pressures in the economy remain elevated and might not cool in the coming months as fast as the Federal Reserve or the Biden administration would like.

The Labor Department said Thursday that its producer price index — which tracks inflation before it reaches consumers — rose 0.6% from January to February, up from a 0.3% rise the previous month.

Which means…this may not be just a temporary Big Loss for most of us…but a permanent one. When you buy stocks, you’re supposed to benefit from the ‘equity risk premium.’ That is, you earn a little more from stocks than from bonds. But everything comes at a price. And the price for higher profits is greater risk. You give up the certainty that your money will be there when you need it. In fact, you may never see it again.    

Print on Demand

The Fed cannot just ‘print’ money like it used to…not without giving bond investors the heebie jeebies. They took a bath over the last 3 years – some of the worst losses in the bond market ever recorded. They won’t want to repeat it. So, if they see the Fed going back to its old reckless ways – lending at zero, ‘printing’ new money at will – they will revolt. They’ll sell Treasuries, forcing the federal government to pay more to borrow.  

Already, the federales pay more than a trillion dollars per year in interest expense. And it’s going up. Here’s the Committee for a Responsible Federal Budget:

Over the FY 2025 through 2034 budget window, spending under the President's budget would total $86.6 trillion (24.4 percent of GDP) and revenue would total $70.3 trillion (19.7 percent of GDP). 

That’s $16 trillion in total deficits…which will be added to the national debt, bringing the total to over $50 trillion by 2034. And as the national debt edges up, and old debts are refinanced at higher rates, the interest expense goes up, dramatically. Supporting the stock market with more ‘stimulus’ becomes impossible.  

Without the Fed behind them, stocks will have to be valued on the basis of their earnings. That will mean more normal P/Es. Jeremy Grantham thinks Wall Street prices could go down 60% to bring them into line with earnings. And then, it could take more than 20 years of earnings growth to bring the survivors – if there are any – back to today’s prices.

Here’s Grantham, Business Insider:     

Stocks are dangerously overvalued and poised to disappoint, the AI bubble is bound to burst, and a recession appears likely, Jeremy Grantham has warned.

Grantham noted the S&P 500's Shiller P/E ratio — which divides the S&P 500's price by its constituents' average yearly earnings over the past 10 years to adjust for the business cycle — stood at 34 on March 1, a level in the top 1% of the metric's historical range.

The Seven Year Itch

Today’s bubble seems most similar to the dot.com bubble of 1998-1999. Then too prices went wild as investors thought a new technology would make their stocks much more valuable. Amazon, for example, went up 21 times in the two years 1998-1999. People thought it would just keep going ‘to the moon.’

Instead, it crashed 92% and didn’t get back to its 1999 peak until 7 years later.  Then, it went to Mars.

Of course, 7 years is not that long. But most of the leading stocks of the period were not so lucky. Then, as now, the big money was concentrated in just a few stocks. All of them crashed, and most have still not come back.

And we’re not talking about the flakey dot.coms – like Pets.com – or even about pie-in-the-sky, one-stock tech wonders such as Global Crossing. We’re referring to the cream of the crop…the biggest and best companies in the USA at the turn of the millennium. Adjusting today’s prices to inflation, we see that only two of the top 10 companies are in the black for the period – 2000-2023 – Microsoft and Walmart. The rest suffered a combined loss of over $1 trillion in market capitalization, in today’s money.

The Path Down

To put this another way, an investor – in 1999 – who bought the leading can’t-go-wrong companies had an 80% chance of actually going wrong. Cisco, GE, Intel, Exxon, Oracle, IBM, Citigroup, and Lucent all lost money for investors over nearly a quarter of a century, anywhere from a 12% loss at Exxon to a 100% wipeout at Lucent.

And now, investors are betting on the Magnificent 7 – Apple, Alphabet, Amazon, Meta, Netflix, Nvidia and Tesla.  Which of them will survive? Which will prosper?

We don’t know. But that’s the trouble with being on the tippy top of a mountain.  Whether you’re a stock market, a single company, such as Nvidia…or an entire empire – all the paths go down.

Regards,

Bill Bonner,
For Fat Tail Daily