By Kris Sayce, editor, Casey Daily Dispatch
It’s the goal of every investor…
Bigger returns, for as little risk as possible.
The trouble is, many investors get it wrong.
Not on purpose, of course.
It’s just that they don’t understand how to do it.
They end up taking bigger risks… and making little returns.
It shouldn’t be that way.
But don’t worry. We’ll show you how to do it right.
It’ll make all the difference in the world to your investment returns. More below…
If this is your first time reading the Dispatch, welcome. If you’ve been here before, welcome back.
At the Dispatch we have two goals:
To introduce you to the most important investing themes of the day, and
To show you how to profit from them.
We do this by showcasing ideas from our cast of in-house investing experts, Dave Forest and John Pangere. And from the founder of our business, Doug Casey.
Today, we look at how to maximize your portfolio for gains, while minimizing your risk.
Speculating the Correct Way
Over the past few weeks, we’ve explained how you can achieve bigger returns, with less risk, by using warrants… if you use them the correct way.
By the “correct way,” we mean only investing a fraction of what you would normally invest in a stock. If you normally invest $5,000 in a stock, we suggest only investing $500 or $1,000 in the warrant associated with that stock.
That’s because warrants have built-in leverage. We’ve shown you several examples where the warrant price increases by multiples of the stock price.
Dave Forest, our in-house investing expert and editor of our premium service Strategic Trader, has one of his best positions right now in Custom Truck One Source Warrants (CTOS.WS). It’s up 1,688% since he recommended it in July 2020.
(By the way, we don’t normally reveal current open positions, but this one is so far above Dave’s recommended buy-up-to price, we can make an exception.)
Over the same timeframe, the stock is up “just” 148%.
Look, we’re not knocking that return. Most investors would be thrilled with that. All we’re saying is that by thinking about your investments a little more, you can boost your returns and potentially lower your risk at the same time.
Why invest $5,000 in the Custom Truck One Source stock to make a gain of $7,400, when you could invest $1,000 in the warrant to make a gain of $16,880?
Of course, every investor is different. So you need to figure out what works best for you.
But warrants aren’t the only way to boost your returns, without taking on huge risks. Consider this…
How Small-Caps Stack Up Against Blue Chips
Aside from warrants, some of Dave’s biggest successes over the past year have been in small-cap stocks.
If you’re not familiar with them… Small-caps are small companies. They are often new and fast-growing.
Many of them don’t generate any profits… But what they do have is a lot of potential. They can be one big business contract, patent, resource, or drug discovery away from growing into a future multi-billion-dollar company.
And naturally, they’re cheaper to buy into. Just a small amount can go a long way… if the company does well and the stock takes off.
That’s why Dave loves small-cap stocks. And this year, he has helped his readers lock in big gains of 193%, 283%, and 384% on small-cap plays in the clean energy sector.
Two of these were picks Dave made in June last year. That was when many on Wall Street were too scared to recommend stocks, because they didn’t think the price rally was sustainable.
But Dave thought otherwise. As an entrepreneur, venture capitalist, and speculator, Dave understands risk. So while many said stocks were too risky, Dave said buy.
It has paid off. And it has done so in a way that would have helped investors make the most of the gains, without putting a lot of money at risk.
Here, we’ll show you. The following chart shows a comparison of the returns of Dave’s three clean energy picks – Neo Lithium (NLC.V), Albemarle (ALB), and Lithium Americas (LAC) – and the S&P 500.
This chart goes back to June 2020. That’s when Dave added two of the picks. The third, Neo Lithium, was a stock Dave recommended back in 2018. But it was still a buy recommendation in June 2020… at a much cheaper price.
As you can see from the chart, any investor who bought then would be up over 1,000% now. That’s even better than the 384% return for those who bought back in 2018.
Anyway, the point here is that over the past 18 months, each of these stocks has clocked up a big triple-digit gain. At the same time, the S&P 500 has “only” gained just over 50%.
Again, that’s not a terrible return. It’s a nice return. The problem is that to make the most of that return, investors had to put more of their capital at risk.
In fact, to make the same dollar returns on these three investments using the S&P 500, you would need to invest thirteen-times the capital.
A $1,000 investment in each of Albemarle, Lithium Americas, and Neo Lithium in June 2020 (total $3,000 invested), would have resulted in a profit of $19,370 today. To make the same dollar return in the S&P 500, you would need to stake $38,700.
You see the difference?
In many ways, it makes small-cap stocks similar to the warrants plays we’ve described over the past few weeks. Small stakes… with potential for big returns.
Every Investor Needs to Make This Choice
Now sure, we’re not saying this is a perfect comparison.
At the time Dave made these picks, there was no guarantee that each would make a big triple-digit percentage gain. But there was also no guarantee the S&P 500 would gain 50%, either.
Both bets came with risk. That’s what you need to weigh up as an investor. How much risk are you prepared to take for the returns you want… and how much risk are you prepared to take for the potential losses you could incur?
Remember again, there were many analysts saying the S&P 500 wouldn’t be able to sustain the gains. So there were risks buying “safe” blue-chip stocks. Just like there were risks buying small-caps at that time.
As we say, every investor is different. You need to work out the level of risk that makes most sense to you. Hopefully, this helps. We’ll share more ideas tomorrow.
Editor, Casey Daily Dispatch
P.S. One final thought. Our friends at Palm Beach Research Group are holding a special event at 8 p.m. ET tonight (Wednesday, November 3rd). It’s hosted by world renowned cryptocurrency expert Teeka Tiwari.
As part of the event, Teeka will explain another type of asset class that is helping investors make fortunes. He calls it “Tech Royalties.” And like small-caps, it gives investors the chance to make outsized gains while only putting small amounts of capital at risk.
If you can spare the time, we recommend tuning in. You can get all the details here.