By David Forest, editor, Strategic Trader
I’ve talked a lot this year about the incredible profit power of warrants.
If you’ve been following the Dispatch this year, you’ll know the potential gains with warrants can be much larger than with stocks. In fact, I’ve seen multiple cases where warrants went up thousands of percent more than regular stocks.
But I must be honest – getting my subscribers to understand this little-known asset class hasn’t been easy. There’s little information publicly available about warrants. I’ve gone to expensive, private databases to get all the information I can about the best warrant opportunities.
But some people just can’t understand that if warrants are so incredible… if they’re as easy to buy and sell as regular stocks… and if you can trade them in almost any brokerage account, why doesn’t the public know about them?
How is it possible that no one has broken this wide open before?
Sometimes, readers even get angry.
I don’t blame them… And I want to address this head-on.
If Warrants Are So Profitable… Why Haven’t I Heard of Them?
Why, they ask, have we never heard about warrants? These investments are better, cheaper, and faster than regular stocks, but we haven’t heard a peep about them on television, the internet, or from our financial advisors.
Many people believe that secrets – even the closely-guarded ones – eventually come out on Wall Street. After all, warrants I’ve tracked recently delivered gains as high as 4,942%. If warrants are that good, most people believe they should hear about it.
It’s true that finance is getting more democratized. Investments like options used to be the domain of professional Wall Street traders. Now they’re accessible through many discount online brokerages.
Wall Street lets some of its secrets out. With options, they realized they could make fees, allowing more traders to get into the game.
In the case of warrants, however, there’s no incentive to let the cat out of the bag. Warrants are a relatively small market. They’d never generate the fees options do.
Wall Streeters also don’t want competition. Warren Buffett uses warrants as one of his biggest profit tools. Jeff Bezos has a secretive investment arm within Amazon that often buys warrants.
They’d rather not have competition. There’s no reason to tell you and me about these incredible investments.
I’ve worked closely with Wall Street and secured investments from multiple billionaires over my career. If you don’t believe they keep financial secrets, well… I can prove it.
Four Common Tricks Wall Streeters Use
Here are four other common Wall Street tricks you’ve almost certainly never heard of.
1) Private deals do not level the playing field.
Private deals have been one of the biggest steps in democratizing finance. New regulations allow regular investors access to pre-IPO companies.
It’s true that big investors love pre-IPO investments. These can be uber-profitable when the private company eventually hits the stock market and more investors pile in.
These private deals often involve hold periods. Pre-IPO investors are restricted from selling their stock for a certain timeframe.
This is supposed to ensure that no one gets an advantage selling ahead of anyone else.
Big investors, however, have ways around this. Even before they’re technically allowed to sell their stock, they’ll simply “short” the company.
Shorting is when you borrow shares and sell them – promising to pay back those shares in the future.
Borrowing and selling like this, big investors lock in their profits before everyone else does. Then they simply wait till the restrictions on their original stock come off – and use that free-trading stock to pay back the shares they borrowed weeks before.
2) A billionaire buying stock isn’t always a good sign.
I recently contributed assets to a private mining and technology company. Initial shares in the company were financed at 10 cents.
Recently, one of the most prominent billionaires in the business agreed to finance the company at 90 cents. The valuation was high. But investors took heart that such a high-profile investor put his own cash in at that level.
This investor did indeed buy shares at 90 cents. But he’d also participated in earlier, cheaper financings in the company. If you average the cost for all the shares he bought, it was well below 90 cents.
By helping underpin the latest financing – and supporting the company’s high valuation – he likely made himself a double or better on his overall stock position.
Seeing a billionaire involved with a company is usually a good sign. But you need to look at what they actually paid for their stock – and what you’re paying.
3) Everything is manipulated, even the “facts.”
Many investors believe a company’s financial statements represent the “cold, hard facts” about a stock. Regular investors largely rely on financial statements for information. They don’t have access to site tours or CEO calls.
But nearly every single line item in a financial statement can be manipulated.
I knew an accountant who ran an overseas branch of a huge firm. His office consistently showed profits – even when everyone else globally ran in the red.
It was just creative accounting. He’d figured out a way to game exchange rates so that he could always report a profit – no matter what happened in the underlying business.
Another friend of mine in the accounting business always used to say, “Profit is an opinion. Cash is a fact.” The only important line for most financials is the cash in the bank – although even that can be finagled.
4) Sophisticated investors demand warrants.
You might have never heard of warrants. But the world’s top investors use them constantly.
When I negotiated financing for my companies, warrants were often the first talking point. The billionaire investors basically said, “No warrant, no deal.”
Warren Buffett, Jeff Bezos and Amazon, Carl Icahn, and the Koch Brothers. All of them use warrants. Buffett’s Berkshire Hathaway admitted this (quietly) in their most recent financial statements:
Major investment banks like JPMorgan and Goldman Sachs often receive warrants when they finance public companies.
Every special purpose acquisition company (SPAC) created today comes with warrants attached for early investors. These SPACs are created by Wall Street insiders – and they demand warrants for a big payday.
And that’s where we can grab the same advantage.
With SPACs gaining popularity, there’s a growing universe of warrants. They’re all listed on public exchanges. They’re easy to buy with a single click, even from most discount brokerage accounts.
All you need to know is where to look.
I’ve recently recorded a briefing to share with you all for an inside look at the secretive world of warrants.
So check it out here. At the very least, you’ll learn something none of your neighbors know. And at the most, you might change your life using this “billionaire’s secret.”
Keep walking the path,
Editor, Strategic Trader
P.S. I’m giving my dedicated Casey Research team the next few days off to spend and enjoy with their families. We hope you all have a wonderful Christmas weekend.
Look forward to next week… we’ll be back on Monday with a series of Casey Research founder Doug Casey’s best wealth-building essays.