Have you ever wondered how it is that some of the world’s top traders make so much money?
Many times, they take advantage of something called financial asymmetry.
To explain what this is, in today’s Thanksgiving weekend edition of the Digest, we turn to global investment strategist, Eric Fry, editor of The Speculator.
Eric’s experience with macro trends has helped him call nearly every significant market move of the past 25 years … and he’s made more stock recommendations that resulted in 1,000%+ gains than anyone we know in the financial newsletter industry.
Returning to today’s concept, as Eric writes below, “an asymmetric ‘bet’ is when the potential upside of a position is much greater than its potential downside.”
Looking at the market today, nowhere do we see more asymmetric-bet potential than in the technology sector.
Take the tech megatrend of 5G. Here’s Eric, detailing the scope of the opportunity:
In fact, Eric recently held a live event in which he detailed huge opportunities in 5G and other technologies. Click here to see a replay of the evening.
Bottom line, investors stand to generate life-changing wealth this decade through wise, asymmetric bets — many of which will come from the technology sector. So, in today’s Digest, let’s turn to Eric to learn how to find them.
Have a wonderful Thanksgiving weekend,
How to Use “Asymmetry” to Make Macro Millions
By Eric Fry
The Big Short was much more than an entertaining flick.
The 2015 movie told the story of how a small group of very smart traders saw the 2007 housing market crash coming.
Initially, their bosses, Wall Street, and the mainstream media mocked their warnings and analysis.
They were all wrong.
Despite astronomical efforts by the Federal Reserve and the U.S. Treasury Department, housing prices plummeted 32%. Stocks fared even worse, with the Dow Jones Industrial Average cratering 54%.
The 2007-’08 financial crisis was the worst global economic disaster since the 1929 crash, and it led to the Great Recession.
So, in a way, this small group of individuals was vindicated.
That’s nice — but vindication doesn’t pay the mortgage.
However, the billions of dollars these geniuses made by placing financial bets on the outcome — that does pay the mortgage … and then some.
Based on the best-selling book of the same name, The Big Short was a big hit, grossing $133.4 million worldwide. It was nominated for five Academy Awards, including Best Picture, and won Best Adapted Screenplay.
Moreover, it explained complicated financial concepts in ways that moviegoers could understand.
And did I mention it’s wildly entertaining?
But as good as it is, The Big Short completely missed the story’s most important, most useful lesson. It missed the opportunity to teach people one of the investing world’s most powerful concepts.
Maybe just one investor in 100,000 knows about this concept … and less than one in a million knows how to apply it properly.
But this concept is how The Big Short traders turned relatively small amounts of money into hundreds of millions — even billions — of dollars during the 2007-’08 crisis. These traders made returns of more than 10,000%.
That’s the sort of gain that turns every $10,000 into more than $1 million.
One investor in particular, John Paulson, used this concept to make over $10 billion for himself and his clients in what’s known as “The Greatest Trade Ever.”
That’s one of the biggest scores in market history.
As powerful as this concept is, however, you rarely see it mentioned in the mainstream media. They don’t teach it in business school. Wall Street certainly doesn’t want you to know about it.
But those who understand its power use it every day to generate incredible wealth.
I’m talking about financial asymmetry.
Let’s get started …
***Symmetry Is for Suckers
You probably learned about the opposite of asymmetry — symmetry — in grade school.
When the parts of something have equal form and size, they are said to be symmetrical.
For example, cut a square in half, and the two parts are symmetrical.
In many areas of your life, symmetry is attractive.
The more symmetrical someone’s face is, the more attractive they are. Symmetry can be pleasing in art and architecture.
But when it comes to the financial markets, experts avoid symmetry.
To put it bluntly, symmetry is for suckers.
That’s why the operators of exclusive hedge fund circles are obsessed with asymmetry.
That’s why the world’s best investors and speculators seek asymmetry in virtually every position they take.
An asymmetric “bet” is when the potential upside of a position is much greater than its potential downside.
If you risk $5,000 for the chance of making $5,000, you make a symmetrical bet.
But if you risk $5,000 for the chance of making $100,000, you make an asymmetrical bet.
Still, the vast majority of investors fall into the trap of making symmetrical bets in the stock market.
Most investors routinely risk 100% of their money in the pursuit of 100% returns.
Even worse, they risk 100% of their money in the pursuit of 50% returns.
Think about it … Many folks will buy a stock some “expert” touts as having “100% upside” — and they’ll be willing to ride the stock to zero if things don’t pan out.
One hundred percent upside.
One hundred percent downside.
Now, risking a dollar to make a dollar might sound fine. But intelligent speculators know there is a much, much better way to think about risk and reward … a much better way to tilt the odds in their favor.
An investment or trade with symmetrical risk/reward potential gives you horrible odds — the odds you’ll find in slot machines or in the bets drunken sports fans make between themselves.
Most people don’t understand why those odds are so bad, and it kills them in the financial markets.
The world’s best traders and investors almost never touch positions with symmetrical risk/reward profiles.
When I put my money to work, I look for opportunities where I can risk $1 for the real chance of making $5 … $10 … even $20.
Risk a little …
… in the pursuit of making a lot.
That’s the power of asymmetric bets.
Learn this concept — and how to use it — and you’ll reach higher levels of understanding and success in the markets.
You’ll “graduate” to market mastery.
It makes me furious so few investors know and apply this knowledge.
But those who do will have a massive advantage in life.
***In Any Asset … in Any Country … in Any Direction
Wall Street has sold investors on the idea they should start with “micro” analysis.
That’s the idea that they should make investment decisions by comparing things like price/earnings ratios, income statements, or other company details.
But I do the opposite.
I start with the “macro” analysis.
I look for big-picture trends that drive huge, multiyear moves in entire sectors of the market.
The type of trends that can spin off dozens of triple- and even quadruple-digit gains in a span of a few years.
It’s not an exaggeration when I say that catching just one of these trends — at the right time — can help anyone rack up millions of dollars.
When investors use the global macro strategy, they identify investment opportunities from a broad, global, top-down perspective, rather than by examining stocks one by one (a micro, bottom-up perspective).
Global macro traders dig up moneymaking opportunities by watching and going deep on interest rates, business cycles, disruptive technologies, stock valuations, geopolitical events, commodity price trends … and even further afield.
That means global macro opens us up to an abundance of wealth-building opportunities. Here are just a few “for instances” …
- The price trend of crude oil could prompt us to buy stock in an Australian transport company.
- Weather patterns in the American Midwest could make me want to short a Russian fertilizer producer.
- Changes in the Chinese economy could have us running out to pick up a Brazilian iron ore stock.
It’s the “butterfly effect” in action — everything is connected.
Compelling opportunities can emerge in any major financial market … and even some minor ones.
Throughout history the greatest global macro traders have made billions of dollars by trading any asset … in any country … in any direction.
During the financial crisis, John Paulson, the man I told you about earlier, personally made nearly $4 billion by using credit default swaps to bet against the U.S. subprime mortgage market …
In 2009, David Tepper believed the worst of the financial crisis was over for the U.S. banks. So, he took a big position in bank stocks and made more than $5 billion for himself and his clients as banks recovered …
In 1992, George Soros and Stanley Druckenmiller made more than $1 billion by betting against the British pound …
In 1991, Louis Bacon made an incredible one-year return of 86% by correctly anticipating the effects of the U.S. invasion of Iraq. He went long oil and made more money in one year than most people make in a lifetime …
In 1987, Paul Tudor Jones made an estimated $100 million by anticipating the Black Monday stock market crash and making bearish bets …
And in 2000, Sir John Templeton bet on the dot-com bubble bursting and made $80 million. As overpriced tech stocks began plunging, Templeton made a fortune.
I think there’s room for more names on that list.
***Where Can You Find Asymmetrical Trades?
A great way to place asymmetric bets is with options. But what if you don’t want to learn options? Or what if you want a longer time-frame for your trades to work out? In other words, you don’t want your option to expire?
I have your answer — how about a stock option that doesn’t expire?
That’s our nickname for shares of small, speculative companies. These companies typically have market caps below $500 million. That’s less than one-tenth of 1% the size of a large cap like Facebook Inc. (FB).
These companies are often new, speculative ventures. Others operate in deeply cyclical industries (like mining, oil, and airlines) that go through huge booms and busts.
Just like with options, speculative micro- and small-cap stocks represent a great way to place a small amount of money into an idea that could return many, many times your initial investment.
But unlike options, shares of stock in small companies don’t expire. You can hold such speculative positions for as long as you want and maintain that upside exposure as long as the company stays in business.
Because they have huge upside and no expiration dates, small, speculative companies are like “stock options that don’t expire.”
Small biotech and high-tech companies also come to mind here. These sectors tend to operate fairly independently of big-picture macroeconomic trends. Instead, they respond to company-specific successes or failures — in particular, the company-specific successes or failures of embracing transformational, disruptive technologies.
They disrupt the status quo. They change important aspects of societal behavior. In the process, such technologies can doom previously dominant companies, while also elevating microcap stocks to mega-cap success stories.
This is the type of investment that plays a prominent role in my Speculator portfolio.
I identify the transformational technologies that produce major winners and losers.
Disruptive technologies that transform human behavior also transform entire investment portfolios.
That’s all the time I have for today’s essay, but before we wrap up, ask yourself — what’s your approach to the markets? Are you making symmetrical or asymmetrical bets?
Some of Wall Street’s most successful traders have used versions of this strategy to make billions in profits in the span of a few years.
What’s your approach?