On Tuesday, we talked about the first thing to do when facing a sell-off.
Today, we’ll discuss the second thing — and while it’s less simple than holding onto cash, the profit potential in this next move is the offensive counterpart to cash’s defense.
Here’s what I mean…
Have you ever played “Whack-a-Mole?” That’s one of the arcade games you usually find in those dreary “game centers” that cater to deafening hordes of young kids.
The objective of “Whack-a-Mole” is simple: To whack a mole. In fact, you’re supposed to whack every little robotic mole that pops its head out of the game’s playing surface. The more moles you whack, the higher your score.
Many investors play a similar game; they try to whack risks out of their portfolio the moment they see them. The game takes on greater urgency when stock prices are falling. But here’s the thing: risk and reward are part of the same financial organism; they are the same “mole.”
When you whack-a-risk, you also whack-a-reward.
Therefore, over time, one of the best ways to reduce risk is not to whack it, but to embrace it… selectively.
As investors, we do not want to embrace every risk that saunters past us; we only want the ones that offer a large measure of potential reward for every unit of risk we assume.
The risks that do not offer this sort of lopsided, or asymmetrical, reward potential are not deserving of our capital.
Megatrends Lead the Charge
Megatrend stocks often offer asymmetrical reward potential. A megatrend stock is one that draws its strength from an unusually powerful mid- to long-term trend.
The shares of a particular copper producer, for example, might draw strength from a powerful commodity bull market, also known as a Commodity Supercycle.
Another example would be a stock like Lululemon Athletica (NASDAQ:LULU) that has been spearheading a multi-year yoga — and yoga fashion — obsession in the U.S. and Europe.
Thanks to that obsession, LULU shares have skyrocketed more than 4,000% during the last decade.
The more powerful a megatrend might be, the more likely the stocks at the heart of that trend will produce explosive gains, even if the overall market is struggling.
Megatrend stocks do not automatically follow the stock market’s day-to-day price action; they produce their market-trouncing gains by charting an independent course that is not closely correlated with the S&P 500.
That’s why investing selectively in megatrends can increase the odds of success… even if your timing is less than perfect.
Stock market history has shown us repeatedly that stock market highs are rarely the best time to buy stocks. And as I write this in late 2021, the S&P 500 is trading near all-time highs.
Timing is certainly important, but it isn’t everything.
The investment gains that can accrue from buying into a megatrend at the worst time can be astonishing.
Consider a few examples from the past.
Imagine, for instance, that you had purchased shares of Amazon (NASDAQ:AMZN) on Oct. 23, 2007, at what was then the stock’s all-time high.
That investment would have produced a 100% gain within four years, 500% within eight years, 1,000% within 10 years… and a gain of more than 3,000% if you had continued holding those shares until today — or 11 times the return of the S&P 500 index over that time frame.
Admittedly, the path toward this grand investment success would not have been a straight line. Within one year of making this hypothetical purchase, your Amazon shares would have plummeted 65%… and two years after your purchase, you’d still be underwater.
In other words, your timing would have been less than ideal.
But if you had dumped your investment in this iconic company to save yourself some near-term pain, you would have missed the opportunity to capitalize on the online retailing megatrend that powered Amazon’s stock to such a spectacular long-term gain.
Netflix (NASDAQ:NFLX) subjected investors to similar big losses before going manic. Anyone who purchased the stock at its 2011 peak would have suffered an 80% shellacking over the next 12 months and would have still been nursing a loss two long years later.
But an investor who stayed the course with this play on the “screentime entertainment” megatrend could have reaped a 200% gain within four years, 500% gain within seven years and 1,300% gain within 10 years — or four times better than the S&P 500’s gain over the same period.
Remember, these are the results an investor could have achieved from buying Netflix stock at one of the very worst times! Most investors would have purchased their Amazon or Netflix shares at more favorable moments and would have captured even more spectacular gains.
Even legendary stocks like Apple (NASDAQ:AAPL) can inflict pain on shareholders for long stretches of time. Imagine the investor who purchased Apple shares on June 29, 2007, the day the first iPhone went on sale in the U.S.
18 months later, the shares of this transformational technology company would have rewarded our hypothetical investor with a 35% loss.
But despite that dismal start, investors who purchased Apple shares on the day of the initial iPhone launch — the start of the smartphone megatrend — could have captured a 100% gain within three years, a 500% gain within eight years, and as much as 4,000% if they were still holding their stock today.
Obviously, I cherry-picked these success stories. But I could just as easily have selected examples from my personal history.
The Newest Megatrend: 5G
Even though 5G was a big deal when it was first introduced a few years ago, many investors have just kind of forgotten about it.
But what they don’t realize is that 5G on the cusp of a massive growth wave… The numbers tell the story the major financial media — and the majority of investors — are ignoring.
Start with the fact that there were only 212 million 5G smartphone subscriptions in 2020 worldwide. As this chart shows, that number is expected to nearly triple in 2021, and then go on to grow 10X larger by 2024.
That kind of hypergrowth can unlock tremendous investing opportunities — and even though we’re in the first inning of the 5G ball game, so to speak, it is amazing how many investors are more interested in cryptos, meme stocks and other such “trendy” speculations.
Keep in mind, too, that the 5G rollout will not only produce a 10X jump in data traffic on 5G smartphones — it will also lead to 5G autonomous vehicles, 5G environmental sensors, 5G thermostats, 5G security cameras, and so much more.
All of this imminent growth is gearing up to create a $56 trillion tsunami, of which we’re only just beginning to see the effects.
And at the helm of this movement are five companies I believe will soar to new heights over the next decade — I believe in them so deeply, in fact, that I’m giving away the name and ticker symbol of one of them for free.
The only way to get it is by viewing my 2021 Wealth Acceleration Summit.
Don’t be fooled by the title; while there are fewer than 90 days left in 2021, these 5G plays will power us through the next year, and the next, and the next…
P.S. Louis Navellier’s initiative, Project Mastermind, is programmed to find a unique set of stocks that could go up faster than any others — AND with minimal risk. Just one or two could help you see incredible gains. Get the full details on Project Mastermind here.
On the date of publication, Eric Fry did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Eric Fry is an award-winning stock picker with numerous “10-bagger” calls — in good markets AND bad. How? By finding potent global megatrends… before they take off. In fact, Eric has recommended 41 different 1,000%+ stock market winners in his career. Plus, he beat 650 of the world’s most famous investors (including Bill Ackman and David Einhorn) in a contest. And today he’s revealing his next potential 1,000% winner for free, right here.