You'll Want to Own This When Today's Bubble Implodes

Editor's note: The "Melt Up" is still in full swing… And recently, my friend and colleague Porter Stansberry made a discovery that can help you find triple-digit winners as the bull market continues. Plus, it could work even better when the boom times are over. Today, he'll explain the basics of this idea. And he'll share how you can attend a special event, broadcasting everything you need to know live tonight…
 
It's a familiar story to anyone who knows much about financial history…
 
In the decade or so following the greatest spree of money printing and credit growth in history, we witnessed a tremendous bubble in financial assets.
 
This bubble saw interest rates on government bonds plummet as bond and stock prices soared.
 
It saw financial innovations no one had ever thought of before, including new ways to organize capital and banking systems.
 
It even saw the emergence of new currencies, which soared in value, creating an entirely new class of wealth.
 
Most people had no idea what to make of all of these new financial innovations. They couldn't believe how much wealth was being created. And in the days following a national holiday, huge crowds of investors stampeded to join in this new financial revolution.
 
Everyone would soon be rich!
 
Obviously, I (Porter) am describing the most famous financial bubble of all…
 
The South Sea Bubble started in 1716, when a degenerate Scottish gambler, John Law, convinced France's bankrupt king (Louis XV) and his regent (the Duke of Orléans) that he could solve their financial crisis by printing a little money.
 
Not to worry, John explained – these new bank notes would be backed by gold and silver held at a new central bank, the Banque Générale. The bank could then lend the government money (at more favorable interest rates) and thereby increase the amount of money in circulation.
 
Like a modern-day economist, Law explained that this new money would have a "multiplier effect," increasing aggregate demand, stimulating growth in gross domestic product and leading to new tax revenues. The positive effects of all this new money and credit would far outpace the negative risks (inflation and soaring debt payments). "You'll see," he promised.
 
The following year, Law created the Mississippi Company… or, as it was called in French, the Compagnie d'Occident (which translates to "the Company of the West").
 
This company was granted a royal monopoly on trade with Louisiana and Canada for 25 years. And here's the key to understanding the swindle: Its shares could be purchased using the newly issued bank notes.
 
In 1718, the company's charter was expanded to cover tobacco trading with France's colonies in Africa. And so, as Law's bank created more and more paper money, that new money then flowed directly into shares of the Mississippi Company.
 
Law had performed a financial miracle: He had turned the inflation caused by printing money into a positive force for the French economy. Commodity prices didn't rise – share prices rose instead. This was a kind of inflation that made people feel richer, instead of poorer.
 
What happened next?
 
The apparent success of the swindle – I mean, the new bank and the Mississippi Company – led to even greater prestige and power for Law and the Banque Générale.
 
In 1718, the bank was given a royal charter and a new name: Banque Royale. With this new status, the king guaranteed the bank's deposits and the bank began to handle all of France's tax collection.
 
Just imagine if Google's parent company Alphabet (GOOGL) was also the Federal Reserve, and you could buy shares in it. That's essentially what Law had cooking.
 
Shares in the Mississippi Company were trading at around 500 livres tournois in 1719 when Banque Générale received its royal backing. By the end of the year, they were trading for 10,000 livres, an increase of 1,900%.
 
The incredible gains were so appealing – thousands of people had become millionaires in only a few months – that people from all over France and from all walks of life lined up in front of the bank trying to buy shares in the Mississippi Company. They could do so in cash or, even better, by making a small 10% down payment on a French government bond, which could then be exchanged for shares.
 
You'll never guess what happened next…
 
A small move down in the price of the bank's stock led investors to sell and lock in their gains. As the selling pressure grew, more and more investors demanded gold for their shares.
 
Law, who by then was an acclaimed financial genius, had been appointed France's treasury secretary. To stem the flood of gold out of the Banque Royale, he converted the bank's paper money into legal tender… It could be used to pay all debts and taxes, even where contracts stipulated payment in gold. He further agreed to exchange his bank's notes for shares in the Mississippi Company for their previous high price of 10,000 livres.
 
But as you know, once a great monetary illusion has been shattered, you can't put it back together again…
 
By refusing to allow his bank notes to be exchanged for gold, Law was proving that his scheme wasn't stable and wouldn't last. Soon, the inflation he had engineered was flowing into commodities that could still be exchanged for notes, like food.
 
Inflation soared by 23% in January 1720 and continued to rise. More and more investors wanted out of the Mississippi Company's shares. Bank Royale could no longer afford to pay 10,000 livres, because of the resulting inflation of food prices.
 
By September, the price was down to 2,000 livres… then 1,000 in December. By the next year, they were trading at 500 livres again – right where the bubble had started.
 
About 80 years later, the U.S. would buy Mississippi (in the Louisiana Purchase) for about $3 million in gold and another $12 million in bonds – or about $0.04 per acre. In today's dollars, that's about $309 million.
 
Of course, this all happened a long, long time ago…
 
In the modern world, it's unlikely that millions of people would fall for such a swindle. After all, we have knowledge of history. We know that paper money always fails. Sooner or later, all attempts to create huge new amounts of money and credit (in excess of savings) will lead to big increases to commodity prices.
 
The idea of a "monetary multiplier" is as dumb as believing that you can create more pizza by slicing it into more pieces. But everyone knows that now.
 
And who in this day and age could be so foolish as to fall for a brand-new currency, made up out of thin air – and then buy it after it has appreciated by 10,000-fold?
 
Nobody would be that dumb anymore.
 
By the way… when our current bubble implodes, one of the things that will do well are solid, well-financed businesses.
 
All the money won't flee into gold and commodities. If you can remember the tech bubble of 2000, you'll recall that "value" stocks returned to favor in 2001 and 2002 even as most stocks did poorly.
 
My research team and I have been spending a lot of time trying to figure out an accurate indicator to know which deeply discounted stocks are the most likely to do well. We've found a surprising indicator. I hesitate to even tell you about how well it performs. I fear that you won't believe me. And I'm also worried that if too many people know about this secret way of looking at stocks, it will make these opportunities even harder to find.
 
But this is real…
 
And even though it works across all kinds of market conditions, I suspect it will work best as the current mania for bitcoin and "FANG" stocks fades.
 
We're hosting a free webinar tonight at 8 p.m. Eastern time to cover what we've found in detail. But for now, I just want to show you one part of our research.
 
We used our indicator to look at the entire retail sector – including stocks in companies like JC Penney (JCP), which is probably going bankrupt. As you know, the retail sector has been hammered as investors have piled into shares of online retailer Amazon (AMZN).
 
But Amazon isn't going to put every other retail company out of business. Some of these firms will survive. And at these levels, the survivors could see their share prices double or triple next year.
 
Can our indicator help us figure out which ones to buy?
 
At our Stansberry Conference in late September, we presented the following list of stocks to attendees in Las Vegas. These were the seven retail stocks our indicators told us should rebound. We haven't left any out. Surprisingly, JC Penney was on the list. (We disagree about that one.)
 
We haven't included the other names here, but we'll show you the full list tonight during the webinar…
 
Company
Return Since Vegas
Annualized
JC Penney (JCP)
-12%
-62%
Company 2
32%
160%
Company 3
45%
224%
Company 4
35%
175%
Company 5
-11%
-54%
Company 6
20%
99%
Company 7
17%
86%
Average
18%
90%
Here's the point: On average, as of this Monday, these stocks have gone up 18% since our presentation. That's a return of 90% on an annualized basis. Only two stocks didn't go up. One – JC Penney, which we wouldn't have bought – is down 12%. The other is down 11%.
 
This is only a small demonstration of how this unusual indicator works. But we've tested it over several years and across all different sectors of the market. It works so well for one very logical, fundamental reason: It shows us the companies that have far stronger businesses than the market realizes. It shows us the anomalies across huge numbers of companies.
 
Trust me, no one else is doing this kind of research anywhere.
 
We'll explain how it all works tonight at 8 p.m. Eastern time. Please join us. Save your seat here.
 
Regards,
 
Porter Stansberry
 
Editor's note: Tonight, Porter will show you how this discovery could get you into every single stock that rises 100% to 800% during the next phase of this bull market. He'll even tell you about the top two stocks he recommends you buy right now. The best part is, you don't need any specialized skills to use this strategy… All you need is the ability to buy an ordinary stock. Click here to reserve your spot.

Source: DailyWealth

'Melt Up' Update: ALL CLEAR Again

 
"The First Threat to My 'Melt Up' Thesis Is Here," I wrote in DailyWealth last month.
 
I'm watching five specific early warning indicators for the "Melt Up" – the last explosive stage of this bull market. These indicators will let me know in advance when the Melt Up is on its last legs.
 
Since I first published those indicators in my True Wealth Systems letter, none of them was ever a threat. All of them were "all clear."
 
But last month, that changed…
 
I shared one of those indicators with you here in DailyWealth – a specific move in shares of transportation companies (like railroads).
 
You see, transportation stocks thrive when the economy is strong and goods are moving from place to place. When the economy slows down, transports are one of the first places it shows. It's an early warning sign for the stock market… like a canary in a coal mine.
 
Last month, I wrote:
 
You probably know that the overall stock market peaked in 2000. But you probably don't know that transportation stocks peaked in May 1999 – long before the overall market did.
 
The same thing happened in 2007. The overall market peaked in October 2007. But transportation stocks peaked months earlier, in July.
 
Today, we're seeing the first sign of underperformance in transports.

At the time, I was specific in my advice. It was the first sign of weakness… But it wasn't the end. As I said then:
 
While underperformance in transports is a good early warning sign, it's not a sell signal…
 
First, this is just one of the five indicators. Secondly, transports could still turn around and hit new highs, wiping out this short-term concern. And lastly, the overall market has typically peaked months after this early warning signal flashed.

Today, I'm pleased to report that we are back to "all clear" on this indicator. Transportation stocks have now broken out to new highs. Take a look:
 
In short, the threat I wrote about a month ago is now fully behind us. Transports are healthy today.
 
My goal is to maximize your gains in the Melt Up – with minimum risk. Early warning indicators like this can help us identify when the top is getting close. Based on this one indicator, we're not there yet.
 
This is only one of five early warning indicators that I follow in my True Wealth Systems newsletter. The next issue comes out this Thursday. In it, I'll update subscribers on all five of our indicators.
 
Check out the upcoming issue to find out what they say…
 
Good investing,
 
Steve
 
P.S. My True Wealth Systems readers know exactly what to look for – all the signs that show when the Melt Up will end. While it wouldn't be fair for me to share all five indicators here, you can sign up to read all about them in the Thursday issue… Plus, you'll receive all my exclusive True Wealth Systems research to help you profit safely in today's market. Click here to learn more.

Source: DailyWealth

Join Me at the Stansberry Winter Conference

 
I can't wait…
 
We'll meet the world's best investing minds… and we'll have a ton of fun together.
 
Space is limited to just a few dozen attendees. So it's as personalized as any experience we ever offer. It should be just great…
 
I'm talking about the Stansberry Winter Investment Conference, happening February 4-9 at Rancho Santana, Nicaragua.
 
A few things right up front:
 
•   This event will certainly sell out from this write-up. So reserve your spot immediately if you are interested.
 
•   We will have an AMAZING time… It might be the most fun you'll ever have at an investment conference.
I'm your host. So I set the agenda…
 
In short, we'll talk investing on most mornings – with some of the world's best investors. And we'll have a ton of fun in the afternoons.
 
Some of my favorite investors will be featured speakers in the morning sessions – including my good friend Meb Faber…
 
Meb, to me, is one of the most original thinkers on Wall Street. He's the chief investment officer of Cambria Investment Management and the host of the excellent podcast The Meb Faber Show. He's someone that I look to when I'm searching for original investing ideas.
 
Always-interesting hedge-fund manager Carlo Cannell will speak… And so will my colleague Austin Root. Before joining us at Stansberry Research, Austin worked for investment-management firms Soros Fund Management, SAC Capital Advisors, and a hedge fund backed by Julian Robertson's Tiger Management.
 
In short, the quality of the investing insights you'll hear will be as good as it gets – no kidding.
 
And if you want to talk politics, Buck Sexton will be there – co-host of the fantastic podcast Stansberry Investor Hour, and host of the radio show America Now.
 
These guys will join us when they can for the afternoon fun, too…
 
One day we'll have surfing lessons, in an ideal spot for you to try surfing for the first time. You probably know surfing is a huge passion for me. I'll be out teaching lessons with other speakers, Stansberry employees, and local pros.
 
If you don't want to surf, of course, you're welcome to enjoy everything Rancho Santana has to offer. Hang out by the pool, go horseback riding, go into town, play golf – you name it!
 
Lastly, we have an incredible music performance planned for the final evening – where I'll be showcasing my latest guitar adventures… playing with other musicians who have out-of-this-world talent. I can't wait. You can grab your favorite drink, take in the incredible sunset, and listen in if you'd like – or hang with your new friends.
 
Come for the extraordinary investing insights. Come to relax and get away from the cold. Leave refreshed, armed with new investing knowledge and some new experiences under your belt with some great folks.
 
It doesn't matter if you come for the investing knowledge, or for the fun. I guarantee you won't be disappointed either way.
 
The one thing I do urge you to do is contact us immediately if you are interested. This event will certainly sell out based on this essay.
 
You can find all the details right here.
 
I look forward to seeing you there,
 
Steve
 

Source: DailyWealth

Forget a Bear Market… The U.S. Financial System Is About to Be 'Reset'

The Weekend Edition is pulled from the daily Stansberry Digest. The Digest comes free with a subscription to any of our premium products.
 
 Oh boy, did I set off the "boo birds"…
 
A week ago, I (Porter) discussed a number of troubling warning signs that are emerging and that could emerge next year. I wrote that investors should "start selling."
 
And that brought out the boo-birds. Here are a few of the more civil replies I received…
 
"Perhaps it's just a timing issue due to publication deadlines, but how do you rationalize the bearishness in Friday's Digest with this statement from Steve in Friday's issue of True Wealth? 'The great boom in stocks could continue to 2019 or even 2020. And the Fed – the usual cause of stock market crashes – should not cause the markets trouble in the near term.'" – Paid-up subscriber Chris D.
 
"Well Porter, you asked for it. You've been calling for the End of America, or the End of The World for a long time now. I have lost track of how many years you have been hollering 'Fire.' If you can't tell us what you recommend we do now, other than buy another subscription, could you please take a page from Dr. Steve's book and at least tell us what inning we are in, in this mess? – Paid-up subscriber Frank H.
 
"Bubble, no bubble… cryptos, no cryptos… park your money, bullish as hell… Blah, blah, blah. You play both sides and claim victory to whatever happens. You guys wear me out!" – Paid-up subscriber Neil C.

Lots of you pointed out that I've been bearish for a long time – which isn't exactly true. Plenty of other folks reminded me that our hedging strategy in Stansberry's Big Trade hasn't worked at all – which is certainly true. And virtually everyone wanted me to explain how I could write "start selling" at the same time that my colleague Steve Sjuggerud says the "Melt Up" will continue until 2019 or 2020.
 
So let me clarify what I wrote and explain what you should do about it right now.
 
Then let me show you why what happens to your portfolio over the next few years should be the least of your worries. Protecting your portfolio is easy. Protecting everything else won't be.
 
 So what's the problem?
 
For the first time since 2010, default rates on consumer loans are rising. This credit weakness is accompanying a general decline in transportation stocks.
 
These two leading indicators suggest weaker economic activity is likely next year. If this weakness continues, it could weaken gross domestic product (GDP) and earnings. Given the high premium on stocks right now, any decline in earnings could trigger a bear market (a decline of 20% or more in average stock prices).
 
Steve could be right. Stocks could simply continue to rise, despite deteriorating fundamentals. Stranger things have happened before.
 
Nevertheless, I think it's wise to start planning for your portfolio to survive a decline next year – just in case. Steve doesn't.
 
So we disagree. That happens frequently when people discuss their opinions about the future. It's not a conspiracy. It's just both of us trying our best to serve our customers.
 
 But the issue runs deeper…
 
If that were all this issue was about – the fact that I'm cautious about stocks and Steve is bullish – then it wouldn't be a big deal. But the problem goes beyond two guys with different opinions about the stock market.
 
You see… what's powering Steve's Melt Up is a gigantic credit bubble, the biggest one yet. And I believe that when it finally collapses, the damage will go way beyond economic problems and a bear market in stocks.
 
The signs of these far bigger problems haven't emerged – yet. As I wrote a week ago, I believe they will emerge next year. I'm talking about an inverted yield curve (if the Federal Reserve keeps raising interest rates) and soaring borrowing costs for the federal government.
 
These two factors are incredibly important for investors to consider carefully because they will have a profound impact on the amount of credit that's available and the cost of that credit.
 
As interest rates on the government's bonds increase, that debt will become more expensive, taking a larger and larger share of the government's spending. That will reduce what the government can spend elsewhere. And even more important, it will make government debt progressively more competitive with other kinds of credit, like consumer debt and corporate debt. That will make capital more expensive to borrow across our entire economy.
 
 Our economy hasn't seen any significant increase to capital costs since 2008…
 
Even the briefest increase to capital costs in late 2015 saw yields on junk bonds soar to more than 10% and caused the stock market to decline by almost 10%.
 
If that happens again next year, I'm absolutely certain the damage will be much, much worse.
 
Why? Because we're much further along in the credit cycle. An enormous amount of credit comes due in the corporate bond market between 2018 and 2020 – more than $1 trillion in speculative-grade credit alone.
 
 And something bigger is at stake now, too…
 
Our entire financial system (and our way of life) has become addicted to cheap and ever-expanding credit.
 
Since September 2010, when nonmortgage consumer credit bottomed at $2.5 trillion, it has rebounded at its fastest pace ever. Today, Americans owe $3.7 trillion in outstanding consumer credit. That's $1.2 trillion of additional consumer spending, created out of thin air (not savings) in just eight years.
 
During the same period, the federal government increased its debt from $14 trillion to more than $20 trillion. Just think about that number… Our government borrowed an additional $6 trillion in less than a decade.
 
Does that seem wise?
 
Does that seem sustainable?
 
What do you think will happen when these debts come due?
 
What do you think will happen when the people who depend on government transfer payments realize there's nothing behind the "curtain" except for a bankrupt old wizard?
 
And how long do you think those tax cuts are going to last (if they are even passed) if our government's borrowing costs soar?
 
Finally, while individuals and our government have been on an unprecedented borrowing and spending binge, corporations, which have been offered unlimited amounts of essentially free capital, have also been borrowing and spending like never before. Total outstanding nonfinancial corporate debt has doubled since 2005, from around $3 trillion to more than $6 trillion, with most of the growth coming from noninvestment-grade borrowers.
 
Like our government, corporations have borrowed more in the last decade than ever before – more than a 100 years' worth of debt has been issued. And almost all of it went to either buying other companies or buying back shares.
 
Does that seem wise?
 
When you put all of these numbers together, you'll see that we've borrowed something on the order of $20 trillion in just the last eight years. That's more than our entire GDP!
 
 So… what happened?
 
Stocks have gone way up. (Shocker.) Look at how much borrowed money was used to fund share buybacks.
 
Bonds have gone way up. (Shocker.) The Federal Reserve printed $3 trillion and manipulated interest rates to essentially zero. Other central banks around the world followed… pushing rates lower and lower… and in some cases, below zero.
 
All of this debt and manipulation caused demand for financial assets to go bonkers. This demand has reached a never-seen-before level so high that an unknown computer programmer successfully created a new financial asset: cryptocurrency.
 
It's a currency without an issuing country and a tax base. It offers investors precisely nothing. It's like paper money, without the paper. It's not an "IOU nothing" like the dollar, the pound, or the euro. It's a "who owes you nothing"… And this cryptocurrency asset class is now worth almost $200 billion.
 
Does that seem wise?
 
But what about real economic growth? What about real increases to wages? What about gains in our standard of living?
 
Well, despite this enormous tidal wave of debt and spending, Barack Obama was the first president to ever witness a complete term in office without even a single year of growth in excess of 3%. Wages, in real terms, haven't budged.
 
And you know why that didn't happen: The money wasn't earned. It's not real. And it wasn't invested in expanding our productive capacity (in most cases). It was spent on financial assets. It was spent on consumer items and wars.
 
Some of our subscribers are upset or confused because they believe we're not offering them a consistent view of the world. It has never occurred to them that the forces driving Steve's Melt Up thesis are the same exact forces that I'm writing about here.
 
Steve sees the massive boom all of this new money and credit has created. He has done a brilliant job showing our subscribers how to take advantage of it.
 
 I'm focused on what these obligations will do to our markets and our country in the long term…
 
But that doesn't mean I haven't helped a lot of people do well during the bubble, too. Folks who say I'm bearish must not have read any of my newsletters over the last decade. I've been 90% long and have recommended a slew of our biggest winners, including both e-commerce firm Shopify (SHOP) and online retailer Overstock (OSTK).
 
So please… don't pretend that you can't both consider the risks we face and make money while the sun shines.
 
Anyone who wants a universal, coherent view of how to order their affairs in light of these risks and opportunities can simply review The Total Portfolio in our Stansberry Portfolio Solutions product.
 
I manage The Total Portfolio. Look there and you can see exactly what "start selling" means for investors.
 
We've put a lot of capital into precious metals and short positions. We've increased our cash position. And we own a lot of safe, "ride the storm out," fixed-income investments. We've also sold down some of our big winners.
 
This has cost us a little bit in terms of total return. We're now trailing the stock market by maybe a percentage point. But we're still making great returns for investors, with far, far less risk and volatility.
 
So if you're looking for a solution, there it is. It's all right there in black and white.
 
But heck, what fun is that?
 
If we told you exactly what to do, down to the number of shares to buy in each position – and if that portfolio kept pace with a roaring bull market, while keeping about 40% of the portfolio in either fixed income, hedges, or outright short positions – then what could you complain about when I write such scary warnings about the future?
 
You'd think of something, I'm sure.
 
 You're not getting it…
 
Look, friends… you're sitting there thinking about your portfolio. You're worried about your money… worried about earning a return… worried about keeping pace with your neighbors… worried about leaving something for your kids.
 
But you're asking all of the wrong damn questions.
 
By a mile.
 
You aren't getting it, even though you just read the essay I wrote a week ago… And even though you're reading this right now. You just aren't getting it.
 
I didn't write that essay to get you prepared for a bear market. A bear market is nothing. It's no big deal. If you follow your stops and you're hedged at all, you'll be fine. The downturns we saw in 2000-2002 in tech stocks and 2008-2009 in most stocks were as bad as bear markets get.
 
We survived both, handily, in my newsletter. We made money in 2002 by shorting. And we broke even in 2008 by shorting and buying near the bottom. We can handle a bear market. It's no big deal. A bump in the road for most people, a great buying opportunity for some.
 
If those bear markets hurt you, it's probably because you were far too concentrated in a few risky stocks. Just don't make that mistake again and you'll learn not to fear bear markets at all.
 
It's not an eventual bear market in stocks that I'm writing about.
 
 
It's something like you've never seen before. You've never seen what happens when millions of people can't possibly pay their bills. When thousands of companies can't refinance their debts. When confidence in our financial system, our government, and our way of life evaporates overnight.
 
I'm not talking about a bear market. I'm talking about a compete "reset" of our financial system. It's the only way forward – the debts we've racked up over the last decade can't possibly be repaid.
 
Did you read what I wrote above? We've borrowed $20 trillion in less than a decade.
 
We've spent the money on a bunch of stupid stuff – wars, share buybacks, worthless college degrees, inflated medical care, and lots and lots of drugs.
 
The bill is coming due. And there's no way it can be paid back.
 
So whose pound of flesh is going to be roasted? That's the question you should be asking.
 
By the way, we'll begin to see all kinds of other warning signs. Rising short-term interest rates and an inverted yield curve? That's nothing compared to what else is going to happen next year.
 
Think about big defaults on consumer-loan securitizations hitting at the same time the corporate high-yield market freezes up because no credit is available for noninvestment-grade borrowers. That's what's going to happen.
 
How do I know? Just look at the numbers: U.S. speculative-grade companies owe $1 trillion before 2021. There's zero chance this debt can be paid off or refinanced if there's an inverted yield curve.
 
And that's why all of those firms are scrambling right now to finance these debts.
 
Just watch the current efforts by hospital owner Community Health Systems (CYH) to avoid defaulting on its $15 billion debt load. And remember, the company has no significant maturities until late 2019.
 
Think about that.
 
When businesses that own assets as highly regulated and noncyclical as hospitals can't get new funding, what will happen to real free-market companies with declining sales and huge debts? Just imagine.
 
As my friend Grant Williams, who writes the financial newsletter Things That Make You Go Hmmm, did a great job explaining… We've been living in a world of pure imagination.
 
Just about everything seems great when you're in the midst of spending $20 trillion worth of "funny money." But how do you think it's going to feel when we have to pay it back?
 
The whole structure will come unraveled because we can't possibly maintain the current value of financial assets.
 
But you don't have to believe me… Just watch.
 
Good investing,
 
Porter Stansberry
 
Editor's note: The upcoming "Debt Jubilee" is going to wreak havoc on the U.S. financial system. The savings of millions of unsuspecting Americans will be wiped out. But you don't have to be a victim…
 
Porter just published a brand-new book, The American Jubilee. In it, you'll learn all about the 50 most dangerous companies in America today… the one financial asset you need to survive the next crisis… a critical move you absolutely must make in your bank account… and much more. Get your copy right here.

Source: DailyWealth

How to Be Wrong Half the Time… And Still Make Money

 
Let's play a game…
 
We're going to bet on 100 coin tosses… Heads, we win $100. Tails, you win $100. And at the end of the game we'll settle up. How do you think you'll do?
 
You might win or lose a little… But with 50% odds on each toss, you'll likely break even.
 
Of course, this game isn't very exciting. So let's change it up…
 
This time, we'll flip our "lucky coin," which lands on heads 70% of the time. We tell you this… And because of our advantage, we offer you a better payoff…
 
When the coin lands on heads, we still win $100. But when it lands on tails, you win $300.
 
Do you want to play?
 
A lot of folks would hesitate. A 70% chance of losing is a difficult pill to swallow.
 
But in the immortal words of investing legend George Soros: "It's not whether you're right or wrong that's important, but how much money you make when you're right – and how much you lose when you're wrong."
 
Today, we'll dig deeper into this idea. And we'll show you what it could mean for your long-term trading results…
 
Let's get back to the second round of our game – the one with our "lucky coin"…
 
Not surprisingly, the coin lands on heads 70 times, and it lands on tails 30 times. So you lose 70 tosses at $100 each, for a total of $7,000 in losses. And you win 30 tosses at $300 each, for a total of $9,000 in gains. All said and done, you walk away with a $2,000 profit… even though you won just 30% of the time.
 
Your likely hesitation to play this game demonstrates a mental error that traders often make… They only want to put on a trade when they have a great chance at making money. But that's not always the right decision…
 
Just like in our coin toss example, you can make excellent returns even if you're wrong more than half of the time… as long as you keep your losses small.
 
Consider this idea with a trading portfolio…
 
Let's say we have a $100,000 portfolio and we put $5,000 (5%) into each trade. If any trade drops 10%, we'll take a loss and move on. And we'll take profits on any trade that hits a 20% gain.
 
In the table below, we'll look at a summary of the results, after 100 trades, based on different win rates…
 
In the first column, you can see win percentages from 0% (taking a loss on every trade) to 100% (profiting on every trade). The next two columns show what your total gains and losses would be at that win percentage. And finally, the last two columns show the value of our account after the 100 trades and our overall percent return.
 
Win Rate
Gains
Losses
Account Value
Return
0%
$0
$50,000
$50,000
-50%
10%
$10,000
$45,000
$65,000
-35%
20%
$20,000
$40,000
$80,000
-20%
30%
$30,000
$35,000
$95,000
-5%
40%
$40,000
$30,000
$110,000
10%
50%
$50,000
$25,000
$125,000
25%
60%
$60,000
$20,000
$140,000
40%
70%
$70,000
$15,000
$155,000
55%
80%
$80,000
$10,000
$170,000
70%
90%
$90,000
$5,000
$185,000
85%
100%
$100,000
$0
$200,000
100%
Of course, in a real portfolio, you're not going to lose exactly 10% on every loser and make exactly 20% on every winner. But the idea is what's important here…
 
By using this strategy, you would make a 10% profit even if you only win 40% of the time. And if you're better at selecting trades – with a 50% or 60% win rate, for example – your returns would soar.
 
Now, that's using a 2-to-1 reward-to-risk ratio (making 20% while risking 10%).
 
But if we let our winners ride, we can do even better…
 
We'll use the same portfolio as before, but this time, we'll close out our trades at a 30% gain, instead of 20%…
 
Here's the table of our returns, at different win rates, with this new strategy…
 
Win Rate
Gains
Losses
Account Value
Return
0%
$0
$50,000
$50,000
-50%
10%
$15,000
$45,000
$70,000
-30%
20%
$30,000
$40,000
$90,000
-10%
30%
$45,000
$35,000
$110,000
10%
40%
$60,000
$30,000
$130,000
30%
50%
$75,000
$25,000
$150,000
50%
60%
$90,000
$20,000
$170,000
70%
70%
$105,000
$15,000
$190,000
90%
80%
$120,000
$10,000
$210,000
110%
90%
$135,000
$5,000
$230,000
130%
100%
$150,000
$0
$250,000
150%
Now, we've improved our breakeven win rate to less than 30%…
 
With a 3-to-1 reward-to-risk ratio, we can lose money on 70% of our trades and still make a 10% profit.
 
As your reward-to-risk ratios get bigger, your win rate can get smaller… And it won't have a negative impact on your trading.
 
Here's what you should take away from all of this…
 
Don't ignore trading ideas that have enormous upside potential just because the chances of success aren't great. As long as you limit your losses and let your winners ride, you don't need a great win rate to make a lot of money.
 
Some of the best trades of your life may come from ideas that you didn't think would work out… but because you thought about the reward and the risk, you placed the trade anyway.
 
Keep this in mind the next time you're considering a trade. It could mean the difference between a mediocre and fantastic year in the markets.
 
Good trading,
 
Ben Morris and Drew McConnell
 
Editor's note: Ben and Drew recently shared a trade with as much as eight times upside versus the risk. This opportunity is in one of the strongest economies in the world… And with today's high valuations, it's a rare opportunity to capture big, safe gains. To learn how to access this trade with a risk-free trial of DailyWealth Trader, click here.

Source: DailyWealth