ESP Day 4: How small bets could turn into a fortune You could have made 70,000% by investing in ‘green beans’ Bitcoin works!
By Härje Ronngard in Albert Park Welcome back to your Extreme Small-Cap Profits email course. You’re now up to Day 4 of 12. If you missed my email yesterday, we talked about the market in general — small-caps, mid-caps and large blue chips. We also had a look at why it’s extremely difficult to become rich investing in blue chips. And that’s because it takes a lifetime for these stocks to move. Small-caps on the other hand are an amazing opportunity. They have far more volatility, but that’s the point. I also showed you how you could’ve beaten the market by 749% investing in small-caps. ..............................Advertisement..............................
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Today we’re going to look at how to approach small-cap investing. Specifically, we’re going to look at how to limit our losses. Not all small-caps are worthy investments. Some could be amazing. Others you’d be completely crazy to buy. And as you’ll learn, there are plenty of small-cap pitfalls. Some companies run out of cash before they can get products to market. Others are crippled by too much debt early on. It’s extremely important to know how to limit your losses before you start. That way, you might only have a few losses and far more investments that could rocket up 1,000% or more. Alright, let’s do it. Let’s jump into Day 4. Your crystal ball is as good as Buffett’s Will the market rise or fall in 2018? Institutions pay millions of dollars for an answer to this question. And why not? If they know what the market will do, they could potentially make a lot of money. But almost every investor will tell you no one knows what the market will do year-to-year. Paying for forecasts and estimates is simply a comfort activity. They give money managers confidence to make huge bets with money that’s not theirs. Yet even the big money knows to take forecasts with a grain of salt. Many who’ve been in the industry for years knows that there is no one super forecaster. Check out what this Wall Street analyst said in his article for Business Insider about working in the industry (emphasis added): ‘Fifteen years ago, when I was a Wall Street stock analyst, I initially assumed that there were smart people who actually knew what the market was going to do. For close to 10 years, I kept waiting to meet these people. ‘As I worked my way up the food chain, and gained more market experience myself, I began to realise that the smart folks I initially assumed knew what the market was going to do were wrong about the market just about as often as everyone else. ‘When I learned that, I assumed that I just hadn’t met the right smart people yet. So I kept working up the food chain. ‘And, eventually, when I became a famous stock analyst myself, I got to meet just about everybody, including some of the most legendary stock-market wizards in history. ‘And what I finally realised was that even these folks, as super-smart as they were, didn’t know what the market was going to do. ‘They were right about the market slightly more often than all the thousands and thousands of average smart people — and, importantly, they bet big when they thought the odds were very much in their favour. ‘But they didn’t know what the market was going to do.’ Many of the most successful investors, like Warren Buffett and Mohnish Pabrai, acknowledge they have no business in forecasting short-term market gyrations. But what does this have to do with small-cap investing? Limit your losses…literally No one has a crystal ball. No one knows which stock will go up guaranteed. You’re bound to have some losses from time to time. Maybe you got a bit over enthusiastic on the stock. Maybe you thought the company was heading in one direction when it stopped and went in another. If we know we’re bound to make losses some of the time, we can take action to reduce them as much as possible. One way to prevent losing your entire investment, is to employ stop-loss orders. These are orders that automatically sell a stock when it hits a certain price. For example, say you bought shares in furniture business Nick Scali Ltd [ASX:NCK]. You bought the stock at $7.15 per share. Let’s say we’re also not willing to lose more than 50% of our investment. To limit potential losses, we can set a 50% stop-loss order. Meaning our holdings will be sold automatically when Nick Scali drops to $3.57 per share (50% of our purchase price). Most brokers will allow you to set such orders. If you’re unsure how, send your broker a quick email. It’s not ideal to sell for a 50% loss. But it beats losing 100% of your investment. But then, why not limit your losses to 20% or 10%? Well, such a tight range might force you to sell on almost anything. Remember, small-cap stocks are volatile. They can easily rise or fall 10–20% over a week. If volatility picks up, you might end up selling stocks for losses in a short amount of time. A 50% stop-loss might be a better suggestion. It gives you a bit of room for the stock to move down in a short amount of time. But of course, you should set a stop loss at a level you’re comfortable with. The idea is not to lose more than you’re willing to lose. You might be your worst enemy Another way to limit your losses is to literally only invest what you’re willing to lose. It sounds obvious. But a lot of the time, investors throw thousands more than they should into the market. Take John for instance. John (not his real name) was a 31-year-old from Melbourne interviewed by the Barefoot Investor in 2011. A few years ago he got the idea to trade CFDs (contract for difference). CFDs are financial products that mirror the movement of asset prices. For example, a BHP Billiton Ltd [ASX:BHP] CFD mirrors the price of BHP’s stock. Similarly, gold CFDs mirrors the price of gold. Essentially, it gives investors the ability to bet on the price of assets rising or falling. What’s great about CFDs, some investors think, is their ability to use leverage. For example, say you wanted to buy 100 BHP shares at $31 per share. Such a purchase would cost you $3,100 on the open market. But had you bought the equivalent in CFDs, you might only have to stake 5% of the purchase — $155. OK, back to John. John thought, if he used a 10% stake of $10,000 in CFDs, he could potentially double his money. Meaning John would use $10,000 to buy $100,000 worth of shares. A 10% move upwards on $100,000 would then mean John profits $10,000, doubling his money. Of course the situation can get hairy pretty quickly. If prices go the other way, say 10% down, John would lose everything. Worst thing was John was trading CFDs on very volatile assets. Meaning his investment could easily go up or down 10% at a moment’s notice. John stated: ‘I did okay at the start, but I didn’t really know what I was doing. For me, all too often I’d get this kind of overriding, heart-racing moment where I thought things are going to turn around… ‘So I’d go deeper, and deeper…while the market kept going the wrong way. Too many times I woke up to find out I’d received an automated margin call email (to top up his trading account because of losses) from my CFD provider.’ How many times did John have to top up his trading account? Around 25 times. When all was said and done, John was down about $250,000! Clearly John was betting far more than he was willing to lose, and he got burnt in the process. I feel terrible for people like John. But it’s my hope that you don’t end up like them, and limit your losses. Small bets turn into huge profits The biggest advantage to small-cap stocks is their returns. You don’t have to put your life savings into a single investment to make a lot of money. You might only invest $5,000 to start with. Doubling that would be a nice bit of change in your back pocket. But imagine if you grabbed a 10-bagger (1,000%), which is entirely possible investing in small-caps. Such a return would turn $5,000 into $50,000. It would be enough to take a trip around the world in style. Say you invested $10,000 netting the same return. With your $100,000 you’d have more than enough to start searching the property market for a new home. There are vast possibilities investing in small-caps. That wraps it up for Day 4. In day 5 I’m going to show you where to look to find the best small-cap opportunities and what a typical 10-bagger looks like. See you then. Cheers, Härje Ronngard, Editor, Markets & Money ..............................Advertisement..............................
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You Could Have Made 70,000% by Investing in ‘Green Beans’ By Selva Freigedo in Albert Park, Melbourne As we told you on Monday, cryptocurrencies had an incredible year in 2017. Bitcoin, the most popular crypto, shot up about 1,300% for the year. Yet bitcoin wasn’t the one with the most gains. Ripple increased by a whopping 36,000%. But what if I told you that you could have made even bigger gains if you had invested in ‘green beans’? Let’s be clear. I’m not talking about the vegetable. I’m talking about the Chilean chaucha, a cryptocurrency coming out of Chile. It translates from Spanish to…yep you guessed it, green beans. Yet the name is also used to refer to small quantities of money. Since it began trading in 2017 for 1 peso, prices have fluctuated between 0.3 and 1,000 pesos. According to Bloomberg, the chaucha returned about 70,000% in two months in 2017. Its developers have based the chaucha on the litecoin technology, because it allows for more transactions than bitcoin. Yet, like bitcoin, it is scarce. There will only be 123,456,789 chauchas mined. That’s it. While its developers are hoping for mass adoption, they also have another expectation for the chaucha. They are hoping the chaucha will help educate Chileans on how blockchain and cryptocurrencies work, in their own language. That is, the chaucha is also an education project. Think of it as a kind of an ‘entry level’ crypto to educate on the technology behind bitcoin. But, before you go off and try to jump in, let me tell you, it has lost much of its value. At time of writing it is trading at around 36 pesos (almost 8 Australian dollar cents). One likely reason is that Chile is starting to crack down on exchanges. The State Bank of Chile has followed the initiative from private banks to close bank accounts for the three major crypto exchanges. The exchanges are now appealing to the courts. The Chaucha is one of the interesting projects coming out of Latin America...and showing there is increasing interest in cryptos coming from the area. You may have heard that it is quite popular in crisis stricken Venezuela. According to the BBC.com, transactions made in Venezuelan bolivars to buy bitcoins increased by 700% in 2017. Yet Colombia almost doubled that number. Transactions made with Colombian pesos to buy bitcoins increased by 1,200% in 2017. This is just behind China (2,000%) and Nigeria (1,400%). As you can see in the map below from Coinmap — a website that tracks the merchants that accept cryptocurrencies around the world — cryptos are quite hot in most of the Latin American major cities. Source: Coinmap [Click to enlarge] Why are cryptos so interesting for the area? Apart from the attractiveness of recent gains, inflation and hyperinflation are both quite common in the area. As Bloomberg reports, trading volume in cryptocurrencies has increased quicker in countries with capital controls and weakening currencies. And, as Bloomberg continues, growing interest in Latin America could give bitcoin another boost: ‘The Venezuelan bolivar, Carlos Mosquera Benatuil will begrudgingly admit, is a “real” currency. Bitcoin isn’t—it’s basically just a very long line of computer code. Yet there’s no question which the 35-year-old Caracas native prefers. ‘Mosquera is one of Latin America’s many bitcoin believers, scarred by the hyperinflation that’s ravaged the economies of Brazil, Argentina, Bolivia, Peru, and now Venezuela. The region’s tech-savvy middle class, he says, began adopting bitcoin a few years ago to protect their savings from rising consumer prices and currency controls. Now, Latin America’s wealthiest investors want in on the action. The growing interest from them could help propel investments in the currency going forward.’ I mean, don’t get me wrong. While people are using them to stave off hyperinflation, they are still very volatile. You could still lose all your money. And, as much as the rest of the world, regulators are not still really sure how to deal with them. They could ban them at any time. But, it does give people another option for their finances. And, there is another reason why cryptocurrencies are attracting attention in the region. You see, banking is expensive. Only half of the population in Latin America and the Caribbean had a bank account in 2014. Source: Business Insider [Click to enlarge] Yet, while not many people have a bank account, there are a lot of mobile phones. According to the World Bank, back in 2012 84% of households in Latin America and the Caribbean subscribed to some type of mobile service. There are a lot of Latin Americans living abroad…who send money back home. According to PRnewswire, remittances to Latin America and the Caribbean made up over US$70 billion in 2015. Cryptos provide a cheap and fast way to receive funds. And that’s another reason why we could see even more interest in cryptos coming out of the area. Best, Selva Freigedo, Editor Markets & Money PS: If you are interested in getting into this space, don’t miss out on editor Sam Volkering’s step by step guide on cryptocurrencies. You can access it here. ..............................Advertisement..............................
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Bitcoin Works! By Bill Bonner in Baltimore, US Last week, we attended a conference in Miami. Several crypto enthusiasts were there…including Teeka Tiwari and our own ‘in-house’ expert, one of our sons. The price of bitcoin has fallen from a high of around $20,000 to about $8,000 today. That kind of a fall would knock the wind out of most investors. But the bitcoin bulls are still surprisingly bullish. ‘This pullback is very healthy,’ said one speaker. ‘There were so many bad deals in the initial coin offerings (ICOs — similar to initial public offerings, but with cryptocurrencies instead of stocks). Some of them were just absurd. And people who bought into those deals deserved to lose their money.’ ‘Now, we’re getting onto more solid ground.’ He could be right. Bitcoin seems to have found its footing in the $6,800–$7,000 range. Thereafter, it began a modest recovery. ‘Look, a lot of people think there is “nothing” behind these cryptos,’ said one source. ‘But if there were nothing there, the price would have kept going down. The market would have discovered that there was nothing there…and the price would have gone to zero.’ ‘It didn’t. Instead, the market discovered firm ground in the $7,000 area… which is a lot more than zero.’ What the market may have discovered is that bitcoin has a value as, well, bitcoin. When financial chaos strikes, gold holds its value…and bitcoin goes up. Geezers on the internet ‘When you are in a crisis, it can be hard to get gold,’ explained another of the cryptophiles. ‘The dealers don’t want to trade gold for local currency; nobody does. Gold tends to disappear…’ ‘It’s just Gresham’s Law at work. Bad money drives out good money. And usually, people are trapped. All that’s available is bad money. That’s the whole idea – to force people to use paper currency that is losing its value. That’s what is happening in Venezuela, for example, right now.’ We turned to The Christian Science Monitor for confirmation: ‘In the midst of a financial crisis with inflation nearing 2,000 percent, Venezuelans are using bitcoin to pay for groceries, medical bills, even honeymoons. Unaffected by the economic crisis, bitcoins give users an alternative to black market worthless government currency.’ ‘“This is not a matter of politics,” [local Venezuelan] Mr Villar said. “This is a matter of survival.”’ Our boys bought bitcoin and other cryptocurrencies back in June 2017, against their father’s advice. The old man has waited for an ‘I-told-you-so’ moment ever since. But it hasn’t come yet. In June, bitcoin was selling for about $2,500. Even after suffering a 60% drawdown, it’s still three times what they paid for it. ‘Hey Dad, remember when you introduced your readers to bitcoin… two years ago? You and Vern Gowdie tried to buy it. You got that young French girl, Claire, in the Paris office to help you. You made a video of it. I think the title was something like “Geezers on the Internet”.’ ‘Ha ha…very funny.’ ‘Between the three of you, you couldn’t figure it out. Well, if you had been a little more tech-savvy, you would have made a lot more money. The price of bitcoin was just $500 back then. Now, it’s 15 times that much.’ More than zero The crypto market is no stranger to big numbers. Filecoin raised $187 million in one hour in its ICO. Ark — a ‘blockchain platform’ — went up 1,000 times. Nano, whatever that is, rose 3,747 times, transforming an initial investment of $500 into $1.8 million. And there may be more big gains coming in the crypto space. Very, very few people own cryptos. They represent a tiny percentage of money transactions. The experts tell us that most owners have what they call, derisively, ‘dust’ — very small holdings. They imagine, say, 5% of the world’s transactions being enabled by bitcoin, which might increase today’s price by 100 times or more. We offer no opinion of our own. All we know is that there’s something going on…something more than zero. But whether any particular cryptocurrency will go up or down, we have no idea. So we pass along the comments of one of the enthusiasts: ‘Look…we’re still in the very early stages. Money is already mostly digital. And paper cash is disappearing. It makes sense that new forms of digital money arise…and some will catch on. ‘It’s not going to replace the dollar. It’s not going to replace gold. But it is going to provide another form of money. When we have a financial crisis — a money crisis — such as those in Zimbabwe, or Cyprus, or Venezuela, people will lose their money in government’s paper currencies and mainstream banks. ‘They will flee to bitcoin and other cryptos…and they will protect their wealth. That’s what real money is supposed to do. And that’s what bitcoin does. That’s what makes it valuable.’ Regards, Bill Bonner, For Markets & Money ..............................Advertisement..............................
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