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Weekend Edition

This advice will absolutely change your life as an investor
Saturday, December 22, 2012

 Today, I'm going to discuss "financial asymmetry." Yes, really. And yes, I can hear the groans through the ether. I imagine everyone clicking out of this e-mail and wondering why they subscribed in the first place.  
 
 But remember... I write these essays personally. I continue to work hard at writing my newsletter every month because I'm driven to share with you the information I'd want, if our roles were reversed. That's truly my passion in life. I don't work this hard anymore because I need the money. It's simply what I love to do.
 
And I think, if you'll just give me a chance today, I can show you something that's truly amazing... something that will absolutely change your life as an investor. It's not hard to understand. It's not complicated. But it violates almost everything you've ever been taught about the way the markets work... about the way life works.
 
 But... as I'm reminded all too frequently... there is no such thing as teaching. I can't make you read this. And I surely can't do much to help you understand it. You've got to be willing to open your mind a bit... to take five or 10 minutes... and really think about the things I'm about to tell you. I sincerely hope you will. But it's totally up to you.
 
 What the heck is "financial asymmetry"... and why should anyone care about it? Most of the time, people use the word "symmetrical" to describe physical things that are balanced. Interestingly, people prefer symmetry. Behavioral studies prove this: People with nearly symmetrical faces are consistently rated as being "more attractive." The same is true for architectural designs, like bridges and buildings. And although I can't prove it, I believe humans innately believe in philosophical symmetry. Most people believe you get what you deserve. They believe in some kind of cosmic balance.
 
 But... nature doesn't agree. Asymmetries are found in almost every part of the natural world. Take your body, for example. Your left lung is smaller than your right lung – it's missing one whole lobe. Your lungs are built this way because your heart is asymmetrical, too. The left side is larger than the right. Interestingly, almost all biological organisms are asymmetric in at least one dimension. The imbalance develops because of the way cells divide.
 
 In chemistry, certain molecules are "chiral" – they are asymmetric. They cannot be superimposed upon their mirror image. Fundamental physical asymmetries exist in particle physics, too (known as "parity violation"). I'm not going to get into particle physics, don't worry. But the example is important to remember. The world frequently doesn't work exactly like the models suggest it should. Asymmetry is actually the norm, despite the human preference for symmetry.
 
 In finance, the critical symmetry we're taught is between risk and reward. This makes sense to us intuitively. And we want to believe it. It seems fair. If you want to succeed, surely you have to take big risks. But that's complete nonsense. Let me give you several simple examples.
 
 In our studies of highly capital-efficient businesses, we've found that investors who simply reinvest their dividends can consistently earn returns of around 15% a year. (My subscribers have doubled our money in Hershey since January 2007, for example, which is just a tad faster than we expected.) That's simply investing in high-quality, low-risk, brand-name stocks like McDonald's, Hershey, Heinz, and McDonald's.
 
We delve into the topic of capital efficiency in greater detail in the latest issue of my Investment Advisory, published last week... But the key thing to understand is that buying into businesses like McDonald's, Hershey, etc., at reasonable prices is just about the safest thing you could ever do with your capital. And 15% annual returns are far in excess of average returns. Pairing this extremely safe approach to investing with the capital-raising power of insurance made Warren Buffett one of the world's richest men. There's simply no way that would have happened if risk truly equaled reward in finance.
 
 Here's another real-life example. Most of the people I know personally who have made a lot of money investing have done so by financing companies directly on terms that were absurdly unfair. The more unfair, the better. Typically, companies that need a lot of capital (say, to drill a new oil well or find a new gold mine) will sell stock directly to individuals at a price that's well below the market price of the stock.
 
So if the shares are trading at $10, the financing might close at $8. Right off the bat, these private financiers are taking far, far less risk than they would buying the shares in the market. But that's not the only advantage. They also demand (and usually get) "warrants" in the stock. Warrants are call options that never expire. As you may know, the price of an option is determined by duration (time) and the volatility of the stock in question. An option that never expires on a highly volatile stock is worth a lot. But my friends get them for free, as part of the deal. These guys are taking on a lot less risk than regular investors.
 
 In these deals, there's tremendous financial asymmetry. They're buying stock at less than the market price. They're getting a call option for free. If the stock simply stays where it is, they'll make a small gain. If the stock goes up a lot, they'll make a bloody fortune. You don't need many deals like these to pan out well to earn a significant fortune in the market. I happen to know a few guys who've done it... several times.
 
 And that got me to thinking... there's got to be a way for regular, individual investors to do the same kind of thing. I've been working on this problem for a long time – several years. I would much rather you get terms like these when you buy into my recommendations than simply paying the market price. I would much rather give you the advantage of this asymmetry – less risk, more return.
 
 I already know that the vast majority of you – probably about 90% – will never believe me when I tell you what I've recently figured out. You'll continue to believe that risk is always balanced with reward. That's what makes sense. That's what your broker told you. That's what the finance professors teach. Well... I know for a fact that it's not true.
 
I know from my studies of the markets. I know from my friends' investing results. And I know because I personally found an anomaly in the options markets. It's an anomaly that allows almost any investor, at almost any time, on almost any stock they want to own, the opportunity to invest with lower risk and earn profits that are far greater than what's possible by just owning the stock outright.
 
 Like I said, I don't expect you to simply take my word for it. So I've put together a video presentation about this anomaly and how to trade using it. I call the strategy "Alpha." 
 
In finance, "alpha" is the excess return you earn, above the market's return, per unit of risk. The anomaly I discovered, quite simply, will allow you to invest in the markets with less risk, while potentially earning bigger returns. Yes, you've still got to pick the right stocks. This strategy can't turn a bad track record into a winner. But... it can take a fairly safe portfolio... and turn it into a world-beater. To view this presentation – and learn about what I believe is the single greatest investing secret – click here.  
 
Regards, 
 
Porter Stansberry




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