Editor's note: Today, we're continuing our weeklong trading-education series. Again, these are the lessons many of our top analysts learned the "hard way." If you'd rather learn the "easy way," read on...
Tuesday, May 21, 2013
Stansberry & Associates: Doc, your advisories – Retirement Millionaire and Retirement Trader – are centered around an idea you call "anaconda trading." Can you define this idea for us?
Dr. David Eifrig: Sure... First, "anaconda trading" doesn't pertain to a particular trading strategy. Instead, it's a framework to think about trading and investing. It's how many of the world's richest and most successful investors grow and protect their wealth.
I realize it might seem like a silly comparison, but I've found the most useful way to describe this approach is in terms of the anaconda. Anacondas are the largest snakes in the world. And they're one of the deadliest, most efficient predators... but they don't hunt like most other animals.
Anacondas don't "zip" around chasing after their prey. They don't get into long battles with them. In fact, they don't hunt in a traditional sense at all.
Instead, they lie around in rivers for long periods of time. They wait for an unsuspecting animal to pass by or stop for a drink of water. Only then do they strike... by slowly wrapping themselves around the prey and holding on until the animal stops breathing. Then, with their large mouth, they swallow their prey whole. It's a unique strategy in nature. They're nature's "cheap shot" artists.
Said another way, anacondas aren't interested in fair fights... They'll only strike when the odds are overwhelmingly on their side. They're "no risk" operators. And they take their time waiting for their prey and, once it's captured, waiting for the capture to pay off.
Anacondas can grow to enormous size because they don't spend much time or energy chasing every animal that comes along.
S&A: How do you apply this idea to investing?
Eifrig: Well, that's how the world's best investors think about buying stocks, bonds, and commodities. They act only when the odds are heavily stacked in their favor. In a similar way, their portfolios can grow to enormous size because they're greatly reducing risk.
If you begin to think about investing this way, you can avoid a huge amount of worry and wasted time, and set yourself up to make extraordinary returns. Like the anaconda, you can rest along the river bank until the right opportunity presents itself.
S&A: Can you give us an example of how you've used this approach?
Eifrig: Sure, a great example was in 2010 when bank analyst Meredith Whitney went on 60 Minutes and predicted hundreds of billions of dollars of losses in the municipal bond market. Muni bonds collapsed in price, but I thought it was a major overreaction... the predictions were factually incorrect. So we were able to buy these bonds at a major discount with little risk, simply by waiting for a fantastic opportunity to come to us. And we made great, safe returns over the next several years.
S&A: How about an example of how this idea applies to shorter-term trading?
Eifrig: One of my favorite ways to use this idea for trading is to take advantage of spikes in volatility. The Volatility Index, also known as the "VIX" or "fear index," tends to rise as stocks fall and investors become more fearful.
The VIX is also used to determine option prices... When volatility spikes, options become more expensive. Yet these periods of high volatility typically don't last long... and as any professional trader will tell you, most options expire worthless.
So when we occasionally see a big spike in volatility, it often makes sense to sell – essentially short-sell – puts on stocks you'd like to own anyway. The ins and outs of selling puts are beyond the scope of this interview, but this is an ideal "anaconda" situation.
One of the best examples of this is the stock crash of late 2008 and early 2009. Investors who were patient and prudent were able to collect a huge amount of low-risk income and pick up some of the world's best companies at absurdly cheap prices.
S&A: Are there any risks or hurdles with "anaconda trading?"
Eifrig: Because it's a framework rather than a specific strategy, there aren't really risks in the traditional sense. Followed prudently, it can only help you. It's a simple idea, but it can be quite difficult for the novice investor to apply consistently. You'll learn patience and discipline.
Few people are naturally wired with the patience required to be successful investors. In fact, it's often just the opposite. Many investors act as though frequent buying and selling is the ticket to huge wealth. But it's exactly this behavior that ensures the average investor will never build real wealth through investing.
It doesn't help that Wall Street does all it can to encourage this behavior – that's where the commissions are made – and the financial media are constantly talking about the latest hot stock picks.
For most people, this is something they have to work at... a skill they have to build. But it's one of the best things you can do to improve your investing and trading results immediately. I recommend everyone give it a try.
S&A: Thanks for talking with us, Doc.
Eifrig: You're welcome.
"The rich, successful investor is always focused on how he can lose money on a deal, a stock, or an option position," says Editor in Chief Brian Hunt. "He is always focused on risk. Once he has the risk taken care of, he can move on to the fun stuff... making money."
Read how to take care of your risk in the first part of our weeklong series here: The Magic Words Every Trader Says Over and Over.
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