We are just two days away from Thanksgiving.
The cooking has started around here. The turkey went into the brine last night, and the prep work for the stuffing is underway.
There will only be one issue of Hidden Profits report this week, because I expect you will have better things to do than read about stocks and markets as on Thursday. As such, and because I opened the long-shot window on Thursday, let’s stay with that theme today and look at two stocks that have the potential for massive returns over the next several years.
Let’s not kid ourselves that, like all speculative activities, long-shot investing is betting. The chance of a huge gain, there is also a chance of loss. The trick is to look for companies that have the potential to return several multiples of your original bet.
When I pick long-shots, I am making a multiyear bet that the company can survive, recover, and see the prices of its stock climb by 400%, 500%, or more.
I understand I can lose my bet. That’s why I only use a small percentage of my cash for making long-shot bets.
I think about the money the same way I used to regard my poker and horse racing bankroll when I was much younger: I only bet when I think the odds are in my favor, and the payoff is far more than I can lose. If I do something stupid or have a statistically improbable disastrous run and lose my stake, I am done until I rebuild my bankroll from cash flow. I never divert money from savings or long-term investment accounts to long-shots to make up losses.
I only use a small percentage of the bankroll for each bet, and I employ a Kelly calculator to determine how much to put in each stock.
The formula is based on the work of John Kelly, a mathmagician employed by Bell Labs back in its heyday, who asked the question: “How much of my bankroll should I stake on a bet if the odds are in my favor?” The father of information technology, Clause Shannon, whose work is the basis for telecommunications and the information age, also played an important role in developing the formula.
Ed Thorp, the author of Beat the Dealer and Beat the Market, and who beat the casinos at blackjack and ran hedge funds that crushed the market for decades, used the Kelly criterion in his day-to-day decision-making process. It is a fantastic story, told in the excellent book Fortune’s Formula: The Untold Story of the Scientific Betting System That Beat the Casinos and Wall Street, by William Poundstone. I highly recommend it.
Both of today’s long shots have the potential for huge returns; however, they could also go to zero if things do not go well. (And if they do zero out, I do not want to…
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