October 30th, 2021
A Trading Lesson From George Costanza
trading-lesson

Dear Rebel Investor,

Remember the Seinfeld episode, “The Opposite?”

It opens with George Costanza complaining that everything he does is wrong.

Jerry Seinfeld tells him that means he must do the opposite of whatever he thinks is right.

So Constanza takes Seinfeld’s advice to heart.

Result?

Constanza’s life is transformed.

He goes from being an unemployed loser living at his parents’ home with no love life…

… to a man with a beautiful woman desperate for his attention and a high-profile job with the New York Yankees.

The Trading lesson here for retail investors like you?

Do the opposite of what the so-called market “experts” say

Following their advice can cost you incredible profit opportunities.

Take Advanced Micro Devices, Inc. (Nasdaq: AMD).

Morgan Stanley gave the stock an “underperform” rating in 2017 because of concerns about company earnings.

But in June 2019, they admitted they had made a mistake.

Did they ever.

Check out this chart…

amd-stocks

 

As you can see, the stock exploded since Morgan Stanley’s bearish call – from $11.42 on Jan. 3, 2017 to $106.19 on July 30, 2021.

That’s an 829% gain if you’re keeping score.

Then there’s Kinross Gold (NYSE: KGC)

Few analysts had anything good to say about precious metals in early 2019.

They were especially bearish on Kinross.

That’s because they were worried about West Africa and Russia.

Their worries made sense on paper, since those countries comprised 41% of the company’s 2017 revenues.

But common sense has no place in your playbook if you want to maximize your profit opportunities in the market…

kinross-gold

 

Obviously, Kinross did quite well (common sense be damned), shooting up from $3.24 on Jan. 2, 2019 to $5.94 on Feb. 24, 2020.

That’s a respectable rise of 83%.

And by Sept. 18, 2020, the stock hit $9.84 – an increase of 203%.

High-profile analysts can not only cost you profit opportunities they could also put a huge dent in your portfolio

Remember Aurora Cannabis (Nasdaq: ACB)?

In 2019, some analysts were saying this stock would rocket higher because it was aggressively expanding worldwide.

Others were bullish because Congress had passed the U.S. Farm Bill the previous December.

The logic was that the bill – which legalized hemp-derived CBD in all 50 states – would help accelerate the cannabis industry’s growth.

And by extension, it would lead to a massive new expansion opportunity for Aurora Cannabis.

Made sense, right?

But here’s what happened…

aurora-cannabis

 

From April 1, 2019, the one-time high-flying pot stock cratered from $110.16 to $4.05 on Oct. 30, 2020.

And that was after a 1-for-12 reverse stock split in May of 2020.

Talk about disaster…

Let’s say you bought 1,200 shares before that split in November 2019 when the stock was at $50.

That’s $60,000, right?

After the reverse split, you now own 100 shares instead of 1,200.

You know what those shares are worth as of this writing?

A paltry $6.62

Tha means your initial $60,000 investment…  is now worth $662.

That’s a 98.9% haircut!

And how about a high-profile prediction that tech stocks would underperform in 2020?

That prediction came from Byron Wien.

Wien, if you don’t know, is the vice chairman of the Blackstone Group (NYSE: BX) and former chief investment strategist at Morgan Stanley (NYSE: MS).

Let’s take a look at the FAANG stocks to see how accurate Wien’s prediction was.

(The FAANG stocks are listed on Nasdaq and comprised of Facebook, FB; Amazon, AMZN; Apple, AAPL; Netflix, NFLX; and Google – AKA Alphabet – GOOG.)

aapl-stocks

 

As you can see, these tech titans absolutely crushed it.

Had you taken Wien’s advice, you missed out on some big profit opportunities.

Jeez…

I could go on with many more examples of how “expert” stock advice is often wrong.

But you get my point.

Bottom line?

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If you want to consistently profit from the markets, ignore the mainstream financial media

Instead, follow George Costanza’s lead.

That means doing the opposite of what most other investors are doing.

Consider stocks with massive valuations ($20 billion+).

These are obviously companies that have already experienced huge growth.

Yet they still offer great profit opportunities…

…but NOT through buying them outright (like everybody else does).

The real money is through buying options on them.

Options are fantastic for volatile markets like we’re experiencing today

The reason? They can shoot up rapidly in a short period of time.

And when they do, you make FAR more money than you would by owning the stock.

If they move against you?

It’s no big deal because they could easily swing wildly in your favor the next day.

And not only can you play them to take advantage of uptrends and downtrends…

… you can make money on them even if prices churn sideways.

Best of all, your risk is strictly limited to the premium you paid on your options.

Here’s an even simpler contrarian strategy for you

I’m talking about focusing on small cap stocks.

For the most part, the financial media pays scant attention to them.

That’s why they fly under the radar of most investors.

This is great for retail investors like you because small caps give you a far better shot at big gains than stocks with huge valuations.

Let’s face it – a $2 stock has a much better chance of quintupling to $10 than a $700 stock has of hitting $3,500.

So what if your $2 stock gets halved?

Then you lose a dollar.

But if your $700 stock gets halved, you’re out of $350.

So you have far more upside – and far less downside – with small cap stocks.

Makes sense, right?

I’m sure George Costanza would agree.

That’s it for today about George Costanza’s Trading lesson.

Your contrarian correspondent,

Doug Fogel
Contributing Editor, Dear Retail Investors  

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