A Beginner's Guide to High-Risk, High-Reward Investing

From Short Selling to SPACs, an Essential Guide to the Next Big Investment

Robert Ross

• Publisher: Adams Media
• Year: 2022
• ISBN:
  9781507218242
• Topic: Persönliche Entwicklung
• Subtopic: Private Finanzen

Make the best choices for your money and earn big with this guide to high-risk, high-reward investment strategies including options trading, investing in meme stocks, and the business of cryptocurrency. Your favorite sites are filled with the latest investment trends and stories of other people making bank by making smart moves in the market. But how can you get your own share of the wealth? A Beginner's Guide to High-Risk, High-Reward Investing can help you make sense of trends, from short selling to cryptocurrency and "meme stock, " breaking down the buzzwords to give you hard facts about the opportunities and risks of fringe investment strategies. With advice from expert Robert Ross, this easy-to-follow investing guide gives you everything you need to determine which high-risk, high-reward investment strategies are the best fit for your portfolio.

CHAPTER 1 A Primer on High-Risk, High-Reward Investing

In most investing books, a grizzled Wall Street veteran extols the benefits of buying S&P 500 index funds, holding them for 40 years, and retiring with a few million bucks in the bank. The salt and pepper–haired old-timer then expounds on the virtues of holding gold stocks before bragging about how his “all-weather stock-picking system” will help you retire early.

And at some point—without fail—he’ll mention that if you bought $5,000 of Amazon stock 20 years ago, you’d have enough cash now to buy a beach house.

Of course, buying and holding index funds over many years is a great way to build wealth in the stock market. As a millennial with many years left in my investing journey, I employ this approach with nearly half my portfolio. But you didn’t buy this book to learn about the merits of index funds. As the title states, this is a book on high-risk, high-reward investment strategies.

I’m here to show you how to trade short squeezes like GameStop (GME) and discover cryptocurrencies that can surge 300% in a matter of days. Do you like dividend-paying stocks? I’ll show you the best way to find double-digit dividend payers that will pay for themselves in a few short years. And if you’re tired of financial talking heads telling you how much you could’ve made by buying Amazon 20 years ago, rest assured: My plan is to show you how to find the next Amazon.

But most importantly, I’m going to give you step-by-step instructions on how to use these high-risk strategies safely so you can try to avoid losing a lot of money.

UNDERSTANDING RISK

At its core, risk is a study of uncertainty. It’s our attempt to figure out what the actual return on an investment will be compared to what’s expected. The better you are at assessing risk, the better you’ll be as an investor.

I’ve been a stock analyst for the better part of a decade. During this time, I’ve had the pleasure of learning from some of the world’s best and brightest financial minds, including John Mauldin, Felix Zulauf, and Jared Dillian (many of these experts will make appearances later in this book).

I’ve also spent a lot of time talking to individual investors, mainly through direct messages on my popular social media channels. And if there’s one thing I’ve learned, it’s that new investors are terrible at assessing risk. That’s why risk assessment is a major focus of this book.

Low-Risk versus High-Risk Decision-Making

Every person reading this book has likely made a risk assessment today. For instance, let’s say that you’re driving down a busy street during rush hour. You’re running late for an important meeting, so you’re trying to barrel through the upcoming intersection quickly. As you approach the bustling four-way intersection, you notice that the streetlight just turned from green to yellow. And in a few seconds, you know that light will flip to red.

What would you do in this situation? Your decision comes back to how comfortable you are with risk.

If you are a risk-averse driver, you would slow down and stop at the yellow-turning-red light. You would then wait for the light to turn green again and be on your way. While you’ve avoided a potential $75 red-light ticket, you will be late for your meeting.

Not everyone would respond that way. Let’s say the driver in front of you decides to go through the yellow light. At that moment, you decide to increase your speed. You know that there’s a chance you could get caught by the red-light camera, but your risk-reward calculation tells you that it’s worth that risk to get to your meeting on time.

Investors make these same risk-reward calculations every day, although the options are less clear-cut than in the red-light example. For instance, let’s say our driver is sitting at their desk later that day. They just received their paycheck for the month, and as usual they take $500 of that check and add it to their brokerage account.

Unlike the red-light example where there were only two options—stop or speed through the light—the person now has nearly unlimited options to consider. The most risk-averse investor would take that $500 and buy something ultra-safe, like US government bonds yielding around 1% or 2% per year. A slightly less risk-averse investor would buy something with tangible value, like gold, or—if they’re feeling bold—a blue-chip dividend-paying stock such as International Business Machines (IBM) that may return 8% per year.

These risk-averse investors are the type of people who would stop at the yellow light. They don’t want to assume the risk of potentially losing money on their investment, so they are compensated accordingly with lower returns. It is the same concept that motivated the driver who chose to be late to their meeting because they didn’t want to risk getting a red-light ticket.

Not everyone is that risk averse, however. An investor more tolerant of risk sees that $500 in their brokerage account and immediately wants to maximize their returns. They know Boeing Co. (BA) has struggled to keep their planes airborne, which has tanked their stock price. While it’s possible that the stock won’t bounce back anytime soon, there’s a possibility this deep value stock could return 50% if the company repairs its reputation.

Maybe this less risk-averse investor also saw a video on social media discussing a high-tech satellite company that recently went public via an initial public offering (IPO). Though these stocks are very risky, the return could be as high as 100% in a year, so they happily take on that risk. They may also remember that a coworker told them about a cryptocurrency called Ethereum, which could return 200% over the next year.

This investor is the type of person who speeds through the yellow light and risks getting a ticket. This person is willing to potentially lose money on their investment to potentially make more money in the future. They are interested in high-risk, high-reward investments.

Investment risk boils down to this: The higher the chance that you lose money, the more money you can potentially make.

Risk Impacts the Rate of Return

Understanding an investment’s risk is a fundamental building block of investing. As a rule, the higher the risk in an investment, the higher the return, while the lower the risk in an investment, the lower the return. For example, if you buy shares of a blue-chip stock like McDonald’s (MCD) or Johnson & Johnson (JNJ), you can’t expect to double or triple your money in a short time period.

Although with a buy-and-hold strategy there’s a good chance you could double or triple your money over the long term—say a decade or more—but blue chips are by definition low risk and thus yield lower returns. Everybody knows McDonald’s and Johnson & Johnson will be around for years to come, so there’s less risk in buying their shares.

On the other hand, you have high-risk assets like bitcoin. Bitcoin is the world’s first cryptocurrency, a concept that has only been around for 10 years. There’s no guarantee bitcoin (or cryptocurrency in general) will exist in another 10 years. That means investors in bitcoin are rewarded with higher returns for assuming this higher risk. But this rule cuts both ways, since there’s a greater chance of severe losses when investing in high-risk assets.

BALANCING YOUR HIGH-RISK, HIGH-REWARD PORTFOLIO WITH LOWER-RISK OPTIONS

Many of you probably know me through my popular @tikstocks social media channels. My goal with that platform from the outset was twofold:

1. 1. Demystify the stock market for individual investors and thus make investing more approachable.
2. 2. Help others avoid making the same mistakes I’ve made in my investing career.

The first point is very important. Wall Street’s goal is to intentionally make investing seem difficult. They want you to believe that only men in suits with big salaries can make money in the stock market. While these big firms may have more money and more resources at their disposal than you do, that doesn’t mean you can’t beat them at their own game.

I also want you to avoid making the same investing mistakes I’ve made. A common thread from my thousands of conversations with individual investors is that many people take on too much risk. While they have a general idea how to invest responsibly, they often don’t diversify their portfolio well enough, or they bet too big on a risky strategy.

To avoid that, you should balance your high-risk investments with the long-term buy-and-hold investing approach espoused by silver-haired Wall Street veterans. Before starting my own company, I ran an investing service that showed people how to make money with low-risk dividend-paying stocks. If I hadn’t made a name for myself with this strategy, I wouldn’t be here writing a book for you today.

Even investors who want to dive deep into high-risk strategies should know that holding safe positions is a fundamental piece of high-risk investing. The math is simply too strong to completely ignore long-term buying and holding! For instance, over the last 90 years the S&P 500 grew in value in 74% of those years. That means that in nearly three-quarters of the years since 1940, investors who simply bought the S&P 500 saw their accounts grow in value!

THE STOCK MARKET IS STABLE

Though many in the doom-and-gloom crowd warn of imminent stock market crashes, the fact is these crashes are extremely rare. In fact, historically the S&P 500 rises for 9 years between every 30% market crash. And for all those looking to “time” the market, remember that more money has been lost anticipating market crashes than in the crashes themselves.

While this is a book on high-risk, high-reward investing, you want to make sure you have a solid foundation to employ these strategies. As a rule, I keep 80% of my investment portfolio in reliable companies I plan to hold for many years. These are stocks like Alphabet Inc. (GOOGL), Microsoft Corp. (MSFT), and even “trash” stocks like Waste Management (WM). These relatively low-risk positions provide a stable foundation on which I can employ higher-risk strategies.

It’s important to maintain a core of lower-risk, lower-return assets in your portfolio because—frankly—if you only employ the strategies in this book, there’s a good chance you could lose a significant amount of money. Having this solid foundation gives you the ability to take on extra risk without destroying your account.

HOW TO (SAFELY) BUILD ROCKETS

When Elon Musk and Jeff Bezos build their rockets, they know there’s a good chance that the rockets might explode. In fact, NASA estimates there’s a 1-in-60 chance that a rocket mission will fail, with a 1-in-276 chance that the mission will be fatal.

Musk and Bezos go to great lengths to make sure their rockets work properly. This is to ensure the viability of their business and to make sure they don’t kill their employees in the process. They manage their risk by painstakingly reviewing launch protocols to ensure they don’t literally blow themselves up.

To the Moon…When You’re Ready

My goal with this book is to show you how to similarly manage risk with high-risk, high-reward investing. One of the most common investing phrases among the new crop of young investors is “to the moon.” The phrase started in the cryptocurrency community to refer to when the price of a coin rises many hundreds of percent in a short time period. Now “to the moon” is a catchall for any investment that surges in value.

I want to show you how to build rockets to go “to the moon.” But just like Musk and Bezos, you need to make sure your rockets are working properly before launch. That’s why many sections in this book focus on investments that went south; you’ll learn what works by analyzing what didn’t.

WHAT IS DOLLAR-COST AVERAGING?

Dollar-cost averaging (DCA) is an investing approach where you invest equal amounts into an asset over regular intervals without regard to price. You’ll see this term used frequently throughout the book; DCA is a good way to begin your involvement in a particular investment.

For instance, let’s go back to the example of the investor with $500 in their brokerage account. The person feels like taking risks today, so instead of buying a blue-chip stock like Apple Inc. (AAPL), they opt to buy a special purpose acquisition company (SPAC; see Chapter 3) called Nikola Motors (NKLA). But 6 months later, this person loses 80% of their investment because, as it turned out, Nikola’s upper management was charged with lying to investors.

Or instead of a SPAC, our hypothetical higher-risk-seeking investor decides to invest their $500 in a cryptocurrency (see Chapter 2) called XRP. They read an article showing how Ripple, the company that developed the XRP token, was going to revolutionize international transactions, so they plug their $500 into the speculative asset with hopes of tripling their investment. Unfortunately, US regulators come down hard on XRP not long after, sending its value down 90%.

To try and make the lost money back, our investor takes what little cash is left and bets it all on a microcap stock (see Chapter 6). A “microcap millionaire” on YouTube predicted that this stock could surge 1,000% in the next year. What the YouTuber didn’t mention was how “share dilution” works for small companies. Although the share price of the microcap stock rose, our investor lost 50% on their initial investment because of dilution.

This book will spend a lot of time showing you how to manage the risks associated with high-risk, high-reward strategies. That starts with having a solid foundation of low-risk stocks to make sure you are diversified and protected from major market pullbacks.

After all, if you want to go to the moon, you must know how to build a rocket that will deliver you there safely.

CHAPTER 2 Cryptocurrencies

Cryptocurrencies are digital currencies in which transactions are monitored by a system that uses cryptography rather than a centralized authority. Cryptography is a discipline that explores how to securely transfer information while allowing only the sender and the recipient of the message to see the content. Think about the currency you’re familiar with—dollars, cents, and so on. It’s issued by and...