- Is it paranoid to use stop losses?
- How our “bonus” warrants work…
- “I look forward to many more years of investing in the exciting future of technology…”
Welcome to our weekly mailbag edition of The Bleeding Edge. All week, you submitted your questions about the biggest trends in technology.
Today, I’ll do my best to answer them.
If you have a question you’d like answered next week, be sure you submit it right here.
It’s going to be an exciting weekend.
Richard Branson announced that it’s “game on” for Virgin Galactic’s first fully crewed spaceflight this Sunday on its VSS Unity spacecraft. For those who want to tune in and watch the fun, you can go here at 9 A.M. on Sunday morning, July 11, to watch the launch.
The VSS Unity
Source: Virgin Galactic
Weather permitting, Branson will go up with two pilots and three other “mission specialists” in an effort to beat Jeff Bezos and the Blue Origin team to space. Blue Origin’s flight is scheduled for July 20.
Aside from this race between Bezos and Branson to space, it’s remarkable that within the span of nine days, not one, but two fully-crewed commercial spaceflight launches will likely take place.
This is the start of something pretty remarkable.
Fingers crossed for a safe and successful flight on Sunday.
Have a great weekend.
How to think about stop losses…
Let’s begin with a question on stop losses:
When I looked at my holdings on Friday, I almost fell out of my chair. [An Early Stage Trader company] was up over 50% from earlier in the week! I’d started buying that stock back in early December at about $14, and then after joining EST in March and seeing it on your buy list, I set a low limit buy for $17.00 and picked up some more in May.
Your report provided the incentive to purchase more shares and was right on. Thank you. Toward the end of the day on Friday, I set a trailing stop at 25%.
Call me paranoid, but I wanted to protect my gains to some extent, at least until Tuesday, but I am wondering how to proceed from here on out and would value your opinion on that.
Should I remove the trailing stop, or monitor daily and adjust as necessary? Another strategy I’m considering is removing the trailing stop from half my holdings and watching and waiting on the rest.
I know you’ve been recommending holding without stops as a general rule, but do you still consider this the way to go with this stock? Have an awesome weekend, and best of health to you and yours.
– John H.
Hi, John – thanks for writing in and for being a subscriber. You’re correct that we don’t officially use stop losses in any of my research services right now.
That’s a change that came about last year during the COVID-19 market crash. The uncertainty of what was going on led everyone to race for the exit at once. But fear and panic are rarely good foundations for decision making.
I saw the selling as an extreme overreaction… And it provided a good entry point for buying great technology companies.
At the time, I understood two key things…
The crash was artificial in the sense that it was not a reflection of any underlying weakness in the economy. I also had an understanding of the virus and knew that the economy could continue to function. Therefore, my belief at the time was that the pullback would be short-lived.
The other interesting dynamic was that the large institutional money and hedge funds were the main culprits taking the market down. We would have been selling into their panic, only to have them turn around and buy the market right back up to where it was trading.
And that’s exactly what we saw happen last year. Rather than locking in losses, we rode the rebound, bought more high-quality companies, and profited greatly.
As for going forward… Ultimately, we’ve decided to maintain our policy of no official stop losses. This has an added benefit that our positions can’t fall to any other kind of artificial market manipulation.
After all, if large funds know where our stop loss is set, they have the ability to pull the stock down, trigger the stop, and then buy back in – all at our expense. I simply don’t want that to happen to any of my subscribers.
The key determinant for closing out a position is whether or not our investment thesis has completely played out or if it has changed. If it has played out, it’s time to take profits and move on. If not, it is worth holding on to the position longer.
I’m constantly monitoring our portfolio companies with the help of my team of analysts… And we’ll always alert subscribers if one of our investment theses changes and leads us to sell.
And as long as we still have confidence in a company’s prospects and plans for growth, then we don’t want unrelated market action or volatility to shake us out of positions that would otherwise go on to deliver big wins.
And one final comment… I encourage readers to use my research in ways that work for them. If a subscriber finds it helpful to use stop losses to limit losses or protect gains, then that is a personal decision.
John, you’re asking the right questions. It’s smart to find a strategy that works for you and fits your own risk tolerance. I can’t give personalized advice, but I will never dissuade readers from taking a proactive and thoughtful approach to their investments.
My role is to offer guidance so readers can make their own educated decisions based on their preferences and financial goals.
However, I will say one thing about my Early Stage Trader service. The investment strategy is quite different than that of a research product like The Near Future Report.
In Early Stage Trader, we are investing almost entirely in early stage, pre-product revenue companies. Most of these companies are also relatively new to the public markets. Because of this, we see much higher levels of volatility. In fact, we should expect the volatility, and when possible, we should use it to our advantage.
This is why the investment thesis is so critical. Stocks like this can drop 35% in a day, and then two weeks later jump 235% on the back of a strong data release from a clinical trial.
Some of these kinds of stocks have even run up more than 1,000% in a matter of days. So our investment mindset for Early Stage Trader companies should be different than that of investing in large-cap, sleep-well-at-night, growth companies. In short, different asset classes have different investment strategies.
Another critical point for anyone using stop losses… I would recommend using a spreadsheet or alerts through TradeStops or Yahoo! Finance.
Please do not enter any stops as orders with your online broker.
When a stop-loss order is placed with an online broker, it can be seen by market makers. Market makers are companies that provide quotes on buy and sell prices for stocks. They provide liquidity in stock markets, but they don’t act in investors’ best interests… They’re here to make a profit any way they can.
They’ll see the stop loss, open the stock when the stock market opens (or pull it down momentarily), stop the investor out, buy those shares at a grossly discounted price to the real market value, and then pull the market price back up to normal trading levels.
It should be illegal, but it isn’t. I had this happen to me a long time ago. It was a painful lesson, and there was nothing that I could do about it. So if any readers do choose to use stop losses, please don’t fall for this trap.
Will we still get our bonus warrants?
Next, a reader wants to know more about buying units:
Hello, I believe I asked this before. But I must have asked it in the wrong way. I understand you can still purchase the “units” at your broker, even if the broker has all three instruments – units, shares, and warrants. Each instrument can be purchased separately at that given moment from your broker.
So what I’m asking is, do you still get bonus warrants if you split units purchased at the time when all three instruments were available? Or if units were already split, do you receive zero bonus warrants?
Also what’s the purpose of the units still being sold if warrants/shares are also available? If all three are available to purchase, should you just buy the shares and warrants? Or should we still buy the units and split them after purchase in order to receive bonus warrants? I hope that makes sense.
– Vince P.
Hi, Vince, and thanks for writing in and joining us in Blank Check Speculator.
Before I get to your question, let me provide a little background for any new readers…
In Blank Check Speculator, we invest in the units of special purpose acquisition corporations (SPACs).
SPACs – also known as “blank check companies” – exist only to help a private company “back in” to the public markets without going the traditional IPO route.
This happens when a public company (the SPAC) and a private company complete a reverse merger. The SPAC effectively vanishes, replaced with the name of the newly public company that it acquired.
By investing in the SPAC, we can effectively buy “pre-IPO” units of the private company it will reverse merge with.
And in Blank Check Speculator, we invest in SPACs by buying units. One of the benefits of buying units is that we can buy them early, right after the SPAC itself goes public.
Then, within 52 days of the SPAC’s IPO, these units can be “split” into shares and warrants. Each unit splits into one share and a fraction of a warrant.
We’ve sometimes referred to these as “bonus” warrants because, once our units split, the shares will often trade for about the same (or an even better) price than the units we paid for. If we choose, we can sell our shares to recoup our initial investment while holding the warrants with essentially no cost basis.
For example, we might initially buy units for around $10. We could then split those units into shares and warrants. If we sell the shares for $10.70, we would then make a small profit and still hold our warrants “on the house” for any future gains.
As for your question, Vince… Following the split, it’s true that units, shares, and warrants are available for purchase. The liquidity and availability of the units does decrease dramatically after the split, as most holders of units will split their units into the respective shares and warrants.
That said, if an investor does choose to buy units after the split, they can still have their broker split the units into shares and warrants. And it’s still possible for that investor to sell the shares and hold “bonus” warrants. It will simply depend on the prices that each security is trading at.
However, once units, shares, and warrants are all trading, investors may also simply choose to purchase the shares and warrants individually (and avoid the potential fee some brokers may charge to split units). If we do this, we should buy warrants in the same ratio we would have gotten had we originally bought units.
For example, if a unit comes with one share and one-fourth warrant coverage, we should maintain this balance when buying each separately. If we normally buy 400 units, we will buy 400 shares and 100 warrants. This will help ensure that we don’t become overweighted in any one SPAC.
I hope this helps answer your question. And if any readers would like to learn more about our SPAC strategy in Blank Check Speculator, you can go right here for the details.
Making Near Future gains…
Let’s conclude with a reader’s experience investing over the past year:
Thought this would be a good opportunity to touch base with you and relay my Near Future Report story to you. As a retired location photographer I had regularly invested in stable mutual funds over the years and realized some growth over time… but, oh, such slow growth.
With the March 2020 COVID market crash, my wife and I agreed to invest the balance of one of our $30k money market funds into stocks while everything was on sale. I’ve studied the market and invested over the years and was comfortable investing a fixed amount under those current market circumstances.
As a follower and subscriber for years, I had been introduced to you and The Near Future Report, so I joined the NFR and started making small, very measured investments into your recommendations.
Over the past 18 months, I’ve invested into approximately two-thirds of the Near Future Report companies using your research, insight, and recommendations. I’ve diversified within 5G, AI, auto tech, and future health research.
Again, not usually a large number of shares but a starting point that, in many cases, has grown significantly in both stock price and additional opportunity in shares purchased.
Over the past year, I did well with a few of my random stocks (due in large part to buying low in March 2020 and selling high, generally through your mention of a particular stock being valued way too high or a sell recommendation). The capital and profits from those sells would allow me to purchase a few more shares in NFR recommendations.
Just so you can see how your personal experience, expertise, and research recommendations through just your Near Future Report portfolio can work for even a small, fixed investment budget of $30k, it is now valued at nearly $54k.
I’m now a lifetime Near Future Report member and look forward to many more years of investing in the exciting future of technology. Thanks, Jeff.
– Gary H.
What a fantastic story, Gary. You put a smile on my face this morning. Thank you for writing in and sharing this with me.
This is exactly what the Near Future Report is designed to do. It means a lot that my work has been able to help you and your wife grow your investments over the past year. And I’d like to congratulate you on your success!
What you just described was one of the key reasons that I created The Near Future Report. The average annual return of the S&P 500 since 1929 is about 10%.
Most stockbrokers underperform the broad indices, as do most hedge funds. Very few hedge funds consistently outperform the S&P 500. And if they do, it’s only by a few percentage points.
These are terrible outcomes from my perspective, and they’re not attractive in terms of growing wealth.
Yes, if an investor makes 10% a year for 50 years in a row, they’ll do very well. But the average investor isn’t in a position to invest for 50 years. They simply don’t have the capital to invest until they are more established in their careers.
I knew that I could construct portfolios of companies that would stack the deck in the favor of my subscribers. These are companies that are in high-growth markets, with strong competitive dynamics, product/service differentiation, and often something that is not well understood by the markets.
Stocks like these always outperform the broad markets. They also result in returns that can do in one year what it would otherwise take five to 10 years for the standard indexes or mutual funds to do. These are so watered down that an investor will never see impressive results.
I look forward to having you aboard as we continue to invest in some of the most exciting large-cap technology and biotechnology stocks out there over the coming years.
Your story is also a great reminder that we can start with any amount to begin building our wealth. Some subscribers may have substantial funds at their disposal, while others may only be able to put a few hundred dollars into each position.
What matters is consistently putting the money we do have to work in promising companies striving to innovate and develop the technology of the future.
We have so much to look forward to. Let’s get back to work and grow your $54K into a nice six-figure sum as our next goal.
Thanks again for writing in, Gary.
That’s all we have time for this week. If you have a question for a future mailbag, you can send it to me right here.
Have a good weekend.
Editor, The Bleeding Edge
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