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I take an unique approach to markets. It took me a long time to figure this out. I had tried everything from technical to fundamental analysis. However, I believe the way to be successful longer term is by finding overvalued and undervalued assets and trying to get into them early in new trends or just before they reverse course. This is difficult and you must be disciplined in your approach when you trade markets this way. The video below gives a small example of how I look at markets.
With the market about as overvalued as it has been in its history one must be very careful. However, we can still pick away at undervalued companies and look to short the overvalued market and companies (with puts and carefully traded ETFs).
I think due to the overvaluation in the market we are going to see a big bust. To protect against this I have created a small portfolio of strategic put options. The way I have structure this portfolio is I have hand picked about 5-6 companies that I feel are vastly overvalued and can fall hard in a market decline. Calling for a market decline is tough especially in today’s world when the central banks are so determined to prop up asset prices.
However, valuation still matters, one reason the market is flat in the last 7 months is because it is just too overvalued. Companies can buy back stock and the Fed can print all the money it wants if stocks are fundamentally overvalued they will stop going up in price.
It may sound outlandish but the companies I have picked out as potential put hedges have a history of collapsing in down markets. If you get a down market many of these stocks will fall 40,50 even 70 or 80 percent and the profit can be huge, in the hundreds even thousands of percent. In addition, if you find an overvalued company it collapse even in an up market.
Even in overvalued markets you can find certain stocks and sectors which are cheap. While I am very patient due to the markets overvaluation I am looking at stocks and sectors to add positions to purchase in the fall which I think will be great buys (which a lot more potential than the entire market). Actually, we have just found one that we think can jump a great deal in the next year. I expect to add longs in beat up sectors in the coming months especially aggressively in the fall.
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We have a much different approach than most to the markets. When most other look for what is in favor we look for what is out of favor. As my mentor John Templeton would say you NEVER want to buy where the outlook is good.
A lot of it is pure math. If you own Apple at $100 and a near $600 billion market cap you need Apple to go to $200 and become the first ever $1 trillion company to double your money . If you own a beaten up out of favor company that you think can turn the corner that say has gone from 20 to 1, it only takes a move to 2 to double your money . However, finding these companies takes work which most will not put in.
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This has worked for us in recent months. While shorting has been difficult , buying out of favor longs has worked. We bought Russia in December and many of these companies are up 50 to 100 percent in just over 6 months time. Two of our holdings in the precious metals arena are up nearly 100 percent since the fall (one is being taken over which is a hard feat in this market).
For example I have enclosed two charts below. One is of MBT a Russian Telco we recommended at around 6.10 a share in December. In December there was doom and gloom all around Russia and we took a stab at this oversold market. Also I have enclosed a chart of COD Coastal Gold A company were were adding at $0.02-0.03 that is now being taken over closer to $0.06.
We use a long-short strategy in our newsletter similar to hedge funds. Right now I have a undervalued beaten up tech company that specializes in Social network and smartphone advertising that I think is about to turn the corner.
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ON the short side we have been warning about the dangers of this market for a year now. Many think they can time it exactly. They can not. What we have done is look for companies that we can think can fall regardless of the market and have purchased long dated put options as a hedge. If we get a tank in the market history shows us that these options can go up 500, 1000 percent or even more in value. We also recommend shorting these companies with tight stop losses.
The fact that Paul Tudor Jones, Julian Robertson, David Einhorn and some of the great investors in history have joined us in warning this means we must be onto to something.
With the market now having the third longest period in history without a 10 percent correction it gets more dangerous by the moment.
It took me a long time to figure out how to trade like this. However, I think I now have the strategy down pat.
In recent weeks I have been warning that markets could meltdown. Using our protective put strategy and with some unique trades we have (one which involves shorting Japan). When the time is finally right these strategies could pay off big time.
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photocopying, recording or otherwise without prior permission of the publisher. David owns MBT and COD.v This publication contains the opinions and ideas of its authors and editors and is designed to provide useful advice in regard to the subject matter covered. However, this publication is sold with the understanding that publishers, editors and authors are not engaged in rendering legal, accounting or other professional service. If legal advice or other expert assistance is required, the services of a competent professional person should be sought. Those involved in this publication specifically disclaim any responsibility for liability, loss or risk, personal or otherwise, that is incurred as a consequence, directly or indirectly, of the use and application of any of the contents of this publication.