Chris’ note: Making asymmetric bets is crucial if you want to really move the needle on your wealth. This means staking a small amount that can explode into huge gains.
And little-known assets called stock warrants are the best asymmetric bets in the world right now. So we’re highlighting them as part of this week’s series on inflation – and how to beat it.
I recently spoke with colleague and renowned speculator Dave Forest all about warrants. As you’ll see in our Q&A below, the right ones can bring you quadruple-digit gains. They’ve just been the secret of the ultra-wealthy for too long…
Chris Lowe: Hey, Dave. I’ve been in this business for more than 20 years. And I had only a vague idea of what stock warrants were.
I started to pay attention only when I saw the gains on warrants trades in your Strategic Trader model portfolio. The top performers so far include one open position that’s up 1,707%. And the top two positions you closed were up 2,805% and 4,942%.
Not every trade has been a winner, of course. But those are eye-popping gains. So what are warrants? And why do so few investors know they exist?
Dave: I want to get the word out to as many of our readers as possible about how warrants can help really move the needle on your wealth.
The first point I need to make clear is, even if you don’t understand what a warrant is, these things are incredibly easy to trade. Warrants are not the same as stocks, for reasons we’ll get into. But they trade just like stocks do.
You can buy and sell them through your normal brokerage account. The difference is a warrant will have a “W” at the end of its ticker symbol. So if a stock’s ticker is ABC… its warrants will have the ticker ABCW.
Warrants allow you to pick up shares in a company at ridiculously low prices if those shares rise above an agreed-upon level, or the strike price. You pay only this strike price for each share.
That makes warrants great asymmetric bets. Because their potential payoff is way higher than their downside risk.
That 4,942% gain you mentioned… it was on warrants trading for just 19 cents. You don’t have to put a lot down when you can pick up warrants for that kind of price.
Chris: What blows my mind is that so few regular investors know about this. If these are such great asymmetric bets, why haven’t we heard of them?
Dave: It’s a great question. Billionaires know about them for sure.
When someone like Warren Buffett or Carl Icahn finances a company, they get shares just like a normal investor. But because these guys are so wealthy and powerful, they demand something extra to sweeten the deal. And that’s a warrant.
It allows them to buy extra stock in the company if it does well and the share price rises. And because warrants are meant as incentives, they’re very cheap. Buffett has bought them for as little as 1 cent each.
That’s why I love to speculate using warrants. Stocks cost tens or hundreds of dollars to build a decent position. But you’re getting these at literally pennies. If the stock they’re issued against takes off, the warrants will shoot exponentially higher.
Let’s go back to that 4,942% gain. If our readers had bought the underlying stock… and held for the same amount of time… they would have earned just 432%. Talk about a force multiplier.
But you’re right. Most regular investors are completely unaware of the power of warrants. It’s kind of a Wall Street secret. But there’s no reason it has to be, because they’re available to any investor, anywhere in the world.
Chris: When did you first become aware of them?
Dave: It was near the beginning of my career in the natural resource exploration and mining world. As newer readers may not know, I’m a geologist. I hunt for natural resources around the world.
I also raise financing for mining projects. One of them a while back was with five billionaires. I noticed warrants were the first item of discussion. Their attitude was, “No warrants, no deal.”
So I started researching. And I found that warrants were great asymmetric bets. If the trade goes against you, you don’t lose much because they’re so cheap. But if it goes your way, you win big.
This is a cornerstone of successful speculation – the asymmetry between your downside risk and your upside potential. It’s why our mantra at Strategic Trader is, “Unlimited upside, capped downside.”
Chris: And if I’m right, warrants allow you to play setups across a range of different sectors. Can you talk about that?
Dave: Last December, we closed out a warrants play on smart home company Vivint (VVNT). The stock rose 19% over the 11 months it was in the model portfolio. But the warrants shot up 390%. That’s the power of speculating in warrants.
We also have a 5G warrants play in the model portfolio. It’s up 122% since we added it last December.
Strategic Trader subscribers have also had the chance to make 118% on warrants issued by an oil driller. A lot of folks think the oil market is dead. I beg to differ. And so far, that thesis has paid off.
Chris: I’m learning lots talking to you. I love the idea of being able to make asymmetric bets in any sector I want.
If you want learn how to access Dave’s warrant recommendations, you can go right here.
Dave: Thanks, Chris. Like I said, my mission is to get the word out on this. So thanks for helping out.