The Fat Tail Idea Right Now

The Fat Tail Idea Right Now

The market is under pressure right now. Friday’s market action was ugly.

The open today is mostly red too.

However, I don’t think there is any reason to panic here. Volatility is washing through the global markets as the outlook for interest rates rattle around.

Is inflation transitory? Is it more than that?

We don’t presume to predict the future here at The Daily Reckoning Australia. If we have a creed, it’s that we are never certain about anything.

Nor do we need to be. What we want to find in any market — or under any interest rate — are ‘fat tail’ investment ideas.

These are the only ones worth bothering with usually. They carry massive upside…if they work out.

But, by their nature, they must be either against the herd or massively misunderstood in some way.

Let me give you an example.

Most people treat Bitcoin [BTC] as if it’s some kind of strange asset they don’t understand. But they can also see people can make lots of money from it.

Therefore they don’t mind dabbling in it — say 1–2% of their total portfolio — but they wouldn’t dream of owning nothing else.

And yet that is exactly what one of my friends has done. His entire portfolio is bitcoin.

I’m not recommending you do this. The volatility and risk of such a holding are gigantic.

But think through the implications if bitcoin does hit US$100,000 or above in the next five years. He will make a small fortune.

Of course, if it doesn’t, he may very well see his portfolio cut in half or go to zero if he doesn’t get out in time.

Most of us couldn’t stomach this kind of bet. We’re too comfortable and sensible, and rightly fearful, to place our health, future, and sanity at such a risk.

So we accept the historical market return of 8–10% a year as acceptable. We will likely not get rich this way. But we can get by in a little more comfort than yesterday.

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And yet occasionally, opportunities present to put a small stake down that can become an astonishing sum.

The beauty of these is you need not risk your entire portfolio to gain an outrageous return.

These ideas can only come from two areas, really…small-cap stocks and cryptos.

That’s because both sectors offer huge growth potential and are under-researched enough to offer an asymmetric risk versus reward.

I can offer a recent example. I tipped a little gold explorer in December 2018 at 12 cents per share. It was called Chalice Mining Ltd [ASX:CHN]. A subscriber placed $3,000 on it.

He never sold — even through the COVID collapse — and his stake was worth nearly $200,000 when he wrote to me last year.

Chalice is now $8.80 a share…despite spinning out an asset last year too into a separate IPO. A big mineral discovery…one of the best in decades…sent it into the stratosphere.

That was a fat tail investment idea that worked out. Many don’t. Those ones we try to forget…

But it’s astonishing to me how many people do not approach the stock market with this hunt in mind.

I have a wealthy friend that is happy to hold Woolies…BHP…Telstra…you know, the usual list.

When I suggested a small iron ore developer last year, after the iron ore price crash, he balked.

He tuned into the mainstream commentators forecasting its return to somewhere near $70–80 a tonne.

So far, they have been proven wrong. Iron ore is back at $130. And my little developer was up 50% from its recent low — until last week’s market sell down anyway. We’ll see what happens from here.

Every commodity or stock book tells you to buy after a price crash. But it’s never easy because whatever drove the crash in the first place seems so resonant.

Some in the market genuinely believed Chinese property would collapse last year. Buying iron ore stocks was a ‘crazy’ — or fat tail — idea.

And yet, in the last two months, some of the strongest stocks have been Fortescue, Rio Tinto, and BHP. They are set to pay monster dividends in February — again.

Will this continue? I have no idea. But I’m riding the train while it’s there.

Where else might we find a fat tail idea?

I’ve told you. Crypto is likely your best bet now. The market has been walloped recently. People seemed spooked by this, despite this being the very nature of crypto.

As the price goes lower, you should be getting more interested, instead of less.

Fat tail ideas never feel easy. That’s why they can be so damn profitable!

Search for them every day…and who knows…maybe one day you could turn $3,000 into a near $200,000 too.

Best Wishes,

Callum Newman Signature

Callum Newman,
Editor, The Daily Reckoning Australia

PS: Our publication The Daily Reckoning is a fantastic place to start your investment journey. We talk about the big trends driving the most innovative stocks on the ASX. Learn all about it here.