Lesson #5 – Why Only Big Bubbles Will Change Your Life
Since my last bi-weekly lesson, Bitcoin has gone even higher and altcoins are making even nicer returns. Basically, everything I wrote has been spot on. Even my day-to-day updates, which I post on Quora, have been exactly right (even my LiteCoin call).
While I do focus on marijuana stocks, and I’m currently looking at the bounce-back of the travel industry, there is a reason I’ve been focused on Bitcoin. It’s my next lesson.
Lesson 5: You must become a whale hunter (for bubbles and crashes).
Ok, well don’t hunt literal whales. They’re beautiful creatures that have been pushed near enough to extinction—but you get the idea. You want enormous bubbles, not small ones. Of course, a 2600% trade is better than a 40% trade. But there are three good reasons that you want to be on the look-out for enormous bubbles.
#1 Margin of Safety
The main thing you need to remember if you are going to trade regularly is that you are a human being and that you will mess up. Let me give you a story.
I had a nice strategy for shorting volatility in 2016 when people were just breaking into that as a market. Because I do research on environmental topics, I travelled out with a group of people to the Southern side of the Grand Canyon in Arizona. What I didn’t count on was terrible cell-phone coverage (I know!), and so when I got a notice from my algorithm to make a trade, I couldn’t. It cost me a little ($2,000) and that’s the price of not being prepared. (Yes, I know about stop-losses but they weren’t suitable for my position. Afterwards, I just wrote an algorithm to fix the problem.)
The point is that as you gain experience, you’ll mess up less often, not never.
With larger bubbles, you will have the wiggle room to mess up and still make handsome returns. Remember this stupid chart:
The reason it’s so great is that the trade is far from ideal, having gotten burned a ton from the top. It requires no trades in or out for a year, so there’s little chance that you’ll get stuck in the Arizona desert with a sell signal and be unable to execute.
#2 Dumb is Better than Optimal
Here’s a chart of Canopy Growth Company (CGC) in the 2017-2018 Bubble. It went from $10 to $50.
After that, the market overproduced in Canada, and everything crashed down. Which just means that the market needed a positive catalyst to spike demand.
During the 2020 election, several states, including New Jersey, voted to legalize recreational marijuana. It was a no-brainer, because even if Joe Biden lost, at least New Jersey was likely to legalize marijuana. So I bought in before the election.
Actually, I wanted positive momentum first, so I bought in as it crossed the 200-day moving average at a little over $17 a share. There was a price squeeze to over $25 a share, and I sold off some of my position for around a 40% gain in about a month.
That idea was dumb. But dumb is better than some optimal plan of picking the bottom and selling out at the top. In fact, I still own some CGC because I think it’ll make money in the market turn around.
The point is: if you get in early enough, even a “dumb” strategy you can make some extraordinary returns.
#3 Easier to Find
The CGC story brings me to the final point: large bubbles are easier to find. You just need to look for an old bubble and then wait.
Look at this enormous run by VLO in 2017 after the last oil-crash turnaround.
Ultimately this oil refiner went from $58 to more than $120. I can’t even show the run on one screen for you, because it just kept going (look yourself).
So now I’m just waiting for VLO to turn around again once oil does. Look at what the price did when news of effective vaccines suggested that things will get back on track in 6-8 months.
That’s a squeeze from $38 to $55 in about a week. We’re not out of the woods yet with oil, but be on the lookout for this sector, as there is likely to be a very nice turn-around.
And, again, this crash turn-around wasn’t hard to find. There was a huge bubble before and you just need to make sure that the same market dynamics are at work again.
Your goal in bubble (or crash) hunting is thus to aim for big ones. Yes, they do return more, but that’s not the main reason why you should look for them. I’ve outlined three reasons that mostly have to with your fallibility:
- Big bubbles provide a margin of safety.
- Big bubbles can be traded with dumb strategies that are easy to execute.
- Big bubbles are easier to find.
I’ve also outlined why I’m looking at certain trades in the cryptocurrency, marijuana, and oil industries.
In the next article, I’ll go over crash dynamics in more granular detail. Until then!
Notes & Disclosures
Links may have referral ids: If they do, and you click on the, and you decide to buy something, the newsletter will receive a small commission that will not affect the cost to you.
General financial disclaimer: I am not providing advice on financial investments. I am only explaining how I think about this process. Please do your own due diligence before investing in anything.
Specific disclaimer: I own a variety of cryptocurrencies, including Bitcoin and Ethereum. I might also own some of the stocks discussed in these essays. In general, I trade these, so by the time you read this, I may not still own them