Why I Buy Stocks That Mutual Funds and Brokers Are Forbidden To Buy

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July 18, 2013 12:32am NASDAQ:IBB

money and investingBillionaires Portfolio: I want to share with everyone the most important lesson to becoming a good investor, the concept of asymmetrical risk reward.

The world’s greatest Billionaire Investors, Carl Icahn, Warren Buffett, and all of the top performing hedge funds in the world have mastered this concept.

Asymmetrical risk-reward means your expected reward can be multiples of your expected risk on an investment. In most case, if I do not find this risk-reward profile I will not make an investment.

At The Billionaires Portfolio as perhaps the most important part of our process, we are looking for stocks that can jump at least 100%, and more often 300% to 500%.

In general, we buy stocks that have the potential to be influenced by a huge catalyst — a takeover, the sale of a bad business unit, etc.. That unlocks value.

I also will only buy a stock or recommend a stock when I think the downside risk is little to none. How do I know if a stock has little to no downside risk? I make sure that the stock is deeply undervalued, many times trading for less than the breakup value of the company. And I want the presence of a catalyst.

The most identifiable catalyst is an influential or activist investor who already owns the stock and is pushing for the company to put itself up for sale.

Other catalysts include FDA Approvals for Biotech Stocks (NASDAQ:IBB), major political, legal, regulatory and macro changes that will affect the stock in an extremely positive way. But the best and most powerful catalyst I’ve found that can push a stock higher in the short term is to have an influential or activist investor who is already pushing for change to the company.

Catalysts driven stocks can give you a nearly 300% winner in nine months … or a 90% winner in one day. My readers have enjoyed both.

That’s my lesson for today — and it’s an important one.

william meadeWritten By William Meade From The Billionaires Portfolio

William Meade is the President of Pure Alpha Research, a hedge fund consulting and investment research firm. He is the former Director of Research at Zacks Investment Research in Chicago. Before that, he was the lead analyst at a top performing $1.2 Billion dollar institutional investment firm and hedge fund. Mr. Meade has a Masters in Applied Economics from The Johns Hopkins University. Learn more about William Meade and how he follows Billionaire Investors into stocks by visiting the Billionaires Portfolio.

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