Masters Series: Porter's Ghost Story

Editor's note: Some people are convinced they've seen ghosts. Some people won't stay on the 13th floor of a hotel. Superstitions and strange beliefs drive irrational human behavior. And that often carries over to the stock market, where behaving irrationally can hurt your investments more than any other factor...

For instance, if someone offered you better than 2:1 on a coin flip, would you take it? It doesn't matter that the odds are in your favor... most people wouldn't take the bet, especially when the numbers get bigger.

But as Porter explains in today's edition of our weekend Masters Series – originally published in the June 13 Stansberry Digest – a market anomaly has made a similar wager available almost every day stocks are open for trading...

Porter's Ghost Story

By Porter Stansberry, editor, Stansberry Alpha

I am not superstitious. But I once saw a ghost in my old farmhouse shortly after we moved in back in 2006.

My wife saw it, too. She has seen him a few times, actually. He stands just inside our front door, taking his gray coat off. Looks like someone who has just gotten home from a long day at work. He doesn't look like a shadow or an apparition. He looks like a person.

He scared the crap out of me when I saw him. I thought someone had just walked into my home, uninvited and without even knocking. I shouted, "Hey, what are you doing?" As soon as I did, he disappeared. In a blink, he was gone. I thought I was losing my mind. But then my wife saw him, too.

I can't really explain what I saw. But I don't believe in ghosts. I believe the universe operates according to certain physical laws – stuff than can be measured, tested, and repeated. Ghosts don't fit into that worldview.

Friday the 13th doesn't mean anything to me, either. And I think it's silly that lots of elevators don't call the 13th floor "13." After all, it doesn't matter what number you put on the button, it's still the 13th floor.

Nevertheless, today is Friday the 13th. So it's a great time to talk about human nature – superstitions and the strange things people believe that drive irrational behavior. These factors have a huge impact on your investments – perhaps larger, in the short term, than any other factor.

Humans seem to need to believe in things that aren't real (or at least, like my "ghost," that can't be proven). Playing to those emotions is a big business. For example, right now, the best-selling book in America is about a four-year-old boy who claims he saw heaven. Heaven Is Real has been on the New York Times Bestseller list for 185 weeks – longer than all but one other book on the list right now.

I'm not going to comment on whether there's a difference between religion and superstition – between believing in ghosts or in angels. It's bad enough that I write about money and politics. So please, don't bother sending me a screed about why angels are real. I'm not saying they're not. The point I'm making is simply that rational people would surely discount anything a four-year-old boy claimed, wouldn't they?

My business partner Bill Bonner is fond of saying the head is the heart's dupe. People believe they make rational decisions, but they don't. They make decisions guided by emotion and then justify their decisions with logic. Or as Bill also likes to say, "Rational people make better investors. I've just never met any."

Brian Hunt, my friend and the Editor in Chief of my publishing company, says the No. 1 rule in life is that people do crazy things all of the time. "You shouldn't let it surprise you when someone does something really stupid or even crazy. It happens all of the time."

I am endlessly fascinated with the nonsense that people believe and the strange choices people make. I secretly believe that everyone's real goal in life is to destroy himself in his own unique way. I can't prove it... but that's what experience has taught me, again and again. People do the darnedest things.

Let me show you how these human, emotional impulses influence the markets... and suggest one incredible way for you to profit on the irrational, emotional decisions of your fellow, hapless investors.

Investors tend to be more afraid of losses than optimistic about gains. That is, given a 50/50 chance to win $10 or lose $5, most people wouldn't take the bet. It doesn't matter that the "pot odds" are vastly in your favor. That's especially true when the numbers get big or when the odds are more realistic. Think about it. Imagine I offered to flip a coin and pay you $25,000 if you won, but would demand $20,000 immediately if you lost. Would you take the bet? Most people wouldn't. They fear a loss more than they enjoy a gain.

In experiments where people are actually presented with a similar bet, most people say something like "I know I should take that bet, but I've just got bad luck and I know I won't win." Those same folks, by the way, are happy to go to Vegas and play games with far worse odds as long as they win occasionally and don't have to make any big, significant bets all at once.

In short, people would rather be guaranteed to lose slowly than to take a single big bet with winning odds. Think about that for a while. Think about it in the context of your larger decisions... like the career path you chose, the person you married, the investment strategies you follow. Have you set yourself up for failure simply to avoid taking any big risks – even if those risks offered odds that were heavily in your favor?

It's unlikely that anyone will offer you winning pot odds on a coin flip. On the other hand, a similar wager is available almost every day in the financial markets. It's a simple anomaly that occurs in the options market. Investors are frequently willing to pay far more for protection from losses than they are willing to speculate on big gains. Therefore, put options (or "puts") – which obligate an investor to buy 100 shares of stock at a set price for a specific time period – often cost far more than similar call options (or "calls"), which give investors the right to sell 100 shares of stock at a set price for a specific period of time.

This so-called "put premium" can be especially dramatic when the market is pessimistic about a company's prospects. My trading service, Stansberry Alpha, uses this basic market anomaly to generate gains that wouldn't be possible if other investors were perfectly rational. By selling a put option that's too expensive relative to a call option on the same stock, we're able to create a synthetic long position that lets us take on far less risk than simply buying the stock. It also gives us much better odds of making a reasonable amount of money, as most of these trades start up 20%-30% against the capital we invest (on margin).

By capitalizing on the foolish emotions of other investors, we're able to design a strategy that offers us far greater odds of winning and that's far safer than simply buying stocks outright. Since we began publishing these recommendations (in November 2012), we've made a total of 20 separate recommendations. We've only lost money on three trades. These trades are so safe that many brokers will allow you to put up only about 20% of the capital required to fulfill the put contract. That means you get 5:1 leverage on these trades, which is far more leverage than you could normally get in stocks.

Our average gain on the margin we invest in these trades is more than 50%. And we have held the positions open for only 189 days on average. Thus, our average annualized return on margin is in excess of 100%. Even if you don't use any margin, our annualized returns so far have still been in excess of 20%.

This track record is, by far, the best track record we've ever assembled with any product over any reasonable period of time. I can explain precisely why it works. It's a pricing anomaly that's caused by human nature and people being driven by their emotions. I don't believe that will ever change. I've proven we're adept at using the strategy. The only question in my mind... why don't all of our subscribers use Stansberry Alpha?

There's no question that this strategy is far, far better than simply buying stocks outright. So... do you use it? Why not? Is there an emotional reason or a logical one? Are you so afraid of a single big loss that you're going to ignore vastly better odds? Are you going to follow a strategy that loses slowly instead of one that poses significant individual risks, but offers dramatically better overall odds? Is that rational?

You'll have to ask yourselves these questions. But... if you're honest... you already know the answers. You're either too cheap to pay for great information, or you're too afraid to try it because you don't understand it well enough.

If the only reason you're not using Stansberry Alpha yet is because you don't know enough about it, well, I've got good news. I just released a brand-new presentation about the Alpha strategy.

I'll show you exactly what kind of stocks it works best with, how to find them yourself, and how, exactly, to implement the strategy. If you're simply too cheap to subscribe to learn how to use it, this is your chance to learn for free.

Why would I do that? Why would I give away some of our most valuable information? My bet is, once you really understand why this works and how it works, you'll never buy a stock in the ordinary way ever again. You'll soon be making enough money to join the Stansberry Alliance. And you will be getting all of my products for the rest of your life. That probably sounds like blather to most of you, but I've seen it happen thousands of times. The truth is, the best way I can drum up business is to make you a much better investor. And this is the one of best ways I know how.

Regards,

Porter Stansberry

Editor's note: Porter and his team of research analysts have found a better, safer way to buy stocks than simply buying shares outright. The Alpha strategy can lead you to 50%-100% gains every six or 12 months and lowers your risk in the market.

Porter recently released a special video presentation to walk you through this trading strategy. In it, you'll get a "crash course" on how this trading strategy works. You'll also learn why RIGHT NOW is the best time to start using this strategy. And right now, we're including a free gift and a special offer simply for watching this educational workshop. But don't delay... You only have until midnight tonight to take advantage of this incredible offer. Learn more here.