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Tips for holding aggressive investments while cutting risk as a conservative investor

aggressive investments

Conservative investors have many opportunities to profit from aggressive investments. Here are some tips.

Most of the aggressive investments we recommend in our Stock Pickers Digest newsletter expose you to more risk than you’ll find in the recommendations of our flagship advisory, The Successful Investor. But you can minimize that extra risk—and expand your profit—by applying the risk-cutting philosophy of The Successful Investor to aggressive investments.

That means you should hold your aggressive investments within a portfolio that reflects our three-pronged Successful Investor wealth-building philosophy. That is, invest mainly in well- established companies; spread your money out across most, if not all, of the five main economic sectors (Manufacturing, Resources, Consumer, Finance and Utilities); and downplay stocks that are in the broker/media limelight.

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As an aggressive investor, you may stretch these rules a little, while still sticking to the general idea.

You may invest in more companies that are less well-established, compared to choices that would appeal to a conservative investor. But you’ll want to stay away from the most highly speculative types of aggressive investments. For instance, you’ll want to avoid loading up on “penny mines” (speculative mining stocks that have not yet proven they have a mineral deposit that can be mined at a profit). You’ll also want to stay away from “concept stocks”—junior companies that have a business plan but have not yet established a business, much less made a profit or paid any dividends. Stocks like these expose you to a serious risk of total loss. You find a lot of these kinds of concept stocks in the technology industry.

In contrast, the growth stock picks you’ll find in Stock Pickers Digest have established a business and have at least some history of building revenue and perhaps cash flow. They are well beyond the risky start-up phase where so many companies fail.

Picking aggressive investments from tech stocks

Junior technology stocks are considered aggressive investments. For this reason, when we pick stocks in the more volatile technology field, we make it a priority to focus on firms with high research and development spending. That’s because technology stocks have to treat their research spending as a day-to-day expense, much like salaries or taxes. So research spending comes out of the current year’s sales, and it lowers the current year’s earnings.

As a result, many tech stocks’ earnings per share may look lower than those of stocks in other industries. But, in fact, taking out research spending, they are much more profitable than they appear. That causes some investors to overlook promising tech firms, or to see them as overpriced.

Research and development spending has the potential to pay off in dramatic long-term returns. That’s because the products that grow out of this spending will help tech firms increase their sales and profits over the longer term.

We see high research spending as an especially powerful ingredient for technology stocks that will profit from a global economic recovery. That’s because they’ll be ready with new and improved products that businesses and consumers will want to use when they increase their technology spending.

Aggressive investments are often found in riskier sectors

Compared to a conservative investor, you may choose to invest more heavily in Manufacturing and Resources, the two riskiest sectors. If so, take care to spread your money out across the many industry groups within each of these sectors. That way, you protect yourself from an unforeseeable industry downturn. When holding aggressive investments in Resource and Manufacturing, we continue to recommend picking the top companies in these sectors. For example, if you want to hold gold as an aggressive investment, we’d recommend that you hold gold mining companies that continue to increase production and generate cash flow even when gold prices are low.

Another key part of our philosophy is to downplay stocks that are in the media/broker limelight, since it fosters bloated investor expectations. When stocks fail to live up to those expectations, big downturns can follow.

Applying the Successful Investor philosophy to aggressive investments also leads us to stay out of most new issues or IPOs. That’s because most new issues come to market when it’s a good time for the company or insiders to sell. That’s rarely a good time for you to buy.

Key factors to look for with aggressive investments

A further key factor we look for in our aggressive investments is hidden assets. By hidden assets, we mean assets that are getting less investor attention than they deserve. When assets are wholly or partly hidden or ignored, a stock can trade for less than it’s worth. So buyers get a bargain. These stocks are also more likely to attract takeover bids from corporate acquirers, who are usually looking to buy asset bargains, just like us.

For example hidden assets can include real estate. When a company buys real estate, the purchase price goes on its balance sheet as the historical value of the asset. Over a period of years or decades, the market value of that real estate may climb substantially. But the historical purchase price remains unchanged on the balance sheet. At times, the hidden assets in a company’s real estate can even come to exceed the market value of its stock.

Some assets stay hidden indefinitely. But most of the aggressive investments we recommend have other pluses as well that give them above-average value—rising sales, good balance sheets and a strong hold on a growing market.

A key risk of aggressive investments is to get carried away at market extremes—throwing caution aside when stock prices are shooting up, and dumping good stocks when prices drop.

By following our conservative philosophy, you can attain what we’d call the best of all possible investment worlds in your aggressive investing: a heads-you-win, tails-you-break-even situation. When times are good, it can be extraordinarily profitable. But during the inevitable market downturns, it cuts your losses and leaves you well positioned to profit again in the inevitable recovery.

How much of your portfolio have you allocated to aggressive investments? Has your strategy changed towards aggressive investments? Share your experience with us in comments.

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