- Money Morning Australia

Three Steps to Wealth: Leverage, Volatility and Risk

Written on 06 September 2011 by Kris Sayce

Three Steps to Wealth: Leverage, Volatility and Risk

In yesterday’s Money Morning we signed off with this thought:

“Think about it this way: the long-term average annual gain for stocks is about 11% per year – give or take a few per cent. But if you play smart, you can make roughly half of that by sticking a wad of your money in cash or a term deposit.

“The trick, of course, is how to make up the extra 5-6% you need to mirror the long-term performance of stocks?

“That’s where you use stock market leverage, volatility and risk to your advantage.”

But before we get stuck into that, a quick note on this year’s Gold Symposium. This is an event our colleague, Australian Wealth Gameplan editor, Dan Denning has spoken at for the past few years. He’s speaking at this year’s event too.

As an added bonus for attendees [wink], your editor is set to chair day two of the Gold Symposium.

Keynote speakers that day include Eric Sprott of Sprott Asset Management, based out of Toronto. And Ben Davies of Hinde Capital, based in London.

If you’d like to check out the programme, click here. And if you’d like to register for the two-day event in Sydney at a cost of just $199, click here.

Oh, by the way, we don’t get a kickback or anything if you register. We just mention it because it’s something we think you may be interested in…

And as you know, gold is one of our must-have components in an investment portfolio. And we don’t just mean the 3-5% rubbish some of the mainstream advisors now recommend. They’ve just jumped on the bandwagon so they can say, “Yeah sure, we recommend gold…”

But even those guys are in the minority. 98% of financial advisors wouldn’t have a clue about gold, let alone recommend it.

Anyway, you know our position on the shiny metal. So we won’t labour the point. There are other things to discuss…

The glum 10-year record of stocks

Back to yesterday’s cliff-hanger: just how do you make up the extra 5-6% you need to match the long-term performance of stocks?

The first answer I can give you is: don’t invest in an index. For the past 10 years, the S&P/ASX 200 has gained a whopping… 26.4%.

That’s an average non-compounded gain of 2.64% per year. That’s terrible.

Of course, if you add dividends, the result is better… From June 2001 to June 2011 you would have doubled your money, assuming you were able to reinvest all dividends.

But here’s the thing. Most of the return has come from income, not capital growth.

That tells you, for growth investors, betting on the index and blue-chip stocks won’t get you anywhere fast.

Most of the return – three-quarters of it – has come from income. But in order to get the income, investors have had to sit through an extraordinary period of gut-wrenching market volatility. To sit back and keep cashing the dividends while stock prices fall takes nerves of steel.

But let’s be honest, most folks don’t have nerves of steel. Most aren’t hardened investors… they’re just people who want to make a decent living.

People who want enough saved for retirement so they don’t have to live off tinned hotdogs, wear op-shop clothes or rely on the crappy public health system.

What we’re getting at is this: why have sleepless nights with all your cash in the stock market if the stocks you’ve invested in are only giving you income rather than capital gains?

Why wouldn’t you relax by having most of your cash tucked away in the bank? (We’re no fan of the banks. That’s why you should hedge your cash position by holding a decent position in gold.)

But, that doesn’t mean you should put all your cash in the bank. Not while there’s the opportunity to use leverage, risk and volatility to your advantage.

The key is not to play along with the crowd. Because the crowd is rigged by vested interests. It’s a game they’re playing, using their rules… and your money!

If you can’t get the same deal, get a better deal

A perfect example is Warren Buffett’s deal to buy part of Bank of America [NYSE: BAC]. When the news was announced, investors loved it. They bought Bank of America shares on the news. The share price rallied 20%… “Well, if Warren’s buying, it must be good.”

But it isn’t. Warren’s getting his own deal. In fact, under the structure, it’s actually bad news for other Bank of America investors because he gets an almost guaranteed 6% dividend yield while ordinary shareholders get an unguaranteed 0.55% yield.

Warren is playing for the other side. He’s not playing on the same team as you. That means you shouldn’t do what he does, you should do the opposite to what he does!

For a start, it means buying gold, holding cash for a 5% or 6% compounded return and then using just 10-20% of your savings on strategic investments.

How so? Let us explain…

We’re not saying shares are a bad investment – that would be strange for a publisher of financial newsletters. But you’ve got to be smart with investing. You’ve got to understand how the market is rigged against you, and what you can do about it.

The best way to handle it is to through Risk, Volatility and Leverage:

  1. Leverage: This is where you try to bet pennies to make pounds. Stick a few small-cap stocks in your portfolio that are leveraged to market events. My old pal, Diggers & Drillers editor, Dr. Alex Cowie has done this with a bunch of gold and silver stocks. Don’t invest your life savings in these stocks. They’re risky. But with gold edging higher, small-cap gold plays should out-gain physical gold at some point. And that makes them worth it. But small-caps aren’t just about growth. If you’re conservative, there are a number of profitable small-cap stocks that offer growth and better-than-the-bank dividends. Again, you can make a small investment in them and get a good yield, plus growth.
  2. Volatility: Trade stocks. It sounds hard, but it doesn’t have to be. You can start off small and these days with the market volatility you can even make good returns trading blue-chip stocks. Just ask our Slipstream Trader, Murray Dawes. This morning he sent out a take-profit alert on two stocks he short-sold last Friday. Of course, be careful. Trading isn’t for everyone. And if you don’t have the time to do your own research, you either need to make time or pay someone to do it for you. You can check out Murray’s latest free video update here
  3. Risk: Buy no more than a handful of reliable blue-chip stocks that pay a regular dividend. These should be “bottom drawer” stocks. That means, stocks you’re prepared to hold on to through thick and thin… simply because you’ve only got a small part of your wealth invested in them. If the blue-chip stocks you’ve picked are really good you should think about taking part in the dividend reinvestment plans so you can compound your returns. But you should only do this if you don’t need the cash income from dividends.

Now. Don’t ask us how much you should invest in each area. That’s up to you. The most important thing is to do what’s comfortable. If you’re not comfortable trading, then don’t do it – it’s not the end of the world if you don’t.

But it may mean increasing your exposure to small-cap stocks, or putting a bit more into stocks that pay a dividend – or any other way of giving your returns a little boost.

But whatever you do just remember that when central bankers, politicians and mainstream advisors tell you something has to be done to save the economy, what they’re really saying is, “This is what needs to be done to save our own necks, and you – the taxpayer – have to pay for it.”

Don’t fall for it.


Already a subscriber to Money Morning... or simply, just like what you're reading? Then show your support and spread the word...
Share this post on...

Kris Sayce
Kris is never one to pull punches when discussing market developments and economic events that can affect your wealth. He’ll take anyone to task — banks, governments, big business — if he thinks they’re trying to pull a fast one with your money. Kris is also the investment director for Australian Small-Cap Investigator, Diggers and Drillers and Revolutionary Tech Investor. If you’d like to more about Kris’ financial world view and investing philosophy then join him on Google+. It's where he shares investment insight, commentary and ideas that he can't always fit into his regular Money Morning essays. Read more about Publisher and Investment Director Kris Sayce.

Leave a Comment

Letters will be edited for clarity, punctuation, spelling and length. Abusive or off-topic comments will not be posted. We will not post all comments.

If you would prefer to email the editor, you can do so by sending an email to moneymorning@moneymorning.com.au

3 Comments For This Post

  1. susan Says:


  2. SG Says:

    Hong Kong………the most ‘different here’ real estate bubble there every was (this decade)

    So breath in that fresh different air, put a big different smile on your face and some difference in your step………and get out there and feel better about that different you………….(realities sold separately)
    “We would love to spend some money in Hong Kong,” he said. “But I just think the cycle timing is completely wrong right now. My concern is we’re headed towards another 1994.”
    Low interest rates sent Hong Kong office values to record highs in early 1994. Prices of offices in landmark buildings fell as much as 30 percent by February 1995, then Morgan Stanley Asia Managing Director Peter Churchouse estimated. The decline came after Hong Kong followed the U.S. to raise interest rates, suppressing demand for housing and offices, and as China ordered its banks to tighten credit.

    “Property prices will start to decline soon and we are likely to see that in the rest of the year,” said Yu Kam-hung, a Hong Kong-based senior managing director for valuation and advisory services in Greater China at CB Richard Ellis Group Inc. “Prices will trend down by about 10 percent in the next two years and I don’t rule out the chance that they may fall as much as 20 percent in the worst case scenario.”

  3. Chris Chalkley Says:

    Another excellent article! Well done!

FREE INVESTMENT REPORT: Why Dividend Stocks Are The Key To Retirement Wealth

In this report discover how dividend stocks can give you income long into retirement — even if stock prices don’t rise.

PLUS you'll get Money Morning every weekday...absolutely free.

Enter your email address below and hit the 'Claim My Free Report' button now.

Privacy Statement
We will collect and handle your personal information in accordance with our Privacy Policy.
You can cancel your subscription at any time

New Frontier Investor

The last investment megatrend birthed stock gains of 11,095%, 20,621% and 50,760% over 20 to 40 years.

If Kris Sayce is right, gains from this next megatrend won’t just reach those heights...

They’ll SURPASS them...

To see why, click here.

Iron ore leadgen

  • ^NDX3961.623+27.487 - +0.70%
  • ^FTSE6795.34+66.90 - +0.99%
  • ^AORD5553.600+19.600 - +0.35%
  • ^AXJO5563.100+19.800 - +0.36%
  • AUDUSD=X0.9387
  • USDJPY=X101.525

The Denning Report

‘The era when the US was a
superpower has ended. We need
to protect ourselves’

Japanese Politician Takaya Muto

A quiet war in the Pacific has begun. The key combatants are the US, China and Japan. And WE are trapped in the crossfire.

In this brand new special report Dan Denning details three reasons why Australia is losing control of its future...and a three-part investment strategy you can use to protect your wealth and PROFIT


interest rates leadgen

Australian Small-Cap Investigator

Why Holden’s future lies
beneath the soil in

And not just the future of Holden…but Toyota,
Hyundai and Mazda too


investing success leadgen

Phil Anderson Cycles, Trends and Forecasts

‘This man can see the future…’

In 2003, when America was at war and CNN was warning of a ‘double-dip recession’, he was buying small cap stocks right at the bottom...

Also in 2003, Australian newspapers were full of headlines warning of a looming property crash, he said nonsense, and that Australian property would boom for years to come...

In 2011, when everyone thought the euro was history, he said ‘the euro is not going to collapse... Greece will NEVER be permitted to default...’

Simply: this man can see things others can’t.

To find out who he is, and what he’s forecasting right now, click here.

Resource Sector leadgen

Gowdie Family Wealth

Which type of family are you?

  1. The kind that ends up in court
    battling over inheritance money…

  2. Or the kind that knows how to
    protect, pass on and grow wealth forever.

Click here if you want the kind of family
that grows its wealth for generations.

Diggers and Drillers [BANNER]

The Money For Life Letter

A giant wrecking ball is about to smash Australia’s retirement system to smithereens...
And unless you take the evasive action outlined in this Special Issue, everything you’ve saved and invested over your whole working life could soon be GROUND to DUST.
Click here to read.

Gold Stock leadgen

Revolutionary Tech Investor


You decide to buy a share on the stock market.

The company, on face value, is run by lunatics.

Their business plan is madness.

It's only 48 cents. What the hell?

You whack ten grand into it.

Ten years later that $10k is worth just shy of

Welcome to the Moon-Shot Club!

Graphic Ad 1 – Blue Chip Stocks Report

More Recommended Reading Below...

The Pursuit of Happiness & The Daily Reckoning

  • The Pursuit of Happiness
  • The Daily Reckoning Australia

New Zealand may not be an emerging market, but it’s highly leveraged to growth in emerging markets. [Read More...]

Clearly, illegal immigrants are a headache for the government. But rather than store them on Christm [Read More...]

Don’t fear the swan. But don’t be complacent either. Acknowledge and respect that black swan events [Read More...]

Education was one of the most pressing concerns at the World Future Conference. Our education system [Read More...]

As our personas become ever more digital, our social capital online will be equally important. We ar [Read More...]

Russia and its supporters have nothing to gain from attacking civilians. Russia and Putin were winni [Read More...]

This morning the Australian dollar is trading for 93.9 US cents. It hasn't managed to regain pa [Read More...]

While Australian investors continue to hold most of their share investments in local stocks, they ar [Read More...]

Investors can't consistently choose good investments; because they don't know the future. [Read More...]

Stock markets around the world keep going up. Australia's stock market keeps going sideways. Th [Read More...]


"I think you're fantastic! I love to read what you write...you're so interesting and amusing and I've learned so much" -
Money Morning reader, Chris Gadd

"You guys are brilliant. I feel more relaxed about the future than ever simply because I know what is going on rather than floundering around with smoke screens and mirrors from the government and mainstream" -
Money Morning reader, Helen Carter

"Wow what can I say? I was an economically confused moron until I read your newsletter and even though I've been a subscriber for a short period I can now see how easy it is to understand, if you use common sense and can have the spin translated into everyday language. Thanks for an entertaining read." -
Money Morning reader, John

"Keep up the good independent and well thought out articles offering a view that often debunks mainstream myths." -
Money Morning reader, Craig

"I do admire your straight talking and simple analysis of the situation, I think of you as the Jeremy Clarkson of finance." -
Money Morning reader, Jeffery