“They make it sound so easy… I think the market is in a “false” recovery…

It’s being driven by interest rates. There’s the possible black swan event in the Ukraine… The price of oil’s moving toward $100/barrel… Consumer spending will come to a halt... There’s the new COVID-19 hybrid… I could go on.

Oh, forgot inflation.”

A RiskHedge reader questioned my recent interview with micro-cap expert Chris Wood.

In it, Chris said the recent sell-off is handing us an amazing opportunity to pick up disruptive micro-caps at bargain-basement prices…

Chris says we’re seeing valuations we haven’t seen since the darkest days of COVID.

Back then, he urged anyone who’d listen to buy the right micro-caps while they were on sale. Readers who acted on his guidance were handsomely rewarded.

Since the “corona crash,” Chris has closed a total of 10 positions in his Project 5X advisory for an average gain of over 200%.

So today, I’m bringing Chris back in to address this subscriber’s concerns.

We’ll also look at Chris’s performance in 2021—and how he was able to successfully navigate his readers through a rough year for markets.

***

Chris Reilly: Chris, a reader brought up a good point. Yes, micro-caps are dirt-cheap again today, just like in March 2020. But there are new factors to consider—what about all these negative headlines that dominate the news?

Chris Wood: Negative headlines always dominate the news… and they always will.

If you pay too much attention to them, you’re going to make bad decisions with your money. Like selling an investment at exactly the wrong time. Or not having the will to act when faced with an amazing opportunity.

If you’ll allow me to geek out for a second, I’ll explain why this is true…

See, there’s this concept in neuroscience called “negativity bias.” It means that negative experiences affect us more than positive ones.

So, we humans tend to focus more on bad stuff. We also tend to remember, learn from, and respond more to bad stuff than good stuff.

This tendency is an evolutionary hand-me-down from our ancient ancestors.

Our ancestors had to worry about being eaten by predators. Or being overrun by marauding tribes. Their brains evolved to notice any sign of danger in their environment. And to respond to that danger for survival.

The world has changed a lot since then… but our brains haven’t. We’re still predisposed to pay special attention to negative information.

And the news media is happy to exploit this to generate gobs of advertising revenue.

The threat of a new war… The threat of inflation… The threat of a new deadly disease…

We’re constantly getting bombarded with bad news.

The point of all this being that while our subscriber said, “They make it sound so easy…”

I’m actually saying the opposite.

It’s hard to make good investment decisions when the media is hell-bent on scaring you.

Reilly: How so?

Wood: It’s hard to overcome negativity bias and buy when everyone else is selling.

That’s why most folks fail to buy low and sell high.

And look, I’m not saying don’t be informed. But I am saying don’t let bad news cloud your decisions. If you do, you’ll miss out on great opportunities.

Reilly: Your Project 5X portfolio achieved a 53.39% return in 2021 (measured using the Internal Rate of Return method), which is saying something considering micro-caps got pummeled.

How were you and your readers able to come out on top?

Wood: Put simply, we took profits when they were available.

Even in a bad year for micro-caps, you’ll get some profit opportunities if you’re invested in the right ones. And you must take advantage of those opportunities.

For example, the first six weeks of 2021 were very good for micro-caps. During that period, many of our stocks shot up to new highs.

On February 12, we booked a 399% gain on Kopin (KOPN) and a 422% gain on Magnite (MGNI).

We sold those stocks because they soared past my three-year price targets in less than two years, and their valuations had gotten ahead of themselves.

It’s a good thing we sold when we did. Kopin has fallen 74% since then. And Magnite fell 77%.

We also took advantage of the high prices early in 2021 by taking “free rides.”

Reilly: Can you share more details on your free ride strategy for new readers?

Wood: A free ride is a simple transaction. It means you sell enough shares to pull your original investment out, then let the profits ride.

So you can’t lose money on the position, even if it goes to $0. And you still have skin in the game to profit if the stock price continues to rise.

In other words, a free ride lets you ride stocks to big profits AND reduce risk by locking in gains.

It’s an incredibly important strategy in the micro-cap world because these stocks are so volatile. And taking your initial investment off the table helps you stomach the volatility and sleep at night because your capital is preserved.

In Project 5X, we usually take free rides after a stock has risen 100% to 200%. So we’ll always have at least half of our initial position after a free ride.

In the first six weeks of 2021, we took 10 free rides. This played a huge part in how we were able to generate a 53% return for the year.

Micro-caps sold off for pretty much the rest of the year. But we realized so many gains early in the year our downside was protected. We’d already taken a big pile of money off the table.

We ended up selling five of these stocks during the year for total realized gains of 422%, 399%, 252%, 177%, and 35%.

And the five other free rides we took are up an average of 61%. If we hadn’t taken the free rides, we’d currently be down an average of 1.3% on these stocks.

Reilly: Our readers sometimes get frustrated with us recommending free rides…

Wood: I get it. You have to sell a stock exactly when you don’t want to… when it’s soaring!

But when it comes to micro-caps, taking some money off the table when it’s available is essential.

And 2021 was the perfect example of that.

In our next talk, I’ll share why 2022 is shaping up to be a big year for micro-caps. And I’ll detail a tiny stock that looks a lot like Magnite and Kopin before they went on their big runs…

Reilly: Thanks, Chris.

Readers, before I sign off, I have an exciting announcement to share with you…

In short: my publisher and I recently got together and came up with what we believe is the perfect way to capitalize on our research in 2022…

We call it the RiskHedge All Access Pass. It gives you full access to every single RiskHedge publication. That’s every pick. Every important alert. Everything you need to navigate 2022 successfully.

It’s valid this week only. And we’re only issuing 200 passes.

I’m running out of time to share all the details today…

But if you’re interested, go here to see what we put together for you.

Chris Reilly
Executive Editor, RiskHedge