Posted July 15, 2021
By Zach Scheidt
A Legitimate "Cheat Code" to Help You Consistently Beat the Market
Yesterday, my 8-year-old Caleb asked for his own account on our PlayStation game console.
I try to be careful about the media content my kids consume. So this question kind of caught me off-guard.
Why would an 8-year-old need his own gaming account?
His plans were innocent enough...
"Dad, when I play Minecraft at my friend's house, he uses cheat codes to build his cities faster. I want to see if I can use those codes and create some cool buildings like Dylan!"
I didn't wind up giving Caleb his own account.
But I did promise him we'd spend some time this weekend on my account, building a huge city together. I'm looking forward to spending time with him this weekend.
Caleb's question about cheat codes got me thinking about the market and how some investors have figured out special "market hacks" to help them generate profits year after year.
Did you know that there really are some “cheat codes” (or market hacks) you can use in your investment account?
These special trade situations can tilt the odds in your favor and help you become a winning investor.
(And if you're already a winning investor, using these strategies can help add to your profits and compound your wealth more quickly!)
Today, I want to show you a few of my favorite "cheat codes" in the market so that you can put them to work investing for your retirement.
A Situation You Should NEVER Turn Down
Imagine that I asked you to pull a coin out of your pocket and flip it. I'll pay you $60 every time the coin lands on heads and you have to pay me $50 every time it lands on tails.
I'm talking about a fair coin with a 50/50 chance of landing on either side of each flip.
Would you take me up on the deal?
What if I said you could flip the coin as many times as you’d like for the next 10 minutes. And the deal is still the same: $60 to you for every heads and $50 to me for every tails.
If you're smart (and I know you are) you’d flip that coin as many times as possible!
After all, you're going to win more money each time you're right than you’ll lose every time you're wrong.
Sure, there is some risk with each flip. You've got a 50% chance of losing every time you flip the coin. And sometimes you'll flip tails several times in a row.
(To put the odds in perspective, the chance of you flipping tails six times in a row is about 1.56%.
That means if our whole Rich Retirement Letter community took me up on this offer, about 1,500 of our readers would flip tails six times in a row and lose $300.
That's a significant number of people who would be pretty ticked off at me!)
But even though a small percentage of people would lose money on this trade, the coin flipping offer would still be a very good deal for you.
Any time you can stack the odds in your favor — where your potential gains are larger than your potential losses — it's worth it to take a shot!
That's exactly the kind of setup my team and I are constantly looking for in the market.
And believe it or not, the market gives us dozens of "profitable flip" opportunities every day!
Setting a Trade In Your Favor
Whenever I consider a new trade or investment for my account, one of the first things I think about is the probability of success.
After all, every single investment we take carries risk. In the market, there are no crystal balls and no one can see perfectly into the future.
But we can come up with an idea of how likely an investment is to work out profitably. And we can also get an idea of how much profit we’re likely to make if the trade works out as planned.
Putting those two factors together can give us a great idea of whether the odds are in our favor. The goal here is to set up "coin flips" that are either:
- More than 50% likely to land on "heads" or
- Pay us more for winners than we lose when the trade doesn't work out.
Bonus points if you put both of these factors in your favor!
Just to make sure this point is clear, let's look at two attractive situations I would love for you to invest in.
1: A high-probability opportunity. This is a trade that’s very likely to work in your favor.
Let's say you risk $1,000 on a stock that could pay you $1,000 in profit if it trades to your target price.
If you do your research and figure out that the stock has a 70% chance of hitting your target and a 30% chance of losing your $1,000 at risk, this is a great investment!
2: A low-probability opportunity with a high payout. This would be a more speculative trade that probably won’t work out — but it will pay you a big return if you're right.
For this play, let's reverse the situation and say that your trade only has a 30% chance of success. That means seven out of 10 times you're going to lose money.
However, with this play, you can expect to get 10 times your investment in profit if the trade works out!
So with your losing trades, you’d give up $1,000. But when these trades work out, you'll bag a $10,000 gain.
If you invest $1,000 into 10 different situations like this, you'll lose $7,000 on the bad trades. But the three winners will more than offset those losses with gains of $30,000. Add up your winners and losers and you'll walk away with a $23,000 profit!
Of course, you have to be careful to make sure you're getting your probabilities (and potential returns) right when you set up the trade to begin with.
But if you study markets and specific investments for years as I have, you'll get pretty good at estimating how these probabilities will work for any given trade!
Now, let's take a more practical look at how these "cheat code" trades work in real life.
I want to show you three different types of trades — many of which we cover regularly here at Rich Retirement Letter to help you book consistent profits in the market.
Cheat Code #1: Using a Range to Skew Your Odds
One of the first things I learned at my hedge fund job was to come up with target prices for specific stocks.
My boss and mentor Bill would often have me write up my opinion of a stock and give him three target prices for where that stock could trade.
The first target would be a worst-case scenario price. To come up with this price, I'd look at specific items like:
- Risks specific to this company
- Risks for the overall market
- Historic multiples like the price of a stock compared to its earnings or sales
- Recent ranges (or prices) where the stock had been trading
Looking at these different scenarios, I could typically come up with a worst-case scenario for the stock, helping Bill and I estimate what our risk could be with this specific trade.
Second, I'd find the most likely stock price.
This price was based on expectations for the company's earnings, the trend for the overall market, the stock's valuation compared to its peers and a few other traditional metrics.
Finally, Bill would have me mock up a best-case scenario price for the stock. This would be a price we could expect the stock to trade to if everything went perfectly and investors bought into the story.
For some plays, we might assume a new product launch or FDA approval of a drug in development.
For others, the best-case scenario would be widespread adoption of their services or expansion into an international market.
Once we got all three target prices on paper, we could assign a probability to each one.
We could figure out how much we were willing to risk and whether the potential return justified risking our clients’ capital for this specific play.
And if the numbers came out in our favor, we would enter the trade!
While you don't have to go through a detailed process like this for every stock that you buy, you should always have a good idea of how much you are risking, and what kind of return you expect to generate.
Putting these two factors side-by-side will help you make better investment decisions and "cheat" Wall Street out of less profitable plays.
Cheat Code #2: Buying Options for Better Returns
One of the most popular ways traders skew the odds towards their favor is through option contracts.
When you buy a call option contract, you're entering a contract with another trader. This contract gives you the right to buy shares of stock at a certain price.
Of course, the higher the stock trades, the more valuable this right becomes!
Similarly, when you buy a put option, you're also entering a contract. This contract gives you the right to sell shares of stock at a certain price.
So the lower a stock trades, the more value this contract has. After all, if you have the right to sell a stock at $50 even when it is trading at $20, that right is worth at least $30 per share!
Option contracts are often misunderstood by investors. And just like any tool, they can be dangerous if used improperly.
But when used correctly, you can buy an option contract that offers potential profit much larger than the amount of money you're risking.
The key with these contracts is to not just look at the potential profits, but also the probability of those profits flowing into your account.
For example, consider an option trade that could give you five times your money — but could also lose all of its value.
For this setup, you would want to make sure the probability of this option working would be at least 20%.
And to be safe, I'd prefer to have a much higher chance of winning.
If you take some time to learn how options work and how to calculate your potential profits and risks, these plays can help you grow your account very quickly!
[Editor's note: If you would like to learn more about how option contracts work, please let me know! Maybe we could spend one day each week discussing these powerful trading tools and how they fit into your retirement strategy.
If you'd like to learn more about option trading, please let me know via email: RichRetirementFeedback@StPaulResearch.com]
Cheat Code #3: Selling Options to Collect Income
While buying options can help you generate huge gains in a short time, there's another strategy you can use with options to collect reliable income.
For years I've been using this high-probability strategy to collect income for my family.
And I've also shown thousands of other traders how to do this through my Income on Demand trading service.
Did you know that you can sell a put contract to another trader and collect instant income from one of your favorite stocks?
When you sell a put contract, you're technically entering an agreement to buy shares from another trader at a specific price.
(The trader who buys the put contract has the right to sell you those shares at the agreed upon price.)
This is a great strategy if there are shares of a specific stock you’d like to buy at a discounted price.
By selling a put contract, you're agreeing to buy at that discount price. And you're getting a lucrative payment (often hundreds of dollars) for that agreement.
This strategy tends to be a very high-probability situation. So rather than flipping a 50/50 coin, it's more like betting every number on a roulette wheel.
You're bound to get paid a little bit each time. And unless the stock that you want to buy trades sharply lower, you're very likely to come out on top.
Over years of teaching other traders how to use this strategy, our Income on Demand service has had a win rate of about 95% on hundreds of closed trades.
None of these trades will make you a millionaire overnight, but the gains truly add up over time!
One Final Word of Caution
When you're using these "cheat codes" in your own trading, please be mindful that every trade carries risk. (Remember, even with the coin flipping experiment, some people will get"tails six times in a row.)
So never bet the farm on any one trade — no matter how good it looks on the surface.
If you invest a small amount into each opportunity and take advantage of the many different setups the market offers day in and day out, you'll accumulate profits without taking too much risk on any one position.
And the exciting thing about this approach is that as your account grows, you'll be able to risk a bit more on each new trade.
Before you know it, your trades will offer much more profit (on a dollar basis), while still representing only a small portion of your overall retirement savings.
That's how you grow wealth consistently and sleep at night knowing that your retirement is safe.
Ultimately, this should free your time (and your mind) to focus on the things that really matter to you.
Here's to living a Rich Retirement!
Editor, Rich Retirement Letter