Why I won't be subscribing to Special Ops
The TMF Special Ops looks like a really promising new service. And I enjoyed the videos and the text from Tom Jacobs. I have no reason what so ever to believe that he can't deliver on his past results. I agree whole heartily that turnaround opportunities are often incredible and a much sounder investment than sometimes richly priced blue chips like Apple or Amazon. Troubled companies, because of their beaten down price, often carry even less risk than the latest hot thing. Let's not forget, even the "Holy Grail" Apple has in not so distant past been a troubled, beaten down stock. So, I agree, the opportunities are there and I believe Tom Jacobs and his team can help you cash in on them.
However... We have to consider the costs of this service.
First, there is a cost of higher turnover. More buying and selling means higher trading costs, so we have to be compensated by considerably higher returns than owning a simple index fund or holding dividend paying stocks. At current trading costs I am paying $7 per trade, which amounts to $14 to buy and sell one position. So I need at least $1400 invested in a given stock to have trading costs reasonably low at 1% of investment in a low turnover scenario. In a high turnover scenario the average position should have at least $3000 to $5000 invested in them. Even if we manage to control our trading costs, the potential 10% return above the S&P500 index turns into a 8% or 9% gain. If we can't keep our trading costs low, the returns can quickly turn in a 5% or 6% return over the SP500. Still quite good.
The other cost item we have to take into account is the cost of the service itself. Potential price of the Special Ops service of $1999 is a significant amount which will weigh heavily on our potential returns. Let's say we intent to commit $50.000 to Special Ops. The cost of subscribing to Special Ops service amounts to 4% of invested capital per year. A very significant reduction of potential gains. Our previous 8% or 9% comes down to 4% or 5% returns above SP500 index, if we keep our trading costs low. If not... you see my point.
And.... We have to consider the risk.
Risk is of course very difficult if not impossible to measure. Volatility is a very poor measure of risk if at all. And as I argued before, these kind of beaten down stocks can be even less risky. My point is, we simply don't know. The only way to keep risk reasonable is to be diversified. Not just across different regions and different industries but also among different asset classes. I strongly believe that in order to control risk we need some large-cap dividend stocks, some mid-cap growth stocks and some small- and micro-cap growth and turnaround opportunities. So Special Ops portfolio have to be just a part of our overall portfolio. I would say not more than 25%.
I know that Special Ops is not only about micro-caps and only about troubled companies. It's. as I understand it, about beaten down, misunderstood and misprized stocks. So, in one word, about hidden value. But every true investment strategy is about value. We buy something, because we believe (and have some empirically measurable reason) that we have received more than what we have paid for. Everything else is trading (technical, momentum, ...). And if the value isn't hidden, it's usually not there.
So, to summarize. I think minimum amount we would have to commit to Special Ops in order to keep our costs reasonably low is $50.000. And that should not be more than 25% of our portfolio. I don't have that kind of money at the moment, so I'll pass on that experience. And by the way, for $1999 a year I can get a lot of books about investing, so I fail to see a good value in subscribing to Special Ops for the learning side of it.