Showing posts with label Market. Show all posts
Showing posts with label Market. Show all posts

Saturday, February 16, 2019

Here We Go - Get Ready for the Breakout Pattern Setup

We are writing this post today with a few forward-looking expectations while attempting to warn traders that some extended rotation is likely to enter the markets over the next 30+ days. If you’ve been following our research, you’ll know that we’ve been calling these move months in advance of other researchers and analysts. Our September 17, 2018 research post highlighting our Adaptive Dynamic Learning predictive modeling system suggested the U.S. stock markets were poised for a massive price rotation followed by a very unique price setup that we are experiencing now.

Currently, the YM (Dow Futures Contracts) are leading the pack on a dramatic upside breakout move. This is likely a result of the US government spending bill that is recently working its way towards approval and the fact that this new spending bill clears the way for at least 8+ months of uninterrupted market optimism (or at least we hope). This 300+ point upside move clearly breaks price highs and puts the U.S. stock market, at least the Dow/Blue-Chips, back into “new high trending mode”. As many of you are likely aware, our Fibonacci price study teaches us that price must ALWAYS seek to establish new price highs or new price lows AT ALL TIMES. Thus, these new price highs are a very strong indication that the upside trend is dominant and should continue for a while.



Additionally, we want to highlight what we believe will be a similar price pattern to 2015/2016 in the U.S. markets – a multiple Price Wedge formation that could ultimately set up another price leg (which we believe will be higher, to the upside, at this time).

In the next article “PART II” pay close attention to the charts and images as we are attempting to clearly illustrate how and why price rotation is about to hit the US markets and why you need to be prepared for this move.

We continue to read that large amounts of capital are sitting on the sidelines or have been pulled from the markets over the past 12+ months. We understand this as the rotation in early 2018 frightened many investors and the continued sideways price action, global market concerns and geopolitical issues have caused international investors to want to protect their investments from risk – thus they move their capital into cash. We get it. But we also believe the next breakout in the U.S. markets will be a great opportunity for skilled traders to identify and prepare for an incredible profit potential no matter which way the market breaks up or down because technical analysis allows us to closely follow the direction of the market.

The amount of capital that is sitting on OUTSIDE the markets, currently, represents a massive amount of resources that could re-enter the markets when traders/investors decide the timing is right. We’ve termed this a “Capital Shift”.

In simple terms, it reflects capital/cash moving from one market to another or from actively invested to cash, then back to actively invested. Our belief is that capital operates in a manner to always protect itself from risk while attempting to identify suitable returns. The best environment for capital is always a relatively safe investment with protective values and a high probability of decent returns. Therefore, this massive amount of capital not being deployed in the global markets will, at some time, re-enter the markets and will likely increase pricing valuations.

How and when will this capital re-enter the markets? What will price activity look like and how will we know when the timing is right for our own strategic deployment of our trading capital? Continue reading to learn why we believe we are only 30~45 days away from an incredible trading setup. You won’t want to miss this one.

Please take a minute to visit The Technical Traders to learn how we can help you find and execute better trade in 2019 and stay ahead of these market moves. We are confident that you will find our Daily Video, Detailed Market Research, Proprietary Research Tools and Detailed Trading Signals will help you make 2019 an incredibly successful year.

Chris Vermeulen
Technical Traders Ltd.


Stock & ETF Trading Signals

Wednesday, December 26, 2018

Has This Selloff Reached a Bottom Yet?

Everyone wants to know if this selloff has reached a low or bottom yet and what to expect over the next 30 - 60+ days. Since October, the U.S. stock market has reacted to the U.S. Fed raising rates above 2.0% with dramatic downward price moves. The latest raise by the U.S. Fed resulted in a very clear price decline in the markets illustrating the fact that investors don’t expect the markets to recover based on the current geopolitical and economic climate.

Over 5 years ago, our research team developed a financial modeling system that attempted to model the U.S. Fed Funds Rate optimal levels given certain inputs (US GDP, US Population, U.S. Debt, and others). The effort by our team of researchers was to attempt to identify where and when the U.S. Fed should be adjusting rates and when and where the U.S. Fed would make a mistake. The basic premise of our modeling system is that as long as Fed keeps rates within our model’s optimal output parameters, the U.S. (and presumably global) economy should continue to operate without massive disruption events unless some outside event (think Europe, China or another massive economic collapse) disrupts the ability of the U.S. economy from operating efficiently. We’ve included a screen capture of the current FFR modeling results below.

This model operates on the premise that U.S. debt, population, and GDP will continue to increase at similar levels to 2004-2012. We can see that our model predicted that the U.S. Fed should have begun raising rates in 2013-2014 and continued to push rates above 1.25% before the end of 2015. Then, the U.S. Fed should have raised rates gradually to near 2.0% by 2017-2018 – never breaching the 2.1250% level. Our model expects the U.S. Fed to decrease rates to near 1.4 - 1.5% in early 2019 and for rates to rotate between 1.25%~2.0% between now and 2020. Eventually, after 2021, our model expects the US Fed to begin to normalize rates near 1.5-1.75% for an extended period of time.


Additionally, our Custom Market Cap index has reached a very low level (historically extremely low) and is likely to result in a major price bottom formation or, at least, a pause in this downward price move that may result in some renewed forward optimism going forward. Although we would like to be able to announce that the market has reached a major price bottom and that we are “calling a bottom” in this move, we simply can’t call this as a bottom yet. We have to wait to see if and when the markets confirm a price bottom before we can’t attempt any real call in the markets. You can see from our Custom Market Cap Index that the index level is very near historically low levels (below $4.00 – near the RED line) and that these levels have resulted in major price low points historically. We are expecting the price to pause over the next week or so near these $3.50 levels and attempt to set up a rotational support level before attempting another price swing. As of right now, we believe there is fairly strong opportunity for a price bottom to set up, yet these are still very early indicators of a major price bottom and we can’t actually call a bottom yet. If our Custom Market Cap Index does as it has in the past, then we are very close to a bottom formation in the US markets and traders would be wise to wait for technical confirmation of this bottom before jumping into any aggressive long trades.


Lastly, our Custom Global Market Cap Index has also reached levels near the lower deviation channel range over the past 7+ years, which adds further confidence that a potential price bottom may be near to forming in the US markets. As we can see from the chart below, the recent selloff has pushed our Global Market Cap Index to very low levels – from near $198 to near $144; a -27.55% total price decline. Nearing these low levels, we should expect the global markets to attempt to find some support and to potentially hammer out a bottom, yet we are still cautious that this downward price move could breach existing support levels and push even further in to bear market territory.


There are early warning signs that the market may be attempting to form a market bottom and our research team is scanning every available tool we have at out disposal to attempt to assist all of our members and followers. We alerted you to this move back on September 17, 2018 with our ADL predictive modeling system call for a -5 - 8%+ market correction. Little did we know that the U.S. Fed would blow the bottom out of the markets with their push to raise rates above the 2.0% level.

As the U.S. Fed has already breached our Fed Modeling Systems suggested rate levels, the global markets will be attempting to identify key price support in relation to this new pricing pressure and the expectations that debt/credit issues will become more pronounced as rates push higher. In other words, the global markets are attempting to price in the renewed uncertainty that relates to the U.S. Fed pushing rates beyond optimal levels. We expect the markets are close to finding true support near the levels we’ve shown on our Custom Index charts, yet we still need confirmation before we can call it a bottom.

We will continue to update you with our research and analysis as this move plays out and we hope you were able to follow our analysis regarding the Metals, Oil, Energy and other sectors that called many of these massive price swings. We pride ourselves on our analysis and ability to use our proprietary tools to find and execute successful trades for our members. Our ADL predictive price modeling system is still suggesting an upward price move is in the works for the U.S. markets and we are waiting for our “ultimate low price” level to be reached before we expect an upside leg to drive prices higher again. Based on our current research, we may be nearing the point where the markets attempt to hammer out a price bottom – yet time will tell if this is the correct analysis.

Please take a minute to visit The Technical Traders to learn how we help our members find and execute better trades. Recent swings in the markets have made it much more difficult for average traders to find and execute successful short term trades. Learn how we can help you find greater success and read some of our recent research posts by visiting our Free Research section of the Technical Traders.



Stock & ETF Trading Signals

Monday, January 15, 2018

How to Know if This Rally Will Continue for Two More Months

Our trading partner Chris Vermeulen has our readers off to an amazing start for 2018. If this is any sign of what we have to come this year we are in store for one of our best years of trading possibly ever. 

Chris just sent over his latest article and it explains how our old reliable Transportation Index is guiding the way once again. Read "How to Know if This Rally Will Continue for Two More Months".

Our research has been “spot on” with regards to the markets for the first few weeks of 2018. We issued our first trade on Jan 2nd, plus two very detailed research reports near the end of 2017 and early 2018. We urge you to review these research posts as they tell you exactly what to expect for the first Quarter in 2018.

Continuing this research, we have focused our current effort on the Transportation Index, the US Majors, and the Metals Markets. The Transportation Index has seen an extensive rally (+19.85%) originating near November 2017. This incredible upside move correlates with renewed US Tax policies and Economic increases that are sure to drive the US Equity market higher throughout 2018.

In theory, the Transportation Index is a measure of economic activity as related to the transportation of goods from port to distribution centers and from distribution centers to retail centers. The recent jump in the Transportation Index foretells of strong economic activity within the US for at least the next 3 months.

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One could, and likely should watch the Transportation Index for any signs of weakness or contraction which would indicate an economic slowdown about to unfold. In order to better understand how the Transportation Index precedes the US Equity markets by 2-5 months, let’s compare the current price activity to that of 2007-08.

This first chart is the current Transportation Index and shows how strong the US economic recovery is in relation to the previous year (2017). As the US economy has continued to strengthen and open up new opportunities, the Transportation Index has related this strength by increasing by near +20% in only a few short months. This shows us that we should continue to expect a moderate to strong bullish bias for at least the first quarter of 2018 – unless something dramatic changes in relation to economic opportunities.

Current Transportation Index Chart



In comparison, this chart (below) is the Transportation Index in 2007-08 which reacted quite differently. The economic environment was vastly different at this time. The US Fed had raised rates consecutively over a two year period leading up to a massive debt/credit crisis. At the same time, the US had a Presidential Election cycle that saw massive uncertainty with regards to regulation, policies and economic opportunities. Delinquencies as related to debt had already started to climb and the markets reacted to the economic alarms ringing from all corners of the globe. The Transportation Index formed a classic “rollover top” formation in late 2007 and early 2008 well before the global markets really began to tank.

2007-08 Transportation Index Chart



Our analysis points to a very strong first quarter of 2018 within the US and for US Equities. We believe the economic indicators will continue to perform well and, at least for the next 3 months, will continue to drive strong equity growth. We do expect some volatility near the end of the first Quarter as well as continued 2-5% price volatility/rotation at times. There will be levels of contraction in the markets that are natural and healthy for this rally. So, be prepared for some rotation that could be deeper than what we have seen over the last 6 months.

In conclusion, equities are this point are overpriced, and overbought based on the short term analysis. We should be entering slightly weaker time for large cap stocks over the next couple weeks before it goes much higher. Because we are still in a full out bull market, Dips Should Be Bought and we will notify members of a new trade once we get another one of these setups.

In our next post, we are going to talk about two opportunities in precious metals forming for next week!

Read the analysis we presented before the end of 2017 regarding our predictive modeling systems and how we target our research to helping our members. If you believe our analysis is accurate and timely, then we urge you to subscribe here at The Technical Traders to support our work and to benefit from our signals. We believe 2018 – 2020 will be the years that strategic trades will outperform all other markets. Join us in our efforts to find and execute the best trading opportunities and profit from these fantastic setups.

Chris Vermeulen
Technical Traders Ltd.





Stock & ETF Trading Signals

Wednesday, December 20, 2017

Today's Gap Fill and Prediction Complete, What's Next?

Subscribers of our Technical Traders Wealth Building Newsletter were told before the market opened that stocks were set to gap higher and then fill the price gap. Only 12 minutes after the market opened the gap window was filled for a 9.5 pt move in the SP500, which is a quick $475 profit for those trading futures, or $103 profit per 100 shares traded of the SPY ETF.



Yesterdays Gap Fill Forecast



If you want to know what the market are going to do today, this week, and next month be sure to subscribe to our new and improved market trend forecast and trading newsletter....

Visit "The Technical Traders ETF Cycle Trader" Right Here



Friday, May 12, 2017

The Bond King Says "Short U.S. Stock"

Image result for jeffrey gundlachShort the SP500.....That’s not something most investors would consider right now. After all, US stocks have been rallying for eight straight years. At this point, it’s hard to even remember what a down market feels like.

But that’s exactly what Jeff Gundlach thinks you should do. Gundlach, as you may know, is one of the world’s brightest investors. He manages more than $100 billion at his firm DoubleLine Capital.

On Monday, he told a room full of investors at the Sohn Investment Conference in New York to short (bet against) the SPDR S&P 500 ETF (SPY). This fund tracks the S&P 500. It’s the most heavily traded ETF on the planet.

It’s a bold call, to say the least.…
But Gundlach has a history of nailing calls like this. At last year’s Sohn Conference, he told investors to short the Utilities Select Sector SPDR Fund (XLU) and buy the iShares Mortgage Real Estate Capped ETF (REM). If you had taken Gundlach’s advice, you’d be up 40% on this trade today. Gundlach was also one of the few people to predict that Donald Trump would become president of the United States. In June, he told CNBC:
People aren't getting along, they're not happy because of technology taking jobs, and sort of this long, slow grind of a new economy. And so they're looking for change, and I think Trump is going to win on the basis of that.
In other words, it pays to listen to Gundlach.…
But here’s the thing. Gundlach doesn’t think you should get out of stocks completely. Instead, he thinks you should “go long” emerging markets. These are countries that are on their way to becoming “developed” countries like the United States. Brazil, Russia, India, and China (also known as the “BRICs”) are the largest emerging markets.

On Monday, Gundlach told investors at the Sohn Conference to buy the iShares MSCI Emerging Markets ETF (EEM), which tracks over 800 emerging market stocks. It’s one of the safest and most diversified ways to play emerging markets. Of course, you would have already known that if you’ve been reading the Dispatch.

After all, I’ve been pounding the table on emerging market stocks for months.…
In February, I outlined the bullish case for emerging markets. A month later, I told investors to “forget about US stocks” and consider emerging market stocks. I even recommended checking out EEM, just like Gundlach. Not only that, Gundlach likes emerging markets for the same reasons we do. I’ll share those with you in a moment. But let’s first look at why the “Bond King” thinks you should short the S&P 500.

U.S. stocks are incredibly expensive.…
Just look at this chart. It compares the total market value of the S&P 500 with the annual economic output of the United States, as measured by gross domestic product (GDP). This key ratio is now at the highest level since the dot com bubble.




US stocks aren’t just expensive from a historical perspective, either.…
They’re also much more expensive than emerging market stocks. Gundlach explained to CNBC on Monday:
The valuation of emerging markets is half the valuation of the S&P 500 when you look at things like price to sales, price to book, [and] Dr. Shiller’s CAPE ratio.
Dispatch readers know CAPE stands for cyclically adjusted price to earnings. It’s the cousin of the popular price to earnings (P/E) ratio. The only difference is that it uses 10 years’ worth of earnings instead of one. But just like the P/E ratio, a high CAPE ratio means stocks are expensive. You can see below that the CAPE ratio has surged to 29.5. That’s 76% higher than the S&P 500’s historical average. US stocks have only been this expensive two times in history: just before the Great Depression and during the dot com bubble. Meanwhile, the CAPE ratio for EEM is floating around 14, meaning it’s 52% cheaper than SPY.

To be fair, emerging market stocks have been cheaper than US stocks for years.…
And they’ve still underperformed them. But that’s starting to change. Just look at the chart below. It compares the performance of the S&P 500 with EEM. When this line is rising, it means US stocks are doing better than emerging market stocks.


You can see that’s been the case for years. But this key ratio just broke a long term upward trend line.
This tells us that emerging market stocks should outperform US stocks for years to come.

If you haven’t already, I recommend you pick up some emerging market stocks today.…
The easiest way to do this is with EEM or another major emerging market fund. These funds will give you broad exposure to emerging markets. Once you build a core position in emerging markets, you could consider investing in individual emerging markets. Right now, three of our favorite emerging markets are Poland, Colombia, and India.

As for U.S. stocks, I wouldn’t encourage everyday investors to short the S&P 500 like Gundlach recommends. Instead, I suggest you be very selective about what U.S. stocks you own. Avoid stocks trading at nosebleed valuations. Own companies with resilient business models and little debt.

The article “The Bond King” Says Short US Stocks was originally published at caseyresearch.com.




Stock & ETF Trading Signals

Tuesday, May 9, 2017

Force Winning Trades While Reducing Your Trading Risk to Zero....New Video

Every time you lose money in the market, someone on the other side of the trade is grinning their fool head off because they won and you let them do it. Discover how savvy insiders make sure every trade is won before it’s even placed. And you can do it too!

Todd “Bubba” Horwitz is a renowned floor trader, market maker and senior analyst who is frequently interviewed by FOX News, CNBC, Bloomberg Networks and other media giants. Horwitz just released a power packed special report no trader should be without. And today, you can download it here for FREE

Here's an example of what Todd will be sharing with us....

  *  Discover a clever insider trick that gives you free trade protection reducing your risk to zero!

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There’s been a lot of speculation lately over the strength and longevity of the “Trump Bump”....Bump or Slump don’t sweat it....Let's exploit it!

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See you in the markets,
Ray @ the Crude Oil Trader

P.S. You’ll also gain access to an exciting 10 minute video revealing an easy way to create instant cash flow on a shoestring budget. Get FREE eBook and Watch Video Here

Option and stock investing involves risk and is not suitable for all investors. Only invest money you can afford to lose in stocks and options. Past performance does not guarantee future results. The trade entry and exit prices represent the price of the security at the time the recommendation was made. The trade record does not represent actual investment results. Trade examples are simulated and have certain limitations. Simulated results do not represent actual trading. Since the trades have not been executed, the results may have under or over compensated for the impact, if any, of certain market factors such as lack of liquidity. No representation is being made that any account will or is likely to achieve profit or losses similar to those shown.



Stock & ETF Trading Signals

Monday, April 17, 2017

Crude Oil Seasonality, Inventory Rebalancing and Production Cuts

The historical stock build from December 2014 through July 2016, and subsequent decline from August through December has led some to conclude that global stocks had started to rebalance. Instead, the normal seasonality in stocks had been masked by the high overproduction of OPEC, but then normal seasonality kicked in.

Global OECD inventories from past years demonstrate the normal seasonal patterns, with some variability. As shown in this graph, stocks normal build early in the year and peak around August. Stocks normally drop from September through December. But in 2015, the oversupply was so excessive that stock just kept building through the year. They finally peaked in July 2016, then dropped off due to normal seasonal demand. This normal pattern led to a false conclusion that the rebalancing of stocks had begun.
But according to Energy Department data, OECD stocks in March 2017 are 13 million barrels higher than December. And it projects that stocks are likely to peak in May this year, earlier than normal, but to end 2017 with stocks just 14 million lower than a year ago. This is based on the Energy Information Administration ((EIA)) assumption that OPEC does not hold production to its March level. Furthermore, the EIA projects global stocks to set new record highs in 2018, after the OPEC non OPEC cuts presumably end.

Effect of Production Cuts

Some argue that the 285 million barrel excess above the 5 year average as of the end of December should disappear in five to six months by dividing 285 million by 1.8 million barrels per day, the agreed upon size of the daily cut. But that math first assumes that supply was in balance with demand, makes no allowance for rising supplies, such as in the U.S., and it does not take into account the seasonality.
According to OPEC’s figures, global OECD stocks are likely to build both in the first and second quarters, and then decline in the second half of the year, assuming OPEC production remains at the March level.
There was one development last week, if true, did shift the inventory trend lower. The EIA revised its December estimate of OECD stocks down 105 million barrels, a major revision. That reduced the size of the glut to 201 million above its five year average.

Conclusions

The market dropped sharply in early March as a result of the continued rise in stocks. The market has falsely expected to see inventories to soon decline as a result of the production cuts. But seasonal factors need to be taken into account. We should see global stocks decline in the second half of 2017, assuming OPEC extends its cuts. And the decline may start earlier than normal because U.S. refinery utilization is ramping up faster and earlier than usual, thereby requiring more crude oil.
Best,
Robert Boslego
INO.com Contributor - Energies




Stock & ETF Trading Signals

Sunday, June 12, 2016

The 83 Best Stocks to Trade Weekly Options

Why download the 83 best stocks for weekly options? Our trading partner Don Kaufman will tell us why and he is sharing with us the 877 stocks and ETFs that offer weekly options, and the 83 that are the only ones you should trade.

Your Portfolio Deserves More Than a 50/50 Chance
It has been shown statistically, over the long run, that most traders lose money when only buying monthly options. Today there is more volume on weekly options than on the monthly options. Never before has there been a way to generate positive returns in the market using weekly options. Why flip a coin when you can use the 50 best stocks to trade weekly options on?

Diversification is Dead
As a Wall Street saying goes, "When they raid the house they take everyone." Professionals consider diversification as a hedge for people who don’t know how to hedge. Think about it - would you protect the value of your own home against a potential fire by diversifying, that is, buying two houses so if one burns down, the appreciation in the other offsets your loss? Of course not! You insure your home so if it burns down, the insurance covers most of the loss. Welcome to using weekly options. Real professionals know how to use weekly options to protect their portfolio from weekly news events, earnings reports, or surprise upgrades and downgrades.

Be The House
Today, investing in the stock market is a big gamble, almost like going to Vegas and playing the slots. And we all know what happens with slot machines. The House always wins. It may take a loss occasionally, but the overall strategy assures that the House will always come out on top. Weekly options let's you turn the tide and be the house every single week! Download the 50 best stocks to trade weekly options on so you can put the odds in your favor.

Just click here to to get the 83 BEST stocks for weekly options and the bonus free TheoVideo daily video newsletter will be included.....Download Now


Get Don's latest FREE eBooK "The Rebel's Guide to Trading Options"....Just Click Here



Wednesday, June 1, 2016

John's Short-Term Low-Risk Set Ups for Volatile Markets


Our trading partners at Simpler Options are back with another free webinar. This time it's "Precise Short Term Options Setups for Low Risk Profits in Volatile Markets" hosted by John Carter and Chris Belcher.

As always John and Chris have provided a free video to give you some hints as to what we will be covering....Watch that video now!

It all starts this Tuesday June 7th at 7:00 pm central.

Just visit this link to reserve your seat for this game changing webinar right now since all of these webinars get over subscribed.

Watch Todays Video and Sign Up for the Webinar Right Here

These two highly respected traders (with more than 50 years of combined experience) reveal low risk option strategies designed to catch quick explosive moves in volatile stocks. Get ready to take notes because we’re going to review results from actual live trades executed in real time during current market conditions.

Red Thumb Trades: Stop wasting time (and precious capital) on dud stocks. Discover how to find the right options to trade on the right stocks today.

Precision Exit Strategies: Finally know when to take fast profits intraday and when to let your position turn into a swing trade so you can get maximum gains.

Simple Option Setups: Cut through all the jargon and ‘Greek’ mumbo jumbo and learn how to follow a step by step process to create consistent income trading stock options.

The Ultimate Timing Secret: How to know in advance which stocks are likely to explode (in any time frame) and when to jump in with confidence

Miracle Grow Positions: Simple rapid growth strategies for small accounts. Discover why it’s possible to make a whole lot more money with options than you can with trading stocks. The key is to follow a few precise option setups.

Massive Mistakes Exposed: Learn why most traders will never be consistently profitable and discover how to actually profit from the most common (and costly) mistakes.

The Perfect Storm: Why the current volatile conditions are a trader’s paradise, and key catalysts to watch for in the coming months.

Case Study: Review one of John's live trades on TSLA that brought in $17k in 1 day (along with several other recent real money examples so you can see these setups in action).

As always, make sure you get your reserved seat now while you and make sure you log in early on Tuesday so you don't lose your spot.

Reserve Seat Right Here and Now

See you Tuesday evening,
Ray C. Parrish
aka the Crude Oil Trader


Get John's latest FREE eBook "Understanding Options"....Just Click Here!

Thursday, March 3, 2016

The Secret Behind the $1 Million Option Setup....Here’s Your Private Replay (expires soon)

If you missed John Carter’s special training Tuesday night then you are in luck. The limited replay is online now.

Watch the Private Replay Here [Expires soon] 

Get ready to take notes! Unfortunately, I have no idea how long this replay will be up, so watch it while you can. But I can tell you the feedback from those who attended live is beyond awesome. This was not just another ‘webinar’ featuring ‘hypothetical results’.

John detailed, step by step, how to be consistently profitable in these volatile conditions using just a handful of very simple options setups. There was ZERO hype and total transparency. He showed actual trading accounts with winning AND losing trades for all to see. You gotta see this for yourself.

Here’s just some of what John revealed....

  •   Why extreme volatility is the new normal. If you don’t want to crash and burn, you MUST adapt
  •   The setup John used to turn $3k into $119k in just 3 weeks (and how to spot these rare, explosive moves)
  • The simple signal that allowed John to make $1 million in a single day on TSLA options
  • How to pinpoint major reversals in advance by legally ‘spying’ on Wall Street Insiders
  • The publically available intel that allowed John to catch the Nasdaq’s historic January collapse, AND then get long for the February rally
  • The braindead simple option system that turns crazy market volatility into potentially giant gains (sometimes literally overnight , with strictly limited risk)
  • How it’s possible to consistently pull in $100 to $1000 a day by trading from your smart phone (even if you have a job)

Like I said, you don’t want to miss this training. John’s refined these simple strategies over more than 25 years. He shows you what’s really working now and the account killing mistakes that you want to avoid like the plague.

Watch the Limited Replay Now

See you in the markets!
Ray C. Parrish
aka the Crude Oil Trader


Get John's latest FREE eBook "Understanding Options"....Just Click Here!

Thursday, December 24, 2015

Closed Another Winning Trade And New Forecast

Our trading partner Chris Vermeulen just sent over an email detailing his last trade of this holiday shortened week. Make sure to sign up for Chris' holiday special.....
Yesterday December 23rd we closed out a nice winning trade in XLE energy sector. If you have not yet closed the trade can should do so today and will locking an even larger gain of 4-5% return in only three days. The stock market closes early today at 1 pm ET. Today volume will be light and its not worth sitting around watching or trying to trade in my opinion. The best trade for today is to spend quality time with your family and friends.
Attached are couple charts that show where the market is currently trading with my short term analysis and why XLE position was closed yesterday. The market is primed for a sharp correction which may start Monday and if possible, we will take action, but volume will likely remain light for the rest of the year and first couple days of January, so the top may drag out a few more days. Let’s wait for a technical breakdown first before buying inverse ETFs.
overbought 1
Overbought3
overbought2

I would like to thank all my followers and subscribers for their support and kind words throughout the year. It has been an extremely difficult market to trade with the broad market trading in a Stage 3 Distribution pattern. Hedge funds, mutual funds and those who hold individual stocks in their portfolio are all down sharply for reasons I have explained and warned about all year.

Early in 2015 I published a short book talking about how the US stock market was showing significant signs of a topping along with many timing cycles and events that were also unfolding and pointed to a new bear market that will likely last through 2016 and into 2017. Thus far, everything has unfolded as expected and once this Stage 3 Distribution pattern breaks down a new bear market will have confirmed and all kinds of huge trades will start to unfold. It will be a VERY DIFFERENT year than 2014 and 2015.
Chris Vermeulen – www.The Gold & Oil Guy.com

HOLIDAY SPECIAL – GET 12 MONTH OF TRADE ALERTS FOR THE PRICE OF ONLY SIX!


Saturday, November 28, 2015

John Carter's Next Free Webinar "How to Grow Your Account and Grow it Fast"

Our trading partner John Carter of Simpler Options is back with another one of his wildly popular free webinars. And as always this class will fill up fast so get your reserved seat asap, sign up here.

John always comes to us with a game changing timely trading method for current market conditions that we can put to work immediately, and this class is no different. John gave us a taste of what he has in store for us with a new free video this week. If you have not seen it watch "John's Proven Strategies for Q4 and 2016" here.

This weeks free webinar is Tuesday evening December 1st at 8 p.m. eastern time.

Reserve Your Seat to "How to Grow Your Account Fast" Now!

Here’s what you’ll learn from our free webinar:

  *  How to find stocks that are bucking the trend of the general market

  *  What are the key market internals to watch every day for early signals

  *  How to know which options to buy and when

  *  How to trade from the road

  *  How to trade for multiple account sizes

      and much more

Get your seat now and we'll see you Tuesday evening,
Ray C. Parrish
aka the Crude Oil Trader

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Friday, November 13, 2015

Investing Inspiration from the World of Sports

By John Mauldin 

One of the most successful investors in the world is Howard Marks of Oaktree Capital Management. One of the things I look forward to every quarter is the letter he writes to his clients – it goes right to the top of my reading list. Not only is it always full of generally brilliant investment counsel, Howard is also a really great writer. He has an easy style that pulls you through his letter effortlessly.

I have never sent his letter to you as an Outside the Box, as the copies I get are clearly watermarked and copyrighted. So I was surprised and delighted to learn that the letter is free when I listened to a speech by Howard in which he encouraged everyone to get it. Unlike another hundred billion dollar hedge fund company that shall go unnamed, Oaktree evidently thinks that brilliance should be shared.

I am especially pleased to be able to pass on this latest issue, in which Howard returns to a theme he has used in the past, which is the parallels between investing and sports. He recounts the career of Yogi Berra, who sadly passed away in September. Yogi was always a fan favorite, and he was certainly one of mine; but it was his consistency, both on offense and defense, that made him great.

Marks goes on to defend the seemingly indefensible: in last year’s Super Bowl, Pete Carroll, coach of the Seattle Seahawks, called for a passing play on the one yard line as time was running out, which as anyone who watched that game would remember, was one of the most spectacularly unsuccessful decisions of all time. But Howard asks us, “His decision was unsuccessful, but was it wrong?”

Can we judge a career on one play? I am grateful that my investment and writing careers are not judged solely by my many mistakes.

This past weekend at the T3 Conference in Miami was enlightening. Todd Harrison put together a great lineup of speakers who represented a wide range of investment styles and strategies. Perhaps because I have been looking at alternative income strategies in a world of low interest rates, I was particularly intrigued by how investors are finding reasonable yield income. I wrote seven years ago that I thought private credit would become a very large part of the investment spectrum in the future, and it is certainly turning out that way. The whole burgeoning world of “shadow banks” has been an unintended consequence of Dodd-Frank.

That overreaching regulation, coupled with enhanced liquidity requirements, has severely limited the ability of small banks to lend. Private credit funds are being set up to go where banks can’t or won’t, and frankly they have a natural advantage. Their cost of money is lower than banks’, and their overhead is even less. They typically don’t leverage as much as banks do, but they can still produce returns that any bank would be happy with. There is more and more interest in making these investment vehicles more accessible to the public, and I applaud anyone who tries.

Plus, it was just good to see so many friends, then sit by the pool for an afternoon after the conference was over. It was supposed to rain, but we got lucky and caught some sunshine in Florida.

Now I’m back in Dallas and working away on the new book. I am told we have all the volunteer research assistants we need, so if you haven’t contacted us yet, my staff has asked me to suggest that we are full up.
Have a great week, and go to your favorite spot to read and think as you enjoy Howard Marks’ latest memo.

Your glad to be back home analyst,
John Mauldin, Editor
Outside the Box

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Memo to: Oaktree Clients
From: Howard Marks
Re: Inspiration from the World of Sports


I’m constantly intrigued by the parallels between investing and sports. They’re illuminating as well as fun, and thus they’ve prompted two past memos: “How the Game Should Be Played” (May 1995) and “What’s Your Game Plan?” (September 2003). In the latter memo, I listed five ways in which investing is like sports:
  • It’s competitive – some succeed and some fail, and the distinction is clear.
     
  • It’s quantitative – you can see the results in black and white.
     
  • It’s a meritocracy – in the long term, the better returns go to the superior investors.
     
  • It’s team-oriented – an effective group can accomplish more than one person.
     
  • It’s satisfying and enjoyable – but much more so when you win. 

Another angle on the investing/sports analogy has since occurred to me: an investment career can feel like a basketball or football game with an unlimited number of quarters. We may be nearing December 31 with a substantial year-to-date return or a big lead over our benchmarks or competitors, but when January 1 rolls around, we have to tackle another year. Our record isn’t finalized until we leave the playing field for good. Or as Yogi Berra put it, “It ain’t over till it’s over.” It was Yogi’s passing in late September that inspired this memo. [Since most of the references in this memo are to American sports, with their peculiarities and unique terminology, this is a good time for an apology to anyone who’s unfamiliar with them.]

Yogi Berra, Baseball Player 

Lawrence “Yogi” Berra was a catcher on New York Yankees baseball teams for eighteen years, from 1946 to 1963. Although he was rarely number one in any offensive category, he often ranked among the top ten players in runs batted in, home runs, extra base hits (doubles, triples and home runs), total bases gained and slugging percentage (total bases gained per at bat). He excelled even more on defense: in the 1950s he was regularly among the top three or four catchers in terms of putouts, assists, double plays turned, stolen bases allowed and base stealers thrown out.

Yogi was selected to play in the All-Star Game every year from 1948 through 1962. He was among the top three vote-getters for American League Most Valuable Player every year from 1950 through 1956, and he was chosen as MVP in three of those years. The Yankee teams on which he played won the American League pennant and thus represented the league in the World Series fourteen times, and they won the World Series ten times. He was an important part of one of the greatest dynasties in the history of sports. To me, the thing that stands out most is Yogi’s consistency. Not only did he perform well in so many different categories, but also:
  • He led the American League in number of games played at the grueling catcher position eight years in a row.
     
  • He was regularly among the catchers with the fewest passed balls and errors committed.
     
  • He had around 450-650 at bats most years, but over his entire career he averaged only 24 strikeouts per year, and there was never one in which he struck out more than 38 times. (In 1950 he did so only 12 times in nearly 600 at bats.) Thus, ten times between 1948 and 1959 he was among the ten players with the fewest strikeouts per plate appearance. 
In short, Yogi rarely messed up.

Consistency and minimization of error are two of the attributes that characterized Yogi’s career, and they can also be key assets for superior investors. They aren’t the only ways for investors to excel: some great ones strike out a lot but hit home runs in bunches the way Reggie Jackson did. Reggie – nicknamed “Mr. October” because of his frequent heroics in the World Series – was one of the top home run hitters of all time. But he also holds the record for the most career strikeouts, and his ratio of strikeouts to home runs was four times Yogi’s: 4.61 versus 1.16. Consistency and minimization of error have always ranked high among my priorities and Oaktree’s, and they still do. 


Yogi Berra, Philosopher 

Although Yogi was one of the all time greats, his baseball achievements may be little-remembered by the current generation of fans, and few non-sports lovers are aware of them. He’s probably far better known for the things he said:
  • It’s like déjà vu all over again.
     
  • When you come to a fork in the road, take it.
     
  • You can observe a lot by just watching.
     
  • Always go to other people’s funerals, otherwise they won’t come to yours.
     
  • I knew the record would stand until it was broken.
     
  • The future ain’t what it used to be.
     
  • You wouldn’t have won if we’d beaten you.
     
  • I never said most of the things I said. 
I’ve cited Yogi’s statements in previous memos, and I borrowed the Yogi-ism at the top of the list above for the title of one in 2012. “Out of the mouths of babes,” they say, comes great wisdom. The same was true for this uneducated baseball player, and many of Yogi’s seeming illogicalities turn out to be profound upon more thorough examination.

“Baseball is ninety percent mental and the other half is physical.” That was another of Yogi’s dicta, and I think it’s highly useful when thinking about investing. Ninety percent of the effort to outperform may consist of financial analysis, but you need to put another fifty percent into understanding human behavior. The market is made up of people, and to beat it you have to know them as well as you do the thing you’re considering investing in. 

I sometimes give a presentation called, “The Human Side of Investing.” Its main message surrounds just that: while investing draws on knowledge of accounting, economics and finance, it also requires insight into psychology. Why? Because investors’ objectivity and rationality rarely prevail as much as investment theory assumes, and emotion and “human nature” often take over instead. That’s why my presentation is subtitled, “In theory there’s no difference between theory and practice. In practice there is.” Yogi said that, too, and I think it’s absolutely wonderful.

Things often fail to work the way investment theory says they should. Markets are supposed to be efficient, with no underpricings to find or overpricings to avoid, making it impossible to outperform. But exceptions arise all the time, and they’re usually attributable more to human failings than to math mistakes or overlooked data.

And that leads me to one of the most thought-provoking Yogi-isms, concerning his choice of restaurant: “Nobody goes there anymore because it’s too crowded.” What could be more nonsensical? If nobody goes there, how can it be crowded? And if it’s crowded, how can you say nobody goes there?

But as I wrote last month in “It’s Not Easy,” a lot of accepted investment wisdom makes similarly little sense. And perhaps the greatest – and most injurious – of all is the near unanimous enthusiasm that’s behind most bubbles.

“Everyone knows it’s a great buy,” they say. That, too, makes no sense. If everyone believes it’s a bargain, how can it not have been bought up by the crowd and had its price lifted to non bargain status as a result? You and I know the things all investors find desirable are unlikely to represent good investment opportunities. But aren’t most bubbles driven by the belief that they do?
  • In 1968, everyone knew the Nifty Fifty stocks of the best companies in America represented compelling value, even after their p/e ratios had reached 80 or 90. That belief kept them there . . . for a while.
     
  • In 2000, everyone thought tech investing was infallible and tech stocks could only rise. And they were sure the Internet would change the world and the stocks of Internet companies were good buys at any price. That’s what took the TMT boom to its zenith.
     
  • And here in 2015, everyone knows social media companies will own the future. But will their valuations turn out to be warranted? 
Logically speaking, the bargains that everyone has come to believe in can’t still be bargains . . . but that doesn’t stop people from falling in love with them nevertheless. Yogi was right in indirectly highlighting the illogicality of “common knowledge.” As long as people’s reactions to things fail to be reasonable and measured, the spoils will go to those who are able to recognize this contradiction. 


Looking for Lance Dunbar 

There may be a few folks in America who, like the rest of the world’s population, are unaware of the growing popularity of daily fantasy football. In this on-line game, contestants assemble imaginary football teams staffed by real professional players. When that week’s actual football games are played, the participants receive “fantasy points” based on their players’ real world accomplishments, and the participants with the most points win cash prizes. (Why is it okay to engage in interstate betting on fantasy football but not on football itself?

Because proponents were able to convince the authorities that the act of picking a team for fantasy football qualifies it as a game of skill, not chance. But last week, Nevada became the sixth state to ban daily fantasy sports, concluding that it’s really nothing but gambling.) The commercials for fantasy football say things like, “Sign up, make your picks, and collect your winnings.” That sounds awfully easy . . . and not that different from discount brokers’ ads during bull markets. 

In daily fantasy football, the challenge comes from the fact that the participants have a limited amount of money to spend and want to acquire the best possible team for it. If all players were priced the same regardless of their ability (a completely inefficient market), the prize would go to the participant who’s most able to identify talented players. And if all players were priced precisely in line with their ability (a completely efficient market), it would be impossible to acquire a more talented team for the same budget, so winning would hinge on random developments.

The market for players in fantasy football appears to be less than completely efficient. Thus participants have the possibility of finding mispricings. A star may be overpriced, so that he produces few fantasy points per dollar spent on him. And a journeyman might be underpriced, able to produce more rushing (i.e., running) yards, catches, tackles or touchdowns than are reflected by his price. That’s where the parallel to investing comes in.

Smart fantasy football participants understand that the goal isn’t to acquire the best players, or players with the lowest absolute price tags, but players whose “salaries” understate their merit – those who are underpriced relative to their potential and might amass more points in the next game than the cost to draft them reflects. Likewise, smart investors know the goal isn’t to find the best companies, or stocks with the lowest absolute dollar prices or p/e ratios, but the ones whose potential isn’t fully reflected in their price. In both of these competitive arenas, the prize goes to those who see value others miss.

There’s another similarity. Sports media employ “experts” to cover this imaginary football league, and it’s their job to attract viewers and readers by offering advice on which players to draft. (What other talking heads does that remind you of?) My musings on fantasy football started in late September, when I heard a TV commentator urge that participants take a look at Lance Dunbar, a running back for the Dallas Cowboys, based on the belief that Dunbar’s price might understate his potential to earn fantasy points. The commentator’s thesis was that the Cowboys’ star quarterback was injured and, because of the replacement quarterback’s playing style, Dunbar might get more opportunities – and run up more yardage – than his price implied. Thus, Dunbar might represent an underappreciated investment opportunity.

Or not. Dunbar tore his anterior cruciate ligament in the next game, meaning he won’t produce any more points – real or virtual – this season. It just proves that even if your judgment is sound, randomness has a lot of influence on outcomes. You never know which way the ball will bounce.

“Sign up, make your picks, and collect your winnings.” If only everyone – fantasy football entrants and investors alike – understood it’s not that easy.


Are the Helpers Any Help?

In investing, there are a lot of people who’ll offer to enhance your results . . . for a fee. In an allegorical treatment in Berkshire Hathaway’s 2005 annual report, Warren Buffett called them “Helpers.” There are helpers in sports, too, especially where there’s betting. This memo gives me a chance to discuss an invaluable clipping on the subject that I collected nine months ago and have been looking for an occasion to mention.

The New York Post’s sports writers opine weekly as to which professional football games readers should bet on (real games, not fantasy). Each week, the Post reports on the results of the prognostications for the season to date. When they published the results last December 28, they might have thought they demonstrated the value of those helpers. But I think that tabulation – nearly at the end of the football season – showed something very different.

By the time December 28 had rolled around, the eleven forecasters had tried to predict the winner of each of the 237 games that had been played to date, as well as what they thought were their 47 or so “best bets.” By “the winner,” I assume they meant the team that would win net of the bookies’ “point spread.” (Without doing something to even the odds, it would be too easy for bettors to win by backing the favorites. To make betting more of a challenge, the bookies establish a spread for each game: the number of points by which the favored team has to beat the underdog in order to be deemed the winner for betting purposes.) How often were the Post’s picks correct? Here’s the answer:

Percentage correct Total picks (2,607 games) Best bets (522 games)
All forecasters 50.9% 49.4%
Median forecaster 50.6% 47.9%
Best forecaster 58.5% 56.2%
Worst forecaster 44.8% 39.6%

An incorrigible optimist – or perhaps the Post – might say these results show what a good job the forecasters did as a group, since some were right more often than they were wrong. But that’s not the important thing. For me, the key conclusions are these:
  • The average results certainly make it seem that picking football winners (net of the points spread) is just a 50/50 proposition. Evidently, the folks who establish the point spreads are pretty good at their job, so that it’s hard to know which team will win.
     
  • The symmetrical distribution of the results and the way they cluster around 50% tell me there isn’t much skill in predicting football winners (or, if it exists, these pickers don’t have it). The small deviations from 50% – both positive and negative – suggest that picking winning football teams for betting purposes may be little more than a matter of tossing a coin.
     
  • Even the best forecasters weren’t right much more than half the time. While I’m not a statistician, I doubt the fact that a few people were right on 56-58% of their picks rather than 50% proves it was skill rather than luck. Going back to the coin, if you flipped one 47 times (or even 237 times), you might occasionally get 58% heads.
     
  • Lastly, all eleven writers collectively – and seven of them individually – had worse results on the games they considered their “best bets” than on the rest of the games. So clearly they aren’t able to accurately assess the validity of their own forecasts. 
And remember, these forecasts weren’t made by members of the general populace, but rather by people who make their living following and writing about sports. 

My favorite quotation on the subject of forecasts comes from John Kenneth Galbraith: “We have two classes of forecasters: Those who don’t know – and those who don’t know they don’t know.” Clearly these forecasters don’t know. But do they know it? And do their readers?

The bottom line on picking football winners seems to be that the average forecaster is right half the time, with exceptions that are relatively few in number, insignificant in degree and possibly the result of luck. He might as well flip a coin. And that brings us back to investing, since I find this analogous to the observation that the average investor’s return equals the market average. He, too, might as well flip a coin . . . or invest in an index fund.

And by the way, the average participant’s average result – in both fields – is before transaction costs and fees. After costs, the average investor’s return is below that of the market. In that same vein, after costs the average football bettor doesn’t break even.

What costs? In sports betting, we’re not talking about management fees or brokerage commissions, but “vigorish” or “the vig.” Wikipedia says it’s “also known as juice, the cut or the take . . . the amount charged by a bookmaker . . . for taking a bet from a gambler.” This obscure term refers to the fact that to try to win $10 from a bookie, you have to put up $11. You’re paid $10 if you win, but you’re out $11 if you lose. N.b.: bookies and sports betting parlors aren’t in business to provide a public service.

If you bet against a friend and win half the time, you end up even. But if you bet against a bookie or a betting parlor and win half the time, on average you lose 10% of the amount wagered on every other bet. So at $10 per game, a bettor following the Post’s football helpers through December 28, 2014 would have won $13,280 on the 1,328 correct picks but lost $14,069 on the 1,279 losers. Overall, he would have lost $789 even though slightly more than half the picks were right. That’s what happens when you play in a game where the costs are high and the edge is insufficient or non-existent.


Another Look at Performance Assessment

This memo gives me an opportunity to touch on another recent sporting event: Super Bowl XLIX, which was played last February. I’m returning to a subject I covered at length in the “What’s Real?” section in “Pigweed” (February 2006), which was about the meltdown of a hedge fund called Amaranth. Among the ways I tried to parse the events surrounding Amaranth was through an analogy to the Rose Bowl game played at the end of the 2005 college football season to determine the national champion. In the game, the University of Texas beat the favored University of Southern California. While leading by five points with less than three minutes left to play, USC had a fourth down with two yards to go for a first down.

They lost largely because – in something other than the obvious choice – the coach elected to go for it rather than punt the ball away, and they were stopped a yard short. UT got the ball and went on to score the winning touchdown. Before the game, USC had widely been considered one of the greatest teams in college football history. Afterwards there was no more talk along those lines. Its loss hinged on that one very controversial play . . . controversial primarily because it was unsuccessful. (Had USC made the two yards and earned a first down, they would have retained the ball and been able to run out the clock, sealing a victory.)

Something very similar happened in this year’s Super Bowl. The Seattle Seahawks were trailing the New England Patriots by a few points. On second down, with just 26 seconds to go and one timeout remaining, the Seahawks had the ball on the Patriots’ one-yard line. Everyone was sure they would try a run by Marshawn Lynch (who in the regular season had ranked first in the league in rushing touchdowns and fourth in rushing yards), and that he would score the winning touchdown. But the Seahawks’ maverick coach, Pete Carroll – ironically, also the coach of USC’s losing Rose Bowl team – tried a pass play instead. The Patriots intercepted the pass, and the Seahawks’ dreams of a championship ended.

“What an idiot Carroll is,” the fans screamed. “Everyone knows that when you throw a pass, only three things can happen (it’s caught, it’s dropped or it’s intercepted) and two of them are bad.” The Seahawks lost a game they seemed to be on the verge of winning, and Carroll was vilified for being too bold and wrong . . . again. His decision was unsuccessful. But was it wrong?

With assistance from Warren Min in Oaktree’s Real Estate Department, I want to point out some of the considerations that Carrol may have taken into account in making his decision:
  • Up to that point in the season, more than 100 passes had been attempted from the one-yard line, and none of them had been intercepted. So Carroll undoubtedly expected that, at the very worst, the pass would be incomplete and the clock would stop (as it does after incomplete passes) with just a few seconds elapsed. That would have given the Seahawks time for one or two more plays.
     
  • With only 26 seconds remaining and the Seahawks down to their last timeout, if they ran and Lynch was stopped, the clock would have kept running (as it does after rushing plays). Seattle would then have been forced to either use their precious timeout or try a hurried play.
     
  • Malcolm Butler, the defender who intercepted Seattle’s pass, was a rookie playing in the biggest game of his life, and he was undersized relative to Ricardo Lockette, the wide receiver to whom the pass was thrown.
     
  • According to The Boston Globe, of Lynch’s 281 carries during the 2014 regular season, 20 had resulted in lost yardage and two more had yielded fumbles. In other words, the Seahawks had experienced a setback 7.8% of the time when Lynch carried the ball. Further, Lynch had been handed the ball at the one yard line five times in 2014, but he scored only once, for a success rate of 20%. Thus it was no sure thing that Lynch would be able to gain that needed yard against a defense expecting him to run. 
To the first level thinker, Carroll’s decision to pass looks like a clear mistake. Maybe that’s because great running backs seem so dependable, or because passing generally seems like an uncertain proposition. Or maybe it’s just because the pass was picked off and the game lost: outcomes strongly bias perceptions.

The second level thinker sees that the obvious call – to run – was far from sure to work, and that doing the less than obvious – passing – might put the element of surprise on the Seahawks’ side and represent better clock management. Carroll made his decision and it was unsuccessful. But that doesn’t prove he was wrong.

Here’s what my colleague Warren wrote me:
The media and “talking heads” completely buried the decision to throw because of one data point: the pass was intercepted and the Seahawks lost the game. But I don’t believe this was a bad decision. In fact, I think this was a very well informed decision that more people possessing all the data might have made given ample time to analyze the situation.

As you always say, you can’t judge the quality of a decision based on results. If we somehow were able to replay this game in alternative realities to test the results, I think the Seahawks’ decision wouldn’t look so bad. But they certainly lost, perhaps because of bad luck. Now, similar to the USC/Texas situation, the media has written some very significant storylines regarding legacies:
  • The Patriots secured “dynasty” status by winning four Super Bowls since 2001.
     
  • Tom Brady, the Patriots’ quarterback, is hailed as one of the greatest of all time.
     
  • The Seahawks’ defense, which was talked about as being “the greatest ever,” is 
lauded no more (despite the fact that it wasn’t defense that lost the game).
But should this one victory – which swung on a single play – really place the Patriots and Tom Brady among the greatest? And was Carroll actually wrong? All of this goes back to one of my favorite themes from Fooled by Randomness by Nassim Nicholas Taleb, for me the bible on how to understand performance in an uncertain world.

In his book, Taleb talks about “alternative histories,” which I describe as “the other things that reasonably could have happened but didn’t.” Sure, the Seahawks lost the game. But they could have won, and Carroll’s decision would have made the difference in that case, too, making him the hero instead of the goat. So rather than judge a decision solely on the basis of the outcome, you have to consider (a) the quality of the process that led to the decision, (b) the a priori probability that the decision would work (which is very different from the question of whether it did work), (c) the other decisions that could have been made, (d) all of the events that reasonably could have unfolded, and thus (e) which of the decisions had the highest probability of success.

Here’s the bottom line:
  • There are many subtle but logical reasons for arguing that Coach Carroll’s decision made sense.
     
  • The decision would have been considered a stroke of genius if it had been successful.
     
  • Especially because of the role of luck, the correctness of a decision cannot necessarily be judged 
from the outcome.
     
  • You clearly cannot assess someone’s competence on the basis of a single trial. 

What all the above really illustrates is the difference between superficial observation and deep, nuanced analysis. The fact that something worked doesn’t mean it was the result of a correct decision, and the fact that something failed doesn’t mean the decision was wrong. This is at least as true in investing as it is in sports. 


The Victor’s Mindset 

It often seems that just as I’m completing a memo, a final inspiration pops up. This past weekend, the Financial Times carried an interesting interview with Novak Djokovic, the number one tennis player in the world today. What caught my eye was what he said about the winner’s mental state:

I believe that half of any victory in a tennis match is in place before you step on the court. If you don’t have that self-belief, then fear takes over. And then it will get too much for you to handle. It’s a fine line. (Emphasis added) 

Djokovic’s statement reminded me of a conversation I had earlier this month, on a subject I’ve written about rarely if ever: self confidence. It ranks high among the attributes that must be present if one is to achieve superior results.

To be above average, an athlete has to separate from the pack. To win at high level tennis, a player has to hit “winners” – shots his opponents can’t return. They’re hit so hard, so close to the lines or so low over the net that they have the potential to end up as “unforced errors.” In the absence of skill, they’re unlikely to be executed successfully, meaning it’s unwise to try them. But people who possess the requisite skill are right in attempting them in order to “play the winner’s game” (see “What’s Your Game Plan”).

These may be analogous to investment actions that Yale’s David Swensen would describe as “uncomfortably idiosyncratic.” The truth is, most great investments begin in discomfort – or, perhaps better said, they involve doing things with which most people are uncomfortable. To achieve great performance you have to believe in value that isn’t apparent to everyone else (or else it would already be reflected in the price); buy things that others think are risky and uncertain; and buy them in amounts large enough that if they don’t work out they can lead to embarrassment. What are examples of actions that require self confidence?
  • Buying something at $50 and continuing to hold it – or maybe even buying more – when the price falls to $25 and “the market” is telling you you’re wrong.
     
  • After you’ve bought something at $50 (thinking it’s worth $200), refusing to “prudently take some chips off the table” when it gets to $100.
     
  • Going against conventional wisdom and daring to “catch a falling knife” when a company defaults and the price of its debt plummets.
     
  • Buying much more of something you like than it represents in the index you’re measured against, or entirely excluding an index component you dislike. 
In each of these cases, the first level thinker does that which is conventional and easy – and which doesn’t require much self confidence. The second level thinker views things differently and, as a consequence, is willing to take actions like those described above. But they’re unlikely to be done in the absence of conviction. The great investors I know are confident second level thinkers and entirely comfortable diverging from the herd.

It’s great for investors to have self confidence, and it’s great that it permits them to behave boldly, but only when that self confidence is warranted. This final qualification means that investors must engage in brutally candid self assessment. Hubris or over confidence is far more dangerous than a shortage of confidence and a resultant unwillingness to act boldly. That must be what Mark Twain had in mind when he said, “It ain’t what you don’t know that gets you into trouble. It’s what you know for sure that just ain’t so.” And it also has to be what Novak Djokovic meant when he said, “It’s a fine line.” 

So there you have some of the key lessons from sports:
  • For most participants, success is likely to lie more dependably in discipline, consistency and minimization of error, rather than in bold strokes – high batting average and an absence of strikeouts, not the occasional, sensational home run.
     
  • But in order to be superior, a player has to do something different from others and has to have an appropriate level of confidence that he can succeed at it. Without conviction he won’t be able to act boldly and survive bouts of uncertainty and the inevitable slump.
     
  • Because of the significant role played by randomness, a small sample of results is far from sure to be indicative of talent or decision making ability.
     
  • The goal for bettors is to see value in assets that others haven’t yet recognized and that isn’t reflected in prices.
     
  • At first glance it seems effort and “common sense” will lead to success, but these often prove to be unavailing.
     
  • In particular, it turns out that most people can’t see future outcomes much better than anyone else, but few are aware of this limitation.
     
  • Before a would be participant enters any game, he should assess his chances of winning and whether they justify the price to play.
These lessons can serve investors very well.

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