Don’t Get Cute: Being Smart and Making Money

zippertheory

In our youth, we are always told “…you need to be the best and brightest if you want to be rich”. Well let me be the first one to tell you that notion couldn’t be further from the truth. Now don’t get me wrong, certainly there are many brilliant people out there who are very wealthy. Though, I would argue there are far more people out there who found their way to wealth through ritual; following a system that works and only straying when it ceases to work.

There are so many people who toil endlessly to pinpoint future market movements. In fact, many analysts’ lives have been spent trying to ascertain how high the market will go, when the economy will turn, what sectors are going to lead, etc, etc. Frankly, I know this story oh too well as I have wasted many a perfect Friday night trying to learn some econometric modeling tactic so I could be one step ahead of the market. You know what? I probably should have been out grabbing a few beers and observing the real economy because I was fighting a fruitless battle against the markets. Save yourself the trouble and do not go toe to toe with the market: take heed of the most famous trader’s axiom and “DO NOT FIGHT THE TAPE”. One needs to look no further than Long Term Capital to see the issues with exhibiting extreme hubris. If noble laureates can’t model to perfection, there is no way you or I should ever try.

So what can I do to make money you ask? Instead of stating the market should do X and betting, develop several scenarios of what could happen. After developing several market themes, just talking them through is not enough, you must develop specific criteria which dictates which theme is taking place, when to place your bet, and when the theme has ended.

Let me show you a relevant example. Given the economic malaise followed by seemingly rosy market conditions, many academics and market participants alike have debated over whether we will get inflation or deflation. Here is simplistic frame work (a representation and not my actual criteria):

Scenario 1: Inflation/Reflation: CRB Index above 200 day moving average, $TBT remains under its 200 day moving average, CPI yr/yr change stays positive, $DXY  stays under 200 day moving average –Stay long risk assets: $FXI, $JNK, $IWM

Scenario 2: Deflation: opposite of above – Stay long safe haven assets:$TLT, $BSV, $GLD, $Mattress, $AMMO

Scenario 3: Indicators oscillating between criteria – A)sit on the side lines and wait for something to blow up B) Sit in “safe stuff” $BSV, $SUB

While this is very simplistic scenario analysis, it is better than using hope as an investment strategy. Far too often, people think the more complicated the analysis the better, I argue that K.I.S.S. (keep it super simple) is always best. As I continue to write for this Global Macro section of StockTwits, I will share with you my personal criteria for the theme(s) I’m following.

Fighting the tape is useless as your P/L does not care if you have a 150 IQ.  Herein lies the chasm of difference between being smart and making money. You may have the most brilliant idea of what the market should do, but you need to wait for signs of change proving your theme/idea is being accepted by the market. In short the “genius” bets against the market, whereas those concerned with making money wait for confirmation of the shift and bet accordingly. Being a careful observer of global capital markets and having specific criteria for theme shifts is the most surefire way to becoming a successful market speculator.


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