Don't bet on the most likely winner
avoidboringpeople.substack.com
avoidboringpeople.substack.com
1. In many tech area: networks effects and zero marginal costs creates winner(s) take all. In that sense it make sense to follow the winners as previously investors underestimated how big winner could be (e.g. Amazon, Google, Facebook, Apple).
2. Everywhere else: betting on underdogs that are mispriced is much better strategy in long-run. See Warren Buffet got huge returns by looking at fundamentals, but his strategy would not work well in tech.
It’s still only 6% of global search vs 86% for google.
- DuckDuckGo
- Ecosia
- Qwant
- OneSearch
- Search Encrypt
- Swisscows
- etc.
> In July 2016, DuckDuckGo officially announced the extension of its partnership with Yahoo! that brought new features to all users of the search engine, including date filtering of results and additional site links. It also partners with Bing, Yandex, and Wikipedia to produce results or make use of features offered. The company also confirmed that it does not share user information with partner companies, as has always been its policy.
Doing this on DuckDuckGo: https://duckduckgo.com/?q=my+user+agent&t=hk&ia=answer , reviles http://www.bing.com/bingbot.htm in the snippet for whatsmyuseragent.org .
Horse racing is a better place to make the point. Risking your bets on likely winners has a low payout overall — underdogs have a reward that batter aligns with risk.
I worked with a pretty hardcore handicapper. He would plan for certain races for weeks and look at training and other factors. Basically, he'd cover the Saratoga meet and pair favorites a longshots and come out ahead enough to stay ahead. You could tell how well he did by the toys purchased in the Fall. Good year, a truck, bad year a laptop.
Most famously perhaps his investment in Coca Cola in 1988. It was his single largest holding back then, and still is one of his largest today.
In some sense, for Warren Buffet a mispriced top dog is much more valuable, because he can put more capital to work.
Things that are incredibly profitable are by definition not loss leaders.
>Even with high retail price, margins are low.
Is this true? Being as how one can purchase a similarly spec'd laptop for a fraction of the cost of a MBP makes me skeptical. I'd assume they're killing it on their laptops.
Is this true? Do you have a spec sheet? My own research suggests for about the last 5 years Apple hardware has been pretty competitive.
The dell is an abhorrent disgrace in every other matter. It weights two tons, is unable to dissipate heat because surprise surprise bulky plastic is bad for that, is filled with weird bugs, has a bizarrely large spacing between keys on the keyboard, a bad screen, bad track pad, terrible battery life, etc
Apple earns more profits from the Tablet market than all the other hardware venders combined.
Apple earns more profits from the PC market than all the other hardware venders combined.
Tech is still young, and we shall see. Google made around $16 billion dollars in 2014. That means an economic rationalist is willing to pay everyone on earth something in the order of $2 dollars to use their service rather than Google's.
It isn't too late to discover that the equilibrium position is we get paid to use certain search engines or social networks. That'd drive the marginal cost up.
Long Amazon, short JCPenney is an example of an obvious trade the past 5 years. Or even the past 2 years. Same with long Apple in 2012 when iPhones were ubiquitous. And you would have obliterated the index with those trades.
Sometimes you don’t need an edge. sometimes the most obvious idea is the most profitable.
And my theory why is because if it’s obvious, it’s because everyone else is in love with the idea as well and putting money into it. And in the financial world, people don’t just put money into it once. They add on to it month after month after month.
So you don’t necessarily need to be early to profit well. Let the big trend appear, then invest big into it once it becomes clear as day. Because huge trends last longer than you think.
This works wonders and has been a constant source of factor alpha.
And, of course, because so many people do trend following these days, trend following itself will work less well in future.
I was short a ton of these retail positions. I remember a guy who used to be CFO of a clothing retailer telling me earnestly that I was an utter idiot, and didn't understand another clothing retailer (we were short, he was long in massive size).
And he was right...I didn't understand the business, I didn't understand as much as him about selling clothes. But I understood the things that mattered: they had bad locations, footfall was tracking down 3% YoY, and wasn't going to recover (they declared bankruptcy three years later, the CFO owned it all the way down and lost his shirt...he was an "expert" after all).
Hindsight tells us what information is important. But people rarely try to work this out ahead of time. They gather whatever information is most available (usually from the company), but not what is most important.
In addition, I think people who end up in investing rarely think through why other people make decisions. They come up with lots of clever reasons to own dogshit stocks but never consider that no-one is going to use that same reasoning (with retailers, the issue was rarely that people were expecting a recovery...they were buying the company of today expecting things to not get worse...but no-one buys into that situation without doing a lot of research to confuse themselves).
So...imo, it was obvious although not easy or common. Most of the time, you can't get the important information. And most of the time, you can't get someone to take the other side. But it does happen. And most professionals vastly over-complicate investing.
(Also, the OP is not bad...but it is just confused. Credit card data hasn't moved us to some new level of efficiency, his source for this isn't apples to apples as hedge funds today are nothing like hedge funds two decades ago. Markets aren't more efficient, they are just composed of actors who behave differently. In particular, the rise of factor models has opened huge inefficiencies because they are trying to trade fundamentally with no knowledge of fundamentals...this is something that is obviously bad and flawed).
At the time, amazon stock was $400 a share - it wasn't reliably returning profits. AWS wasn't a significant proportion of their business. A lot of people still thought of amazon as a money losing retail company and a vestige of the original dot-com era. I told everyone I knew to invest in amazon because of AWS and it was very difficult to explain to people why it was going to beat the market. The fact that I found it difficult to convince people outside of tech that it was a good buy made me invest _more_ because I realized that 'the market' didn't fully understand the value of the company.
Amazon was losing money because they put every single dollar they earned (and more) into new projects and markets that expanded their reach.
Definitely agree with your second paragaph though! There are so many companies that for some time fly under the radar of the general public, where experts in the field can already see their success coming a mile away.
Nvidia would be another example. Anyone in Computer Science around 2014 could have predicted their meteoric rise due to machine learning and CUDA. But people outside of the field would have no idea.
I think one of the Intel founders said something along the lines of “every new business sows the seeds for its own upheaval”. Yeah that’s true, but only once you start caring about the scoreboard.
https://www.marxists.org/archive/marx/works/1847/communist-l...
Likewise with stocks, it's hard to argue that Tesla isn't doing well, but you'd be bonkers to buy their stock right now.
You're probably correct; but didn't people say that when they went above $200 as well?
Has yet to payoff.
(Not investment advice I'm willing to follow myself! But a comment elsewhere in this submission, and a recent Levine column, have discussed that.. yeah, basically following the trend works... I suppose it shouldn't be that surprising, add more signals and act more quickly and you've reinvented a successful industry/form of professional trading.)
Otherwise, just buy the most boring and low cost index fund you can find.
Stock prices have apparently nothing to do with company earnings and performance so how do you know Tesla isn't worth 2000/3000/4000$ per stock?
Investors buy Tesla because they hope a lot of others will too in the future. As long as this hope is there and more people put their money into Tesla, the stock price will continue to rise.
Not saying I'd bet against them, mind you. The market can stay irrational longer than you can stay solvent, as they say. And even so it's probably not too bad a bet if you could hold it for 20+ years, but it's going to dive before it rises again.
> It's how the stock performs relative to expectations that determines whether you make above average returns or not.
is like, investment 101 knowledge. Anyone who ever came near managing a portfolio understands that.
> you want to bet on the mispriced horse, not the horse most likely to win
"The race is often to the swift, and the battle to the strong, but the way to bet is on those with miscalibrated odds."
If the odds are well calibrated, the expected return is zero; we might as well not bet. The same goes for speculating on well-priced assets.
If we have reason to believe that the odds/prices are miscalibrated, we can expect a positive return by going long/short (depending on which direction they're off).
Interacting with a bookie is a whole different context than interacting with reality.
I think the point of the article was that interacting with the stock market (and potentially other areas of many businesses) is more like interacting with a bookie than interacting with reality.
I can think of a few reasons not to follow this strategy:
- If our uncertainty is too high, we might want to avoid the risk; e.g. even if Georgia wins, we might not get anything out of it.
- If the commitment is too high, e.g. a Martingale.
- If setting up one outcome puts another at risk; e.g. if we fund Georgia's war effort, such that Russia would retaliate if they win; or the other way around; or both!
"Again I saw that under the sun the race is not to the swift, nor the battle to the strong, nor bread to the wise, nor riches to the intelligent, nor favor to those with knowledge, but time and chance happen to them all." —Ecclesiastes 9:11
To understand where Ecclesiastes is coming from:
In the wisdom literature, books like Proverbs will typically state the common case and it's Ecclesiastes that will state the exception. This keeps the wisdom literature balanced as a set of principles, not rules.
The Hugh Keough quote is a great summary then of the main point, which I won't restate.
The regulatory environment is not kind to short sellers.
Matt Levine's Money Stuff often has examples of how shorting can go wrong. Recently there was a company that was accused of fraud. An obvious target for shorting. But: once the fraud properly came to light, the authorities promptly halted trading in the company's stock. After trading was halted, the shortsellers could not cover their shorts.
And of course, in order to shortsell, you always need someone willing to lend you the stock in the first place.
In the case of Hertz, https://fintel.io/ss/us/htz does suggest that plenty of shortselling is going on. But https://finance.yahoo.com/news/why-bankrupt-hertz-short-sque... suggests that finding Hertz stock to borrow became harder over time.
Case: Bear Sterns, AIG, GS
See eg https://www.reuters.com/article/uk-health-coronavirus-hedgef...
1. Look up the timeline of events with Corona.
Late January: millions of Chinese are put in quarantine.
Mid February: Apple gives a warning about not meeting guidances.
Few days later: Markets reach all-time highs despite the fact that the most-valuable company in the world just told everybody that the supply chain disruption in China is real.
That was a good opportunity to go short or buy put options. And I actually did and made a small fortune.
2. Wirecard. The information about the fraud were all known, but the general opinion didn’t price that in (of course, the short sellers did). You could’ve made a killing with that -98% decline in their stock within a week. I missed this opportunity.
But both of these events showed me that there are crazy inefficiencies once in a while that can be exploited (obviously with some chance of being wrong, but that’s part of the game and a question of risk management).