Monday, April 5, 2021

The Plain-Sight Secret About Investing

99% of investors have no idea what the bet is that they're making. It's shocking.
"Elon Musk seems super smart, and he's had so much success in the past, and his future plans sound exciting. Tesla seems like an awfully good bet!"
No. Don't do that. The purchase of Tesla stock is not a bet on the company, like betting on a horse in a race. It's one level more sophisticated and abstract: you are betting on the underestimation of Tesla by other investors. That's the bet; the only bet. You're never betting on a company, you're betting against other investors' sentiment about that company. And those people are all aware of Musk's history, too. That's not privileged information.
Have you ever noticed that many people imagine that when they say the same old shit we've all heard a zillion times it has a special ring? "Now it's me saying it!" In everyday life, this daffy mental miscalculation is annoying. In the stock market, it pays for the 1%'s Lear jets.
This is, oddly, terrifically difficult for nearly everyone to grok. Small time "retail" investors misunderstand because they're naive (naïveté is the single greatest impediment to clarity). Day traders, who grok this in theory, lose touch with it amid the bustle of their manic and complicated trading (complexity is the second greatest impediment to clarity). And professional financiers, who understand this better than any of us, are distracted by their smug self-confidence (ego is the third greatest impediment to clarity).

Most of all, it's a framing problem. If you're an addicted gambler (as most investors are, at all three levels), you do not possess a lithe perspective (see this for how addiction is a framing problem). You are rigid and stuck. You are compelled to see things like a horse track, and can't find the calm latitude to reframe to a more sophisticated, subtle, abstract perspective. Your attention remains riveted to "GO TEAM,” in all-caps. 

We all have an opinion as to whether Amazon still has room to grow, or if Tesla can maintain profits with big automakers getting into electric. Opinions are like assholes; we all have one. And yours may even be correct. But that's not enough. Because your bet is not on Amazon or Tesla, but against titans infinitely smarter and better informed than you. They effectively set the price, and that price already reflects their (smart) consensus opinion. And there's not a single thought in your head that's ahead of them. So you will not only not win against them; they will, over time, eat your lunch.

So don't read annual reports. Don't try to be a smarty. All info is already baked in to the price by people way smarter than you (if you assume no one's smarter than you, then I have good news: your impending poverty will divest you of that delusion). Again: You're not betting on a company, you're betting against the market's estimation of that company. It's not a proposition of predicting business success.

So why would anyone bet against billionaire geniuses and their office towers stocked full of MIT educated analysts? Wouldn't that be crazy?

Yes. Yes it would. Which is why people should invest in index mutual funds, which rise (and, alas, sink) with the market, often bringing even better success than the outcomes for individual twitchy billionaire geniuses (because the latter are limited by ego and an addict’s perspective).

The only exception is if you have some sort of an edge. Which 99.9999% of the time you won't.

Patience is a potent edge. The billionaire geniuses need to be constantly hitting home runs. They can't patiently wait stuff out. They're twitchy. That's why my strategy of buying Apple in its downturns has worked. I can park my money for a year, and those guys can't. Neither can day traders, who are equally twitchy. So, often, it's only sad little me buying on downturns and selling on peaks, while everyone else spazzes out, flocks irrationally, and goes foolishly the wrong way. They’re pursuing bazooka home runs this quarter while I’m content with 25% gains next year. I gobble up discarded crumbs.

Specialized knowledge can also be an edge. A friend runs a genetics lab, and told me TXG's technology would one day be ubiquitous. He could hardly wait to have it, himself. I bought at $54, and it's now $188. Of course, it might just as easily have crashed. Maybe the CEO is a dork. An edge is not a superpower, it's just a way to marginally de-shmuck oneself. Billionaire geniuses also know people running genetics labs. Mostly, I got lucky. But a little luckier than if I'd flown blind, trusting my own puny acumen.

Years ago, I wrote breathlessly about SIGA, a company with an entirely effective (and no side-effects) smallpox cure. It’s a bio-terror countermeasure (it works on weaponized versions), and it also works on cowpox and monkey pox, which are both still out there. I'm still hanging on to half my shares, and at $7 I've made out decently with my $2 investment, though it's sat listlessly for so many years that it's no jackpot. This year I expect at least one big foreign government sale, and/or a sale to US gov with a different formulation, which should hopefully pop the stock back to $12-15. At that point, I'll sell (there's time pressure: their patent on the drug actually runs out in a few years - insert bug-eyed/astonished emoji - and soon I'll be so old that I'd only enjoy a jackpot by gold-plating my walker), and it will amount to good profit despite the ridiculous time lag. In this case, my patience was my edge, then my stubbornness was my edge, then my religious faith was my edge, and, at this point, my stupidity is my edge. All these things are unavailable to billionaire geniuses. I stay in my lane.

It’s hard to understand this maxim, and harder still to live by it. And it’s almost impossible to find an edge for yourself, and harder still to maximize that edge without being clouded by ego or by addictive glee over successes. 

I seem to be at that latter stage. I’ve been beating the market (I bought in low to CRIS, PRKR, BCRX, and the aforementioned TXG and SIGA, in addition to cultivating Apple’s periodic lulls). But it’s more than likely a blip, like flipping “heads” a few times more than likely. So I’m keeping my outlay prudently low. 


jeff davidson said...

Jim, I was tempted to call BS on your 2018 post:

it's nice to see in the interim you've found the financial wisdom that has eluded so many retail investors. As someone that spent a career on both the buy and sell side of wall st, I'd add:

- not just index funds, but low, cost, broad-based index fund e.g. vtsax
- choose an appropriate, risk-based asset allocation. for example, I'm (mostly) retired and we have a 40-60 equity to fixed income allocation. rebalancing the allocation with 5% to 10% bands forces the investor to sell high and buy low. If that's too complicated, purchase a vanguard target date retirement fund and they'll manage age-based allocation and rebalancing for a pittance.

couple of food notes, when you have a chance, suggest you try the basement-baked, plain croissant at first village in ossining and a new-ish pizza place called baci opened in montrose. the pie man is rumored to have worked at diFara's, great ingredients still feeling their way on slice composition but already better than most of the places in westchester (admittedly, a low bar).


Jim Leff said...

I was tempted to call BS on your 2018 post:

Fine by me, but I've paid my bills for years by buying Apple's downturns and selling its upturns (fortunately the cycle's slow so I almost always get long term gains).

One day it will no longer work - Apple won't recover from a downturn - but I don't believe it will plunge to zero, turning my investment into dust. So I figure the abundant upside/limited downside; the opportunity presented by periodic 30% discounts on the most successful company in history; and my pattern of reaping great profits at little risk over many years via this strategy have validated my thinking. My current shares were bought at $104 last September. You know a safer way to make 33% in half a year? That's loan shark rates!

Absolutely agreed on the cost issue. I stick with Vanguard. But I'm not trying to be a financial advisor, just pointing out a broader fallacy.

Thanks for the food tips! I'll offer these: House of Pizza in Hawthorne. Start with sausage slice and garlic knots. And rugelach at Riviera Bake Shop in Armonk (satellite branch at Tarrytown train station). Also: the only north-of-city retail source for Nixtamal tortillas (the good ones from Queens, not the iffy ones from Yonkers) in Westchester is at Rochambeau Farms, which is also a gorgeous pocket of heaven. Weekends they have a coal fired pizza guy working there. I haven't tried it.

jeff davidson said...


thanks for the food tips! I drive out to trotta's once in a while for fresh pasta so looking forward to swinging by the House Of Pizza!

let me try once, gently, to push you in the right direction and perhaps, from time-to-time, you'll think about this comment. There are tens of thousands of algorithms running in the market each day. there are 1000s of finance professionals, with degrees from top colleges, using sophisticated analytic tools tailored working around the clock to simply beat the return of the broad index. Yet you've discovered a strategy that safely outperforms the market by purchasing apple on the dip?

I'm glad it's worked for you and I truly hope it continues to work but the truth is every piece of news is priced into the market and your apple trades, on a risk adjusted basis, are not as good an investment as the broad market index. Diversification is the only free lunch.

It took me ten years, after hearing it from a stanford professor, to come around to this point of view. So it's not an easy thing. If you need more convincing you might try Malkiel's A Random Walk Down Wall St. Or Jim, simply re-read your post, I think your close but, recalling my own experience, it's hard to reject confirmation bias.


Jim Leff said...

I tried Baci and think your assessment’s right on. Some really good ingredients, some know-how, but also all these bizarre decisions.

Crust is good bread, but it’s not pizza. It seems really thick, because it’s so inappropriately chewy, though it’s actually not thick at all. I don’t know enough about baking to diagnose the error, but this is not pizza crust, it’s something else. The round slice crusts are chewy; the squares are neutron-star dense.

Also: the sauce has this weird candy-sweetness. Not the usual culprit of tomato paste or added sugar, I don’t think. I’ve never seen quite this result before, which makes me think he’s doing something head-bangingly crazy with the sauce. My first whimsical comparable, fwiw, was the oil from canned sweet peppers. It's like somebody drizzled that all over the place. Though that's probably not actually it.

Everything is so skewed by these two fiascos that nothing adds up to any sort of gestalt. You used the word “composition”, and I don’t suspect he’ll ever develop it; there’s too much blunt-edged wrongness. But I do agree it’s nonetheless one of the only interesting slices in the county, and it’s unique, and it’s kinda/sorta a distant fourth-degree-of-separation echo of DiFara.

As for the investing advice, I thank you kindly, but I'm reluctant to do it right because the bad wrong stupid strategy I've employed with Apple has paid off beautifully over and over and over and over and over and over again for 20 years. To my addled mind, my actuality trumps your theory, but your unshakable confidence in your high correctness and my low foolishness is too formidable to ignore, so please know how very chastened I'll feel as I continue counting all the frightfully stupid money I make!

jeff davidson said...

that's a spot on assessment of baci. I'm deep down the pizza rabbit hole, steel plate in the home oven and a pizza oven capable of reaching 900 degrees on the deck. I love baci's experimentation with local milled flour (wild hive) and 00. Also, pretty sure that's not same day dough. I think if it was just the bready crust, I might write it off as something new and interesting but the sauce is, as you say, over the top sweet.

I have a theory that as soon as a pizza maker leaves the city, the pizza loses it's New Yorkedness in favor of more cheese, more sauce, more sugar and more toppings. It starts slowly, almost imperceptibly but inexorably moves towards monstrosity (and don't even get me started on chinese food). The weird thing is that just about everyone in our town lived in NYC but now they're quite happy to rail down a couple of local slices. I'm fond of telling my kids that my work as a parent was done when they understood the difference between good and bad pizza (and chinese food).

To your point, Baci will probably never fulfill its potential because the pizza has been met with almost universal acclaim. Having said that, I did have a very good vodka slice last week, the spiciness of the fresh basil a nice counterpoint to the sweetish sauce. But yesterday I brought home a vodka pie for my wife to try and the sauce was far too sweet for us to eat more than a slice. Still, they're 10 mins from our house and I plan to check in from time to time. and I still haven't tried their detroit...

good luck with your investments, I don't think there's anything wrong with your approach of indexing the large majority of your portfolio and speculating the rest. I made some early crypto investments that we now to use to fund our once per year family fine dining adventure.


Jim Leff said...

I have a theory that as soon as a pizza maker leaves the city, the pizza loses it's New Yorkedness in favor of more cheese, more sauce, more sugar and more toppings. It starts slowly, almost imperceptibly but inexorably moves towards monstrosity

When a jazz musician spends time in a place like Europe, you can count the years he’s spent there, like age rings in a tree trunk, by the notches of decline in his swing feel and swagger. It’s like demagnetization.

I like the metaphor of a battery-powered pocket heater, lost out of your pocket as you row a boat, that tries valiantly to heat the sea. You can’t heat the sea. You just can’t, no matter how strong you are. Logic dictates that you’re only powering your particular part of it all, but the world doesn’t work like that. We’re not hermetic.

Jim Leff said...

That catfish place next door looked like maybe it was ok once.

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