To Make Money, Be Smart, Be Small, and Be Different

Weekly Issue

In markets (and much of life) only the numbers matter.

If you get the numbers right, you will make money in the markets.

Everything else is a story and stories are far more likely to cost you money than make you money.

All of these are just numbers.

These numbers have built some of the greatest fortunes in the history of the world.

Stories have as well but that bonanza has mostly accrued to the account of the Dreamweaver.

Now, if you are just in for the action, moments of water cooler glory and the companionship of a merry band of Jesse Livermore aspirants, then the stories are for you.

They probably will not make you much, if any, money over the long run but they will get some feel good floods of dopamine and oxytocin swimming around the old noggin.

You will lose money but feel good about it because tomorrow, and all its million tomorrows, are just a day away.

If you are focused on making actual cash profits, then it's the numbers for you to focus on, specifically the four numerical sets listed above.

No matter where you are on the journey of life, any of the four or some combination of the four above will create the highest probability of reaching that goal.

I have a chance this week to watch two of the true greats of the financial publishing industry talk about building a business in the modern-day version of financial publishing.

At one point the CEO of what has to be the largest publisher of such services in the world said that the biggest problem publishers faced was not getting so caught up in the process that the message was ignored.

While I am not worried about getting too caught up in the marketing process (it should be fairly obvious that I do not have one), it did strike me that I might not be hitting all the right spots in getting the message across.

The message is simply: “you can do this.”

However, you need to be aware that achieving your financial goals and dreams is to a very large degree something of a solitary journey.

Wall Street is not going to help you. In fact, during your investment career they will be your single biggest obstacle to financial success.

Most of the people that you meet and interact with who have the answer to all of your dreams probably don't.

If you do the same things that everybody else does and own and trade the same stocks or bonds or securities that everyone else does you will not achieve above average returns.

In fact, you'll be lucky to get to average.

Most short-term traders fail.

A handful of them will make money over time but they won't beat the market. Your odds of hitting the multimillion-dollar home run or leaving your career to work from home as a day trader are pretty slim.

The odds of a retail trader achieving their wildest dreams in the market are about the same as those of a high school baseball player making it not only onto the roster of a Major League Baseball team.

Odds for option traders are slightly worse.

Since the very beginning of trade, for as long as there has been a market where people buy and sell goods and services, there are three things that have always worked:

There is whole laundry list of reasons, economic, financial and psychological, why these have always worked and why they will always work and that is something we will continue to discuss.

Fundamental momentum is as important as price momentum. Using both together is a 1+1=4 equation.

You have to do what nobody else is doing.

Not hedging during periods of low volatility and tight credit spreads is like not buying insurance on your house when you can see the flood creeping up the front stairs.

Selling option premium when you understand the pricing of the options and have solid understanding of the underlying company can add to your overall return significantly.

If everyone agrees with you, start looking for the reason you are wrong.

If you need to maximize returns to meet goals quicker, get small. Small-cap deep value and small-cap momentum are volatile but over time can deliver high returns.

Using both at the same time can cut down volatility without negatively impacting returns.

Dividends matter.

Charlie Munger opined on several occasions that going forward markets would be more efficient and investors looking to maximize performance would need to exploit illiquid and inefficient pockets of the markets.

Nothing is more illiquid and inefficient than small banks.

A few ten-bagger stocks can make all the difference in your long-term returns.