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My Biggest Investing Edge: 'Variant Perception'By
Thursday, April 12, 2018
"So why are you so excited about China, Steve?" talk-show host Buck Sexton asked me this week on the Stansberry Investor Hour podcast.
The answer is simple.
It is actually my biggest edge in investing.
But almost nobody does it...
My answer applies not only to China, but to basically every successful investment I have ever made. It is this:
Whenever you find a big gap between perception and reality, you can often make a lot of money.
The American perception of China versus the reality on the ground is as big a gap as I have ever seen in my investing life.
As that gap closes, someone is going to make a lot of money. And I believe it will be my subscribers. (That's why I launched my True Wealth China Opportunities service... And it's why I've urged my readers to invest in China here in DailyWealth.)
The thing is, most investors don't invest this way. They might think that they do... but they don't.
Instead, most investors look for the best horse in the race – based on their investing criteria – and then they bet on it.
Sounds sensible. But there's a BIG problem with doing things this way...
Investors forget that other investors – using the same criteria – are betting on the same horse. They're all betting on the odds-on favorite at the Kentucky Derby. If it wins, you don't make much. If you are wrong, you lose it all.
In investing, you will never dramatically outperform if what you're doing isn't dramatically different from your peers. I believe the perception-versus-reality gap is an even more important criterion for success than the value of whatever it is you are betting on.
As horse-betting legend Steven Crist says, "The issue is not which horse in the race is the most likely winner, but which horse or horses are offering odds that exceed their actual chances of victory... Under this mindset, everything but the odds fades from view."
According to him, all you need to look for is "an attractive discrepancy between his chances [of winning] and his price."
Legendary hedge-fund manager Michael Steinhardt has a term for this type of thinking. He calls it "variant perception."
Variant perception, according to Steinhardt, is "holding a well-founded view that was meaningfully different than the market consensus." It is understanding that market expectations are "at least as important as – and often different from – the fundamental knowledge."
If you want to dramatically outperform... yet you are using the same analysis tools as everyone else... then you are doing it wrong.
Instead, think of variant perception. Think of horse race betting – look for "an attractive discrepancy" between the chances of winning and the price. And think of my China idea – where the gap between perception and reality is huge.
If you want to outperform, you have to work on ideas that are "meaningfully different than the market consensus."
All of my own really big investment successes have happened specifically because of this way of thinking.
I urge you to try this way of thinking about your investments too...
Good investing,
Steve
Further Reading:
Steve took a trip to China last summer to see the reality on the ground. His experience may surprise you... "Honestly, it felt like we'd stepped into the future," he said. "This was Communist China?" Read more here: Perception ≠ Reality in China.
"Can you beat the odds in Vegas?" Steve writes. The answer is that at the end of some games, you can increase your chances of winning – and the same is true of investing. Learn more here: This Bull Market Is Near the 'End of the Deck'...
Market NotesDATA PROTECTION SOARS IN A RAPIDLY CHANGING WORLD Today's chart reflects the growing value of data security...
Regular readers know that following big secular trends is one of our favorite investing strategies. These days, companies upload and share information constantly. And as more breaches take place, it looks like protecting customer data is becoming a long-term necessity...
Cybersecurity firm Palo Alto Networks (PANW) is a leading provider of enterprise network firewalls. This is proving to be a vital service... Just last week, airline Delta Air Lines (DAL) and department-store owner Sears Holdings (SHLD) reported that a data breach may have hit hundreds of thousands of their customers, exposing their credit-card information. And in February, hackers stole the personal data of 150 million MyFitnessPal users. With recurring data breach headlines, it's no wonder Palo Alto's latest quarterly revenue has increased 28% year over year...
Meanwhile, shares have jumped more than 65% since last year, recently hitting a new multiyear high. As businesses depend more on cybersecurity to prevent data breaches, this company's stock should climb higher still...
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