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It Took Me a While to STOP Doing This... Do You Do It?By
Thursday, November 12, 2015
It took me a while to "get it" with today's idea...
Honestly, it took me a few years of investing to see it in my own trading. And then a bit longer to truly fix it.
I bet a lot of smart people make the mistake I'm going to share with you today.
The thing is, as I learned, doing this will prevent you from making money... You will have outsmarted yourself. You will have overthought the idea.
Let me explain...
Cliff Asness, a money manager who I look up to, calls it the "exacta" problem.
What's an "exacta"? It's a type of bet...
If you're betting on the Kentucky Derby horse race, a straight "exacta" bet means that you're betting on which horse comes in first, AND which one comes in second – in that EXACT order. (Hence the name "exacta.")
As you might guess, getting a straight exacta right is extremely hard... You are making two specific bets on two specific outcomes. Your odds are dramatically worse than with making just one bet.
The increase in risk is obvious, right?
The thing is, investors make "exacta" bets all the time... without realizing it.
For example, you might hear a hotshot investor say "oh, the dollar is going to go up, therefore I will bet on small-cap stocks."
The hotshot investor might sound smart... He might sound like he's making a crafty bet of some sort. But in reality, he's making an "exacta" bet. He's betting on two outcomes.
The simpler idea, if you think the dollar is going to go up, is to bet on the dollar going up!
Cliff Asness says this about the exacta bet:
As a smart investor, you often want to overthink it... You want to get creative... You want to go for the way to play it that nobody else has thought of. Unwittingly, all you are doing is making it much harder for yourself... Not only do you have to get the big-picture idea right (that the dollar is going to go up), you also have to get the specific trade right (that small-cap stocks will go up).
It has taken me a while to learn that when it's time to buy tech stocks, you buy tech stocks – and leave it at that.
DON'T get more creative than that. Don't look for the secret sector that might do REALLY well if the tech sector does well.
Resist the temptation if you want to make money.
If you don't resist the temptation, then you will be making an exacta bet. The odds will be much tougher for you. You could be moving from a bet with the cards stacked in your favor to a bet with worse-than-50/50 odds.
Tech stocks might go up, but your crafty way to potentially make even more money on the idea might not work out at all.
This is really tough for me to do, still to this day.
I feel like you pay me to find that crafty idea... I feel like you don't want to hear a simple idea from me... and I have to fight that thought. I have to avoid screwing up a good idea with an exacta bet.
More often than not, simple is what works.
Do your best to recognize when you're making an exacta bet... and avoid it!
Good investing,
Steve
Further Reading:
Earlier this month, Steve told readers Chinese stocks could be on the verge of a strong rally thanks to China's recent rate cut. "The gains could be 31% over the next 12 months, based on history," he says. Learn more right here.
Steve also believes U.S. house prices still have significant upside. "I have my money where my mouth is on this one," he says... "I have more of my personal financial assets in U.S. real estate than in any other category... by a wide margin... and that includes the stock market." Learn why right here.
Market NotesTHIS TECH JUGGERNAUT JUST BROKE OUT Today's chart highlights one blue-chip business dominating the tech sector right now...
Plenty of Big Tech firms have been around for decades and have established businesses that generate steady sales and thick profit margins. And many use a large portion of that money to pay dividends and buy back shares. But since they rarely make headlines, investors often pass over them in favor of more "exciting" opportunities.
These "boring" tech giants have been overlooked for years. Take Microsoft (MSFT), for example. The software giant is No. 1 in its industry. It has more than a dozen separate businesses that each generate more than $1 billion in annual revenue. Last year, it sold $68 billion of software, more than its top three competitors – Oracle, IBM, and EMC – combined.
It's a dominant business that has enjoyed steady, long-term growth. Shares are up nearly 90% over the past three years. And the stock continues to outperform the overall market... Shares have soared 25% over the past two months alone and hit a new 52-week high earlier this month. Microsoft continues to treat shareholders well...
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