I grew up playing chess with my dad, although we stopped playing as much as soon as he taught me about investing. Poker came later, and clearing out college kids of everything but their tuition money (relax, we’re talking a $200 pot or so) was always a delight.
They’re both fun, engaging games that require mental skills, although both have very different rule sets.
And yet, sometimes they don’t. When I came up against a chess opponent in college with far more skill, I could only improve by so much. I found it easier to change the rules around. Rather than play to win, I’d simply play to frustrate my superior opponent’s moves. It would prolong the game. All his gambits would fail. Instead of frustrating my attempts to beat him, he became frustrated with his failed attempts to get to me. All I had to do was have the emotional discipline to outlast him.
In other words, I played the player, not the game.
That’s using poker rules in chess. And in poker, you can use chess rules — if you can keep track of the statistics and cards played. That’s not a skillset that I have, but it can be done.
In the financial markets, where we’re small fish in a very large pond, we can win by playing against the big players. We can have the emotional discipline to be greedy during periods of fear.
Likewise, during periods of greed, like now as the S&P 500 is surging to a new high, we can be a bit more cautious and “play to not lose” rather than play to win.
This is the basis of contrarian investing. And it can work for individual investors, even against big players in the market.
For instance, in the past three years, billionaire hedge fund manage Bill Ackman has tried to convince the public at large that the company Herbalife (HLF) is a fraud. Yes, it’s structured as a multi-level marketing company, which is far from traditional from how companies usually employ a sales staff. Ackman has made a large — and public — short position on the company, betting that it will go down.
He’s been in the black on this trade at times, and sometimes not. But he’s spent millions on websites, presentations, and lobbying to try and justify his trade and get the stock to go to zero.
That’s changing the rules of the game. But so far, it isn’t working.
Despite an FTC investigation, shares have held up well and Ackman is bleeding on his short position. All individual investors had to do was buy after the stock dove on his recommendation of shorting it, then hold on for a wild ride. Taking that contrarian position is finally starting to pay off in the past year.
It’s not just individual, big-name investors like Ackman trying to have their way. Markets, i.e., the mass amalgamation of all the small and big players, end up getting caught up in the emotion too.
In some sectors of the economy, there’s been a quiet bluff going on. Prices and valuations in defensive stocks like utilities and telecoms have been gradually rising. Eventually, Mr. Market will call the bluff and investors will have to cash out.
Those cushy blue-chip dividends won’t be enough to offset the capital losses there. I’ve been gradually lightening my load in the sector — just last week I got called away on half my position in AT&T (T). I like the telecom space at the right price. Today, it’s no bargain. That will change again.
Elsewhere, the rules of chess are at work today. For instance, if you can see several moves ahead on the latest rollout of the 5G network, than beaten-down tech chip companies like Qualcomm (QCOM), look like a solid buy now. At the moment, shares are beaten down on the latest slow growth and declining sales in 4G chips. Yes, that sounds bad, but with a forward-looking catalyst, at some point shares will rise and the chess game will morph into poker.
It’s difficult to get a chess-like, analytical read on the markets right now. That’s a consequence of years of near-zero interest allowing for a rise in spending and borrowing without having huge payments to justify it. To many investors, that makes the markets seem like a giant poker bluff. I think it’s more that the money has nowhere else to go — there’s no point in borrowing cheaply to buy zero-yielding bonds.
That’s why some sectors look like they’re bluffing, and others don’t. Rotate to where the value is, and you’ll fare well over time.
is a Senior Financial Editor with Newsmax Media. He currently writes the Insider Hotline investment advisory, serves as investment director for the Financial Braintrust, and is managing editor of Financial Intelligence Report. To read more of his work, GO HERE NOW.
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