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It's never a good idea to get investment ideas from cartoonists. Nothing you hear from me should be construed as advice. And more generally, it's a bad idea for small investors to buy individual stocks or to attempt timing the market.

You have been warned.

I started testing an investment strategy a few years ago that is producing positive results. Yes, I am aware that my small sample is meaningless. And the numbers I present aren't annualized or compared to their same-industry cousins that did even better. But I want you to hear the strategy just so you can keep an eye on it going forward.

The investment idea is that the news always exaggerates risks. This is an extension of the Adams Law of Slow Moving Disasters that says humans generally figure out how to avoid big disasters when they see them coming.

So, for example, when BP stock was in the toilet, and the news media kept telling us the Gulf would be ruined for decades, I loaded up on BP stock because I predicted the opposite: a better-than-expected clean-up. That prediction turned out right. So far, that investment has paid about a 5% dividend in recent years and the stock itself is up 19%. (You should interpret that as just "up" because I haven't compared the performance to the market in general that is also up.)

When the news was reporting that Iranian leaders were on a suicide mission to develop a nuclear bomb to destroy Israel and their own country, I assumed it would all work out peacefully and I invested heavily in a beaten-down EFT of Israeli stocks. It's the biggest single investment I've ever made. That's up 26%.

When the news indicated that the government of Turkey was circling the drain and disaster was near, Turkish stocks crashed. I predicted that Turkey would work things out and get back to business in due time. So I loaded up on the biggest cell phone company in Turkey. As bad luck would have it, that company also has a big position in Ukraine, so it took a hit after I bought it, but now it's up 10%.

To reiterate, I'm not annualizing the gains or comparing them to anything relevant that would tell you how those investments did compared to other investments over the same period. The market in general is up over this same period so it makes almost any strategy look like a winner.

And one must compare investments that have similar risks. Some of you will say I got a meager return betting on high risk stocks. An economist would call that losing. But no one can accurately assign risks for the stocks I mentioned. My investments looked high-risk to the world and low-risk to me. So when I look at the returns for the three investments I mentioned, I compare them to low-risk alternatives and they look fairly good. I would expect most of you to compare them to high-risk alternatives and conclude that they underperformed that class. That difference in risk-assessment is what makes my investment strategy a strategy.

I don't recommend that you invest your own money this way. History is littered with crackpot investment ideas of this type. And my best investment gains over that period were in a diversified ETF. But keep an eye on the strategy just for fun.

I wonder if anyone has ever lost money betting against the news industry's predictions of doom.

-------------------------------

Scott Adams

Co-founder of CalendarTree.com

Author of the best graduation gift ever.

 



 
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May 6, 2014
Boy, my comments on the etymology of c o c k a m a m i e sure fell flat!
 
 
May 6, 2014
I have done pretty well the last few years as a straightforward contrarian - I watch for the market to overreact to some "news" and then I pounce, buy the equity on sale, and sit on it for a long time, particularly if it's a dividend stock with good long-term upside.

I started this strategy when I noticed that whether the quarterly reports came in bad OR good, the price almost always goes down. Likewise, it seemed at that time like no matter WHAT Mr. Alan Greenspan let pass his lips, good stocks fell like rocks.

I came to see this mostly as non-news trivia masquerading as newsworthy. Every day you read, DOW closes down on worries about the Fed's taper comments, then the next morning, DOW opens up on hopes for this afternoon's Jobs report, and it's all a bunch of !$%*!$%*!$ pseudo-explanations fabricated on the spot to fit the tickers. (An aside: I recently learned that !$%*!$%*!$ comes from the 19th Century penchant for decals and the term decalcomania that was used to describe it, but I digress.)

So, Scott, I think what you're talking about is that irreverence for the news-to-value proposition taken to extremes, but I agree with many of the other posters who have said something to the effect that you still should be validating the fundamentals of the underlying asset or asset class in some disciplined way, and trying to weigh it's potential against other investments to avoid taking it in the shorts in lost opportunity costs.

My newest investment idea, btw, is to invest in major corporations or promising start-ups whose headquarters are far inland, well above sea level, and in a place that might benefit from a few degrees of global warming - 3M comes to mind, or whatever is big in Canada, but I have not yet put this into practice. Obviously, this requires a long term buy and hold.
 
 
May 4, 2014
[Contrarian investing is betting against the herd. I'm betting against the news. I wouldn't buy a company just because professional analysts think it will have weak earnings. I want the news media to think there is some large event external to the company that is going to kill it. -- Scott]

Hi Scott - we may be arguing over semantics. When I said Contrarian I meant it in a wider sense, which includes betting against the news (after all, doesn't the herd usually take it's cue from the news?)
/j
 
 
May 3, 2014
They are good safe investments out there. You just really have to do
your research. I check Alexa rankings in order for me to make a decision on
whether or not I should invest. I have found a great company called MAPS. GET
PAID 72 TIMES A DAY! It’s super easy to use, free to get started, and making
money! CHECK IT OUT! http://smarturl.it/sdujko
 
 
+1 Rank Up Rank Down
May 2, 2014
Summary of this thread: To invest successfully, buy when everything is going to hell. Do this despite the impossibility of understanding what's really going on, the futility of researching the market, or making meaningful comparisons. (In any case, you don't know what you don't know.) Then keep those precious shares till you die, unless something terrible happens to them. Then you sell. (Wait -- wasn't that when you were supposed to BUY?)
 
 
0 Rank Up Rank Down
May 2, 2014
"We simply attempt to be fearful when others are greedy and to be greedy only when others are fearful." - Warren Buffett

Buffet has been doing what you mention for decades but that is only a just a starting point of investigating a company. I agree with you that the market often greatly overreacts to bad news but if that is all you go on you are just a monkey pressing buttons. You rarely hear about the corpses from peoples portfolio like Enron, old Kodak, old GM stock... The slow moving disaster for Kodak was the digital camera. For every seller of Kodak stock there was a buyer and if the buyer held onto the stock their investment went to zero.
 
 
May 2, 2014
[That sort of comparison is usually !$%*!$%* because you can game the result by cherry picking your time frame and comparing things of dissimilar risk. I haven't sold any of the stocks I mentioned, because I still like them to outperform their peers, so how do you know who wins a race when there is no finish line and no one agrees who was even racing whom? -- Scott]

...What are you saying here? It sounds an awful like 'Theres no way to compare this investment strategy, therefore theres no way to judge its effectiveness and no way you can tell me its wrong'. Im trying to be fair to you and admit that I may have gotten it wrong.

What sort of method of judging this strategy WOULD you accept?
 
 
May 2, 2014
@whtlnew,
Yeah, I was trying to be snarky. But ascribing to Scott's "grain of truth," I think we can accept that the news often cries fire when there's only smoke (or sometimes steam), and cries Armageddon when people face a real problem, even if they're equipped to handle it. And if it's one of the "evil" industries like energy and finance, the news is going to amplify every problem.

Of course to your point... you never want to follow the herd, and it doesn't matter whether they're acting on truth or lies. The first guy selling does okay, but the last guy is getting screwed. The first guy buying might do great, but the last guy is getting screwed again.

I think Scott's thinking is solid, though. Combine the first paragraph with the second paragraph, and maybe you can be the guy selling when the last guy is buying, or the guy buying when the last guy is selling. Stock trades are zero sum, so the guy profiting most is doing the opposite of the guy losing the most.
 
 
0 Rank Up Rank Down
May 2, 2014


You can't expect the market to rebound, and grow like it has been recently, on a regular basis. Comparing this strategy's gains against the current market rebound is hiding the longer term possibilities of this idea.

The market will not drop and rebound every day. But, the media will exaggerate and dramatize events every day.

On a long term basis, day in day out, I can bet against the media's exaggerations and the reactions of those exaggerations by the public.

My current investment strategy seems to be give all my money to the government and hope I get 10% of that money back someday.


Reading many of the responses (in many threads)... I think schools need to teach engineer types to better understand metaphorical thinking and creative types to better understand an@lytical thinking.

 
 
May 2, 2014
Sesame seed futures.

 
 
May 2, 2014
@cramdenr15

You must have made a blast on all four games of semi-finals of the UEFA Champions League and Europa League.

[/irony]
 
 
May 2, 2014
Thumbs up for, "difference in risk-assessment is what makes [any] investment strategy a strategy." The only way to beat a diversified ETF is to understand something better than The Market does. And The Market has to figure out that you are correct fairly soon.
 
 
+2 Rank Up Rank Down
May 2, 2014
Scott: " I haven't compared the performance to the market in general that is also up".

Riiiight. Because you never investigate anything and looking up a market trend is soooo many mouse clicks these days...

[That sort of comparison is usually bullshit because you can game the result by cherry picking your time frame and comparing things of dissimilar risk. I haven't sold any of the stocks I mentioned, because I still like them to outperform their peers, so how do you know who wins a race when there is no finish line and no one agrees who was even racing whom? -- Scott]
 
 
May 1, 2014
One of the great investors of all time, John Templeton, said

Invest at the point of maximum pessimism

That seems like what Scott Adams is trying to do.
 
 
May 1, 2014
My investment "strategy" consists of betting on the home team in the second game of a doubleheader when it's already lost the first game.
 
 
+1 Rank Up Rank Down
May 1, 2014
[You're still timing the market, which is always a bad idea.]

True, but I think you're still missing something. If I understand the strategy correctly, it boils down to buying based on fundamentals, contrary to the news cycle. Some metric should tell you that the news cycle that triggered your buy is no longer affecting the price. At that point, you should exit that position and reinvest the capital elsewhere. If you continue to hold past that point, your strategy is diluted.

[You're thinking of a trading strategy. I'm only trying to get an historically advantageous purchase price for stocks worthy of holding for the long run. If I knew when to sell stocks, I'd be burned as a witch. -- Scott]
 
 
0 Rank Up Rank Down
May 1, 2014
I tried this technique with airline stocks right after 9/11. Unfortunately there were a lot of other pressures on the airline sector, and I wound up selling them several years later for well below the overall market gain. As @rambis points out, at some point the BadNewsEffect wears off, and you're left with whatever the fundamentals of the company are.

[How would you have done if you still had them? You would have bought low and still owned them now when the airlines are doing great. (I think. Haven't researched that.) -- Scott]
 
 
-1 Rank Up Rank Down
May 1, 2014
I hope you didn't buy any Blockbuster Video stock (or whatever their parent company is) when the external event called Netflix started eating their lunch. :)

[That's not external in the sense I mean. That's very much about the company's business model compared to the competition. -- Scott]
 
 
+4 Rank Up Rank Down
May 1, 2014
Your plan can fail. For example, loading up on Enron during the height of the California Energy debacle would have been a Really Bad Idea.

[You forgot to mention meteors hitting me. Why would you leave that out? -- Scott]
 
 
+4 Rank Up Rank Down
May 1, 2014
[I wouldn't expect to sell any of the stocks I mentioned. I expect to die with them in my portfolio. -- Scott]

Why? That's probably not the best way to manage your portfolio. At some point, the ExaggeratedBadNewsEffect wears off. You will hold concentrated risk in a single issuer for no reason. You want an exit point; Some choices: 1 - sell when the stock reaches it's pre-bad news price. 2 - sell when the stock appreciates by x%. 3 - sell after y months.

[You're still timing the market, which is always a bad idea. But I will agree that if something happened to the fundamentals of the company I would bale out. I just don't like to think in those terms because it causes me to think I can time the market. I'll cross that bridge if needed. -- Scott]
 
 
 
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