Home
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.

 



 
Rank Up Rank Down Votes:  +40
  • Print
  • Share

Comments

Sort By:
+3 Rank Up Rank Down
May 1, 2014
[My strategy is by design a lower risk than normal investing.]

How so? Because YOU think it's a "gimme?" What part of taking concentrated bets in volatile firms makes it "lower risk?"

LTCM was set up as a "risk free" hedge fund by Nobel prize winning economists ... and lost $4.6 billion in less than four months.

[I think it's low risk. Everyone in the world including you thinks it is a high risk. That's what makes it a strategy. -- Scott]
 
 
+14 Rank Up Rank Down
May 1, 2014
[I want the news media to think there is some large event external to the company that is going to kill it. -- Scott]

Just a tiny note from a tired old journalist (and by the way I think your strategy is probably quite clever): There is sometimes little or no correlation between what the media is trying to sell you and what they actually "think".

I regret to say Melvin1 is largely correct in pointing out that the media's main goal is to sell drama, not to inform. By the time the news desk and the editors (these are often the people with the real power, not the reporters/journalists) have shaped and edited any recieved piece of news, the best one can hope for is that there is a tiny nugget of actual news buried inside the steaming turd served up for the public.

Ironically, I hope none of this is news to anyone. ;)
 
 
May 1, 2014
Are you trying to boost those stocks just by talking about them?

The standard measure of an investment is how it compares to a market index. BP is trailing the S&P 500 nearly 50% since a month after the Gulf oil spill. There's no time in the last 5 years where an investment in BP would even approach the return of a basic index fund. These guys are losers compared to any other market average.

When you discuss investment returns, you need to also consider the time frame. A 19% increase over the last 4 years is pathetic when the market average is up 70%. If you were talking about an investment that was up 20% in a year, then we're making money. Until then, stick to drawing comics.

[You are proposing comparing different asset risk classes, which is not standard practice, for good reason. My strategy is low risk (unless my hypothesis is wrong) compared to the S&P. Compare my stock gains to, for example, California Munis at 4% per year tax advantaged. You can certainly debate the risk of my strategy, and you can certainly play the odds and say that like nearly all strategies that have come before it is likely wrong. But it is not logical to compare it to a different risk group. -- Scott]
 
 
May 1, 2014
The law of averages more than dictates that your picking will catch up to you and all those 5% and 19% gains will be tainted by one or more 100% loss as a stock goes belly up.

I recommend Twitter: they are at an all-time low while their industry is at the peak of their peak. The news is saying they are done for. They look ripe for future insolvency. Get the failure out of the way.

This strikes me as the blackjack betting strategy of "every time you lose, you double your bet until you win again" (aka Martingale). Which works great, btw. Until you either lose, say, 10 in a row (which means you would be $10,230 in hole on an original $10 bet) or you hit the table's upper limit. And this is why tables have upper limits.

[My strategy is by design a lower risk than normal investing. It just appears high risk because of the news business. -- Scott]
 
 
+1 Rank Up Rank Down
May 1, 2014
Your strategy is missing a key component -- when to sell.

[I wouldn't expect to sell any of the stocks I mentioned. I expect to die with them in my portfolio. -- Scott]

 
 
May 1, 2014
Hey, it's as good as any other day-trading system out there. If it floats your boat, go for it.

But realize that all it would take is one big bet that goes south for all your gains to be gone, and maybe more. As I recall from a certain book whose title I can't remember, a certain cartoonist made a big bet on a grocery delivery stock and took a bath.

People who bet on individual stocks should realize that they are not investing, they are speculating. Speculating = betting. So don't do it with any money you can't afford to lose.

For those of us who aren't in Scott's financial condition, then having a well-diversified portfolio is a much better way to go. Own sectors rather than individual stocks. Rather than bet on Coca Cola, for example, bet on an ETF that owns all the stocks in that sector. Then if one goes south, the sector itself will not be hit that badly, and you won't lose your undershorts.

If you don't know how to diversify, there are a lot of independent financial advisors (whose fiduciary responsibility, by law, is to you), that you can talk with. Understand that those advisors are different than brokers (actually, salespeople), whose fiduciary responsiblity is to their companies.

If you're going to bet on individual stocks, good luck to you. If you're going to invest in a diversified portfolio, then you don't need luck.

[Webvan was an example of betting on a company that the media loved. It's a big part of the reason I bet against the media now. But in any case, I no longer bet on business models, just large external events. And I am a buy-and-hold guy, not a trader. -- Scott]
 
 
May 1, 2014
So you're currently buying in the Ukraine Scott?

[I have enough exposure to Ukraine with my Turkish cell company that is big there. But otherwise that would be a good example of something I would bet on if there is a reasonable stock vehicle to invest in there, such as a cell phone company. (Haven't looked.) -- Scott]
 
 
+2 Rank Up Rank Down
May 1, 2014
I agree with the countries one, that the problems in countries are often overblown and sensationalized. Generally their business sectors will survive anything except real total war and nationalization.

However, BP should have been broken up and gone bankrupt. The US government simply agreed to run cover for them and do its best to pretend that there wasn't heavy use of the illegal oil dispersant Corexit which was admitted by US coast guards. We know this stuff is REALLY bad for sea life.

Your theory should probably be that the troubles in countries are exaggerated by the media and that the troubles of established, well-connected business will be downplayed or negated by governments. Except for Lehman brothers that one time. But now they won't let that happen again.

[When I heard BP has its own airforce and navy (sort of) I stopped worrying that they would be shut down. And I don't expect people to stop wanting oil in the near future. -- Scott]
 
 
May 1, 2014
It's a good observation about the media. I just want to note something on one of the examples, that being the BP oil spill. "The news media kept telling us the Gulf would be ruined for decades" was as much a political calculation as is was the standard media panic-mongering, because leftist folks in both politics and media are anti-oil in general and take any excuse to play up how horrible oil supposedly is. Anyone with a long enough memory would know that the "ruined for decades" claim was bunk because previous oil spills like the Exxon Valdez similarly had no lasting effect.
 
 
+5 Rank Up Rank Down
May 1, 2014
I like your premise - it's a different take on contrarian investing that probably improves your odds. I often remind people that the media's M.O. is to create drama, not inform us.

But it seems that your results are substantially sub-par. You've handily attempted to avoid measurement by omitting time frames and annualized results, and you've explained away any attempts to quantify risk by saying you've created your own definition of risk. But by any reasonable risk definition -- concentrated positions, volatility, etc -- it's risky.

So, I like the idea, but it seems it hasn't worked in your case.

[Whether or not it "worked" is based on your subjective impression of the risk involved. The returns are good for a low risk investment, which was my assessment. -- Scott]
 
 
May 1, 2014
@Drowlord

[So you're betting that news is lying and misrepresenting news to us? Sounds like a solid premise, so far.]

Another way to look at it: when the news reports something then everyone knows it and a panic will start on the target company driving its value below what it should be.

In other words, the news doesnt have to lie to us for this strategy to work.
 
 
May 1, 2014
[Comparisons are nonsense unless there is agreement on the risk class, and that can never be agreed in this particular situation. -- Scott]

So what you're saying is we cant judge the usefulness of this strategy because we cant compare it and its a bad idea to take investment advice from you anyway. I have to say, this is one of your more frustrating blogs.
 
 
May 1, 2014
So you're betting that news is lying and misrepresenting news to us? Sounds like a solid premise, so far.
 
 
May 1, 2014
My investment strategy, which has worked really well so far is; "Do the opposite of my Brother-in-law". If he is buying, I'm selling. If he's selling, I'm buying.
Since 'winning' in the stock market is all relative, It makes sense to find a relative you can win against.
 
 
May 1, 2014
Hi Scott - it's called contrarian investing and has a long history. There's a high risk/reward ratio that attracts some and repels others. Just one of many choices out there, each with their own risk/reward ratio.
/j

[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]
 
 
May 1, 2014
I have often wondered about a somewhat related strategy of buying stocks of companies when they are beginning to get a lot of mentions in trade magazines, and then selling them when they start showing up in the mainstream media.
 
 
May 1, 2014
[I started testing an investment strategy a few years ago that is producing positive results....And my best investment gains over that period were in a diversified ETF.]

So you DO have something to compare your investment strategy to, namely, the other investments you made during that time. And your investment strategy does poorly compared to at least one of those. What about the other investments? How does your bet-against-the-media strategy stack up against them?

[Comparisons are nonsense unless there is agreement on the risk class, and that can never be agreed in this particular situation. -- Scott]
 
 
 
Get the new Dilbert app!
Old Dilbert Blog