Good post explaining the basics of exploiting insights. A good book with examples on this topic is “Investing the Templeton Way: The Market-Beating Strategies of Value Investing’s Legendary Bargain Hunter” by Lauren Templeton.
OP has acknowledged the hidden and unstated risks here. I strongly support reading the next installment before implementing these insights. Example of such risks:
> suppose you knew Tesla will go up 1% in value over the next month.
There is no way anyone could know this. So this is not a sure bet.
Let’s say you know Tesla is tracking to a huge profit increase, far beyond current market expectations*, suggesting an increase in stock price is likely.
You implement this insight as suggested.
[N.B. Hypothetical example]
But between now and then a pandemic breaks out. Elon Musk dies in a car accident while using a Tesla on autopilot. Joe Biden gets elected and announces that the tax on capital gains will now be at full marginal tax rates (yes politicians lie!). Also it turns out that Tesla’s previous revenues were overstated by accounting fraud wiping out their entire capital base and requiring a massive capital raising. Also, China invades Taiwan and the Stock Market crashes 45% overnight.
How profitable do you think your trade will be?
So what you have is a risk arbitrage, not a sure thing. You need to carefully assess the likelihood of something derailing your insight. Even if you are eventually right, you need to have significant capital available to ride out the fluctuations along the way (ask LTCM about this). You might go bust before you get rich.
The fact that Tesla profits will go up is not a reason to buy the stock. What you need is an accurate variant perception. That is you need to have a different perception from the market that is more accurate than the market’s view. So that means you need to understand the market’s view—something I find quite hard to do. Often I am sure the market already factored something into the price, but then it is officially announced and the price jumps.
Good post explaining the basics of exploiting insights. A good book with examples on this topic is “Investing the Templeton Way: The Market-Beating Strategies of Value Investing’s Legendary Bargain Hunter” by Lauren Templeton.
OP has acknowledged the hidden and unstated risks here. I strongly support reading the next installment before implementing these insights. Example of such risks:
> suppose you knew Tesla will go up 1% in value over the next month.
There is no way anyone could know this. So this is not a sure bet.
Let’s say you know Tesla is tracking to a huge profit increase, far beyond current market expectations*, suggesting an increase in stock price is likely.
You implement this insight as suggested.
[N.B. Hypothetical example]
But between now and then a pandemic breaks out. Elon Musk dies in a car accident while using a Tesla on autopilot. Joe Biden gets elected and announces that the tax on capital gains will now be at full marginal tax rates (yes politicians lie!). Also it turns out that Tesla’s previous revenues were overstated by accounting fraud wiping out their entire capital base and requiring a massive capital raising. Also, China invades Taiwan and the Stock Market crashes 45% overnight.
How profitable do you think your trade will be?
So what you have is a risk arbitrage, not a sure thing. You need to carefully assess the likelihood of something derailing your insight. Even if you are eventually right, you need to have significant capital available to ride out the fluctuations along the way (ask LTCM about this). You might go bust before you get rich.
The fact that Tesla profits will go up is not a reason to buy the stock. What you need is an accurate variant perception. That is you need to have a different perception from the market that is more accurate than the market’s view. So that means you need to understand the market’s view—something I find quite hard to do. Often I am sure the market already factored something into the price, but then it is officially announced and the price jumps.