Mistaking Luck With Brains

I had a very good week. I bragged about it. Now I have the rookie jinx following me into next week.

The reality, of course, is that all the alpha I have today may turn out to be ephemeral. I did, however, also note that I under-performed last year as much as I’m over performing this year. I’m no investing genius. This business is hard.

The trouble with blowing your own horn is that, often, the braggart assigns no value to pure luck. My whole week was made on three trades which could have easily worked against me:

I carried my $SPY puts over the weekend which, after the market closed on Friday, I thought was a mistake. I carried then through Tuesday, which I also though was a mistake after the close. I took them off Wed after the tape looked like it was reversing.

I entered a limit order at the open Monday for November 14/18 $MU call spreads that filled way below my limit because some stupid traders were buying back premium they sold with market orders. That trade alone added 1.7% to my total returns for the week. I think the trade was right but I also know in a more stable market it would have contributed much less.

I put in an order for $RIG late Wednesday afternoon while it was getting pounded because, in my opinion, the market took for bad news as what I think was the best management decision the company could make. They “kitchen sinked” their balance sheet. Then oil rallied on Thursday taking up the whole sector. I’m up on the  position because of that trade but that might not last. Oil could go back down. Still, I think $RIG qualifies as Peter Lynch’s definition of the best company in the most hated industry. I’m sticking with it.

When the market bounced Wed and Thursday a lot of my “high conviction stinkers” like $INTC caught a bid. Hell, almost everything caught a bid. You had to be an idiot not to be up the last two days – which I have periodically proven myself to be.

I started put my hedges back on Wednesday – perhaps a mistake – and added Thursday – which after the close yesterday I worry it might be a mistake. I do think we head back down sometime soon but I’ll take them off if we recapture roughly $SPX 2030. Which might be a mistake.

I still view this market as very expensive, contrary to some smart money managers. On the other hand, I heard Jim Cramer advise everyone in his monologue last night to ‘Buy. Buy. Buy” the FANGs which I think is delusional. I freely admit, though, it might be me who is delusional thinking value matters.

The problem with the price action of the last two weeks is that everyone piled right back into growth – from which I can only conclude that there has been no psychological correction at all. The crazy people that were the last to leave the party have organized an after-party.

Thus, I may have to wait to see the rotation into value which I know will happen. I just don’t know when. And if it takes longer than I think I likely move back into the under-performing row.

For the market’s sake I hope not. We need a good washout to start building a healthy base. At least that’s my opinion – but, as always, I reserve the right to be wrong.

The point to all of this is that it’s hard to know what part of your wins are lucky or smart. We all have a system we use. Some have harder rules than others. But when we start to think luck has nothing to do with investing we set ourselves up for failure. That’s all the more reason to have rules in our investment style.

I’m in awe of guys like Jon Boorman and Jeff Bass for their rigorous discipline. Fundamental value investing need rigorous rules too and maybe more of a stomach for volatility and it is much more art than science.

But even if you follow your rules to the letter, remember that part of investing is knowing your rules aren’t perfect. No one’s are. And luck, or lack thereof, plays a role.

If you’re not humble going in you probably will be going out. That is and has always been true.


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