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It Took Me a While to STOP Doing This... Do You Do It?

Thursday, November 12, 2015 6:11

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It took me a while to “get it” with today’s idea…

Honestly, it took me a few years of investing to see it in my own trading. And then a bit longer to truly fix it.

I bet a lot of smart people make the mistake I’m going to share with you today.

The thing is, as I learned, doing this will prevent you from making money… You will have outsmarted yourself. You will have overthought the idea.

Let me explain…

Cliff Asness, a money manager who I look up to, calls it the “exacta” problem.

What’s an “exacta”? It’s a type of bet…

If you’re betting on the Kentucky Derby horse race, a straight “exacta” bet means that you’re betting on which horse comes in first, AND which one comes in second – in that EXACT order. (Hence the name “exacta.”)

As you might guess, getting a straight exacta right is extremely hard… You are making two specific bets on two specific outcomes. Your odds are dramatically worse than with making just one bet.

The increase in risk is obvious, right?

The thing is, investors make “exacta” bets all the time… without realizing it.

For example, you might hear a hotshot investor say “oh, the dollar is going to go up, therefore I will bet on small-cap stocks.”

The hotshot investor might sound smart… He might sound like he’s making a crafty bet of some sort. But in reality, he’s making an “exacta” bet. He’s betting on two outcomes.

The simpler idea, if you think the dollar is going to go up, is to bet on the dollar going up!

Cliff Asness says this about the exacta bet:

At the very least, it is worse than the original, simpler, one-step idea… It’s hard enough to be right. It’s much harder to be right multiple times in a row.

As a smart investor, you often want to overthink it… You want to get creative… You want to go for the way to play it that nobody else has thought of. Unwittingly, all you are doing is making it much harder for yourself…

Not only do you have to get the big-picture idea right (that the dollar is going to go up), you also have to get the specific trade right (that small-cap stocks will go up).

It has taken me a while to learn that when it’s time to buy tech stocks, you buy tech stocks – and leave it at that.

DON’T get more creative than that. Don’t look for the secret sector that might do REALLY well if the tech sector does well.

Resist the temptation if you want to make money.

If you don’t resist the temptation, then you will be making an exacta bet. The odds will be much tougher for you. You could be moving from a bet with the cards stacked in your favor to a bet with worse-than-50/50 odds.

Tech stocks might go up, but your crafty way to potentially make even more money on the idea might not work out at all.

This is really tough for me to do, still to this day.

I feel like you pay me to find that crafty idea… I feel like you don’t want to hear a simple idea from me… and I have to fight that thought. I have to avoid screwing up a good idea with an exacta bet.

More often than not, simple is what works.

Do your best to recognize when you’re making an exacta bet… and avoid it!

Good investing,

Steve

Source: http://www.stansberryresearch.com/dailywealth/3138/it-took-me-a-while-to-stop-doing-this-do-you-do-it-

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