Lot of ins, lot of outs
10/3/24 Prospero.Ai Investing (158th) Edition (Midweek)
Once again we’ve decided to use a meme from one of our favorite movies to encapsulate what’s going on the market. This quote is from the movie “The Big Labowski”. If you haven’t seen the movie, the main character, Jeffery, “The Dude” Labowski (played by Jeff Bridges) finds himself in a crazy, complex scenario surrounding mistaken identity and a kidnapping. In this scene, the events surrounding the main characters has become so complex and nuanced, that The Dude humorously states “There’s a lot of ins and outs ” (to the case he’s found himself wrapped up in). His point is that there’s so many twists and turns to his reality that it’s impossible to know the true outcome. But despite that awareness he causes a lot of problems for himself by being overconfident in his ability to solve it.
We chose this quote, because the market seems to be acting in a similar way. A word that’s often used to describe today’s market is “Volatile”. And when people think about volatility, they think about a roller coaster that has a lot of ups and downs. But that’s where the analogy falls apart. Because on a roller coaster, you actually have a beginning and an end and you can see which way the turns are going to go. (At least for the majority that aren’t in the dark) But in the market you don’t. True volatility caries with it the idea of lots of ups and downs, but most of the time, even the best, are guessing with partial information. A lot of times overconfidently, just like “The Dude.”
Over the last several days, QQQ Net Options Numbers has been relatively strong. But SPY and the overall has been erratic. Sectors and Cap segments are all over the place, up and down, good and weak, all in just a few days. Because of this erratic behavior we’ve remained fairly defensive. We’ve kept a balanced approach with equal weighted long and shorts. Have we missed some of the upside? Yes. But have we not been exposed to some of the downside? Yes. Why this approach? Because, as the Dude says: “There’s a lot of ins and outs”. But as people that follow us have seen we don’t mind treading water until we have high conviction we know where the market is going. And this is the idea that most struggle with.
One of our CEO’s favorite books and the first one his boss reccomended to him when he worked at his first Value Investing fund when he was 17 - Fooled by Randomness. I’d reccomend everyone reads the book and not to oversimplify the thesis but it says even people with long careers on Wall St. do not know how to determine if they are lucky or skilled. And more of them are the former.
A short story from him on risk evaluation:
I spend a lot of my time tutoring investors 1 on 1. Feel free to reach out to me george@prospero.ai if they are interested. This week it was a smart, fellow AI founder, I met from the Fast Company Impact Council. Any founder that has some success has to be very good at taking calculated risks. But caculating risk is often something that people make domain specific, a lot of the times to their profession. (I looked at over 30 apartments before I moved into my current one to mitigate risk, at this point it is more of an affliction than a skill).
Not only did she still have a not insignificant position in GME but when we chatted about her portfolio, she was HUGELY overweight in companies she had worked for. Especially NVDA. She asked if you should never be that overconcentrated. That is at the core of this lesson. I said the best thing a retail investor could assume is that they are stupid and outplayed until they know how to determine in a well thought out way if that was true. At one point I had all my money in AMC and when asked why I took that risk, I felt there were two strong legs to the trade.
The Short Squeeze and/or retail momentum could overwhelm the shorters.
Even if that didn’t happen when the economy reopened the increase in sales/profits were sure to create a return
I then explained that NVDA was a one-legged trade. The one leg was VERY strong in terms of their incredible growth story. However there was another catostrophic leg around the election with actually two major downside events.
If Harris wins there could be a contested election that could allow chaos and perhaps create an opportunity for China to take Taiwan
Trump winning could put a scare into everyone around tariffs which could cause China to hit back or threaten to and really hurt NVDA’s business
These aren’t random ideas, a few Q’s ago when Jensen Huang expressed geopolitical concern the stock went down on one of the best quarters I’ve ever seen.
This letters intro was the theory and here was the practice. The true story about Prospero was that before I let a single user I didn’t know personally into the app we went through 2 versions. It was over 10 years in AI and almost 20 in Finance before I even started making predictions in the newsletter. And that was because I was using the early versions myself and ensuring I could form strategies with the signals alone. Those strategies became the newsletter when I could hit at a VERY high rate. My thinking was until I could do that, what hope did others have?
So there it is. Before you put anything over 50% of your portfolio in 1 or 2 stocks you should really compare yourself to this story.
For those more curious about our thinking on Meme stocks we put our “Meme Mania 2” from 05/17/24 into a shared document so even our free users can see!
A WORD FROM OUR CEO
We zigged a bit when the market zagged this week. Getting out of positions like ONTO on Tuesday that had great days yesterday. (Looks like not a great start today though!) But we did avoid getting into China stocks due to our volatility concerns. But this is why we hedge agressively in this market we are still beating the S&P 500 by 77% annualized, with a win rate of 61% against SPY benchmarks.
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