Have you seen The Big Short?
It’s the typical finance/investing movie Hollywood likes to pump out.
In one of the scenes, hedge fund manager Michael Burry is looking through a giant excel document. It contains thousands of mortgage repayments that make up a single debt security.
Like in the movie, A Beautiful Mind, numbers appear before Burry and the idea to short the US housing market comes to him.
I don’t doubt that Burry is one smart cookie. But The Big Short really hams up the idea that only geniuses can make money in financial markets.
Everyone else is simply too uneducated or lacks a savant-like quality to be successful.
But that’s all a load of balderdash!
Warren Buffett likes to say this is not a game where the guy with a 160 IQ beats the guy with a 130 IQ.
For one couple in the US, all it took was a bit of basic maths to make millions…
Millions with one simple idea
Jerry and Marge are high school sweethearts.
For about 60 years, they both ran a convenience store. In their 60s, they sold the store and retired.
That was that, they thought. Time to relax and enjoy another two decades of life together.
That was until Jerry went back to his old store.
He saw a brochure for a new lottery game called Winfall. The Australian Financial Review (AFR) picks up the story:
‘Jerry, who majored in maths in college, told 60 Minutes he realised within just minutes that he could almost guarantee making a profit.
‘He explained this was because the winnings rolled down every time the jackpot reached a cap of $US5 mln.
‘Unlike lottery games like Mega Millions, where the jackpot keeps growing until someone matches every single number, with Winfall, if the jackpot reached $US5 mln and no one drew a ticket with all six winning numbers, people with tickets that had five, four, and three winning numbers could cash in.
‘While that may be hard for some to follow, Jerry said that it’s “just basic arithmetic” and that he thought others had figured it out too.
‘The first time he heard a roll-down was happening, he bought $US3600 in Winfall tickets and won $US6300.
‘Then he bet $US8000 and won almost twice as much, he told 60 Minutes.’
Jerry and Marge would soon set up a company. They’d invited their friends to buy in and they’d continue exploiting the loophole.
That was until people caught on…
Games that allowed for these roll-downs would end up discontinuing. All in all, Jerry and Marge won US$26 mln, taking US$8 mln home in profit from their years of playing the lottery.
You see, you don’t have to be as smart as Burry to make money. Most of the time all you need is an idea you can understand…
An educated speculation payoff?
December last year, I laid out a pretty simple idea.
I thought, with everyone down on trade, there was a temporary window to hop into beaten down corners of the market.
Shippers, transporters and trade-related stocks might see a nice jump as soon as Trump and Chinese President Xi Jinping worked out a deal.
Here’s a snippet of what I wrote last year…
‘…this is where your advantage lies — in the small, ugly, unknown part of the market.
‘With a bit of reading, you’ll probably find a few bargains.
‘They might not be the next Amazon or Apple. But a lot of these stocks are mispriced. And it’s because no one is looking at them.
‘So, where are these stocks today?
‘I’d suggest you look at small service companies that depend on trade. Global trade is something everyone hates right now.
‘If things get worse for global trade then businesses like FedEx will likely dip further into the red. But it will also drag down the ugly, small logistics companies that dominates their local market.
‘And if that’s the case, then it’s probably worth finding out how much that small, ugly stock is worth.
‘Global trade is cyclical, after all. It will come back…eventually. The US and China could drop tariffs…in time.
‘What I’m trying to say is that these are all temporary events in the long run. And you know what else is temporary?
‘That tiny, ugly logistics stock and its beaten down price.
‘So, start digging and set yourself up for 2019.’
Well it looks as if the wheels are in motion for Trump and Xi to come to an agreement. According to the AFR, China is fast tracking a new foreign investment law.
It ‘will tackle some of the key sources of friction with the US by banning forced technology transfers and better protecting intellectual property rights,’ the paper wrote.
China is also scaling back their works on an Iranian nuclear project. From South China Morning Post:
‘Chinese were “reducing the speed of cooperation despite their commitment” to redesign the Arak heavy water reactor.
‘Salehi told the state-run Islamic Republic News Agency that China fears possible US sanctions on its nuclear-related firms if it continues its cooperation with his country.’
Of course, this could all be for nothing. The US and China might still be unable to come to an agreement. Higher tariffs will kick in by 1 March. And trade-related stocks might fall lower.
I never said this simple idea was a sure thing. Call it an educated speculation…
The point is to show you even simple ideas can lead to profits.
Again, this is not a game where the highest IQ wins. This is a game where emotional stability and rational thinking rules.
Your rational friend,