Everything You Know Is Wrong...

But everything you suspect is likely true. We welcome our first guest post and walk into the wild world of investing.

We’re mixing things up today with our inaugural guest post! You said you wanted more investing content and well, you’re going to get some investing content. Our guest post comes from Alex King of the Cestrian Market Insight substack.

Alex and I met through a Substack program for writers building their newsletters and I’ve enjoyed following Cestrian’s several newsletters. Do they get technical? Yes. Will it maybe take some patience and time to advance in your knowledge as an investor? Of course. But it’s certainly within your grasp!

Cestrian Capital Research, Inc is an SEC-regulated independent investment research provider, based Newport Beach, CA. This post was written by founder Alex King.  You can learn more about Cestrian at https://cestriancapitalresearch.com/.

---

Everything You Know Is Wrong, Part 704 (*)

DISCLAIMER: This note is intended for US recipients only and, in particular, is not directed at, nor intended to be relied upon by any UK recipients. Any information or analysis in this note is not an offer to sell or the solicitation of an offer to buy any securities. Nothing in this note is intended to be investment advice and nor should it be relied upon to make investment decisions. Cestrian Capital Research, Inc., its employees, agents or affiliates, including the author of this note, or related persons, may have a position in any stocks, security, or financial instrument referenced in this note. Any opinions, analyses, or probabilities expressed in this note are those of the author as of the note's date of publication and are subject to change without notice. Companies referenced in this note or their employees or affiliates may be customers of Cestrian Capital Research, Inc. Cestrian Capital Research, Inc. values both its independence and transparency and does not believe that this presents a material potential conflict of interest or impacts the content of its research or publications.

(*) But everything you suspect is likely true.

First up, a word about our host here.  Broke Millennial is in our view a superb newsletter.  We applaud the straight-talking, no-nonsense, you-gotta-look-out-for-yourself-because-nobody-else-is-gonna-do-it motif of Erin’s work.  Our own business is in the business of investing and the same approach should be applied to investing as to personal finance.  The best tweet we ever saw on the topic of the markets was along the lines of, “Yes, everyone else IS trying to take your money off of you”.

Many readers here at Broke Millennial are contemplating how to approach investing now, when literally everyone on every media platform is telling you that it is the End of Days, It’s All Going To Zero, and so on. 

If you seek the standard source of opinion, talking heads on CNBC or FinTwit or your neighborhood investment advisor will say, well, if you’re in the early/mid stages of your career and don’t plan to retire anytime soon, just keep putting money to work in the market every month and, probably, the mathematics of compounding will work and when you come to retire you will have a goodly sum of money, thanks to the magic money machine called the S&P500.  They will say, this must be true, because Warren Buffett told you it was true. This opinion says, do something called dollar cost averaging.  Buy X dollars’ worth of the S&P500 every month be the market up or down and in the end it will work out.  Probably.  Or not.  But, you know, it works most of the time so, hey, it could work for you too!  Er, anyway, sign here!

The first thing to say about this is – the notion of putting money to work with your asset manager every month is primarily in the interests of, well, the asset manager.  Because one way or the other the more money said manager has to manage, the more money arrives in their pocket each month. 

The second thing to say about this is – if you can learn one thing only about investing, it is this:  invert, always invert.  This saying has been ascribed to the mathematician Carl Jacobi, and we like it.  It’s neat.  But we prefer the SNL version which is, Opposite Day.  And in investing?  It’s Opposite Day Every Day.  If a Big Money Hedge Fund Guy is on Twitter saying, X is gonna happen and everyone should do Y about it – do you really think this is likely to be good advice?  Really?  Why would Big Money help you?  Big Money is there to grab all your money and keep it for itself.

And so the third point is to ask yourself right now – if Big Money is telling you it’s all going to zero – could they perhaps be … misdirecting you?  Perhaps if you think it’s all going to zero and start selling all the stocks and ETFs and whatnot that you own … Big Money might be buying all that stuff from you on the cheap in order to … keep it all for themselves, after all.  On account of them being good at making money and not known for helping people.

Remember Every Day Is Opposite Day.

Now, the positive and constructive part.  Becoming a successful investor isn’t beyond anyone who is moderately smart, can add up, and has the attention span of a grownup.  It’s not easy and there’s no quick way to excel at it. You have to put the work in. But if you put the work in, you can get good at it for life.

If you’re serious about becoming successful for life, the answer here is to first get yourself educated about how financial markets work. If it seems bewildering? It isn’t. You just have to break the problem down into bitesize pieces. 

Pick one type of security and get good at it.

You are unlikely to become an expert in stocks, bonds, options, futures and crypto all in one go. At Big Money, LLC, people spend their entire careers in very narrow fields, and that’s because if you get really good at any of the above fields, you can make money consistently year in year out. Yes, even in 2022, even in 2008-2009, even in 2000-2002. Good markets, bad markets, there is always a way to make money. 

So, pick something you have a feel for – stocks are usually a great place to start because there’s a lot of upside available and it’s quite difficult to lose all your money unless you do something dumb like borrow heavily to buy the stocks in the first place. Bonds have limited upside but a lot of downside unless you really know what you are doing, and a lot of people have gone from being Wealthy Millennials to Broke Millennials by dabbling with options, which people think are a way to make Big Money from Small Money but unless you can talk to us convincingly about convexity and probability functions, don’t even start to try to tell us you know what you’re doing with them.  (Big Money, LLC, loves options. They love to sell options to Small Money. Think about that for a moment).  Crypto – well, head over to CoinTwit and find the Macro Trading Experts formerly known as Crypto Bros, and see how they’re doing lately.

Next. 

To get good at stocks, learn how Big Money manages stocks, and then make like Big Money. You don’t have anything like their edge and never will have. Everything bad you have ever heard about Big Money is likely to be true in some corner or other of Wall Street. Fortunately you only have to follow just a little bit behind Big Money to do well. And Big Money leaves a trail of breadcrumbs wherever it goes. Learn how to identify the breadcrumbs and then follow them.

Stocks go up and they go down. It’s not random. They move according to many complex factors including the availability and cost of money to large account players, the return available in other instruments such as US Treasuries, and the impact of the options market. Also corporate earnings and GDP and inflation, but not at all in the way you were told in school or you are told on FedTwit right now. 

Again, learning and understanding how this works is critical if you want to take control of your own investing and become successful at it for life. Most retail accounts are a source of funds for professional investors. It is not a win-win situation. Your loss actually is their gain.

If you want to start somewhere, we suggest you toss Economics 101 out the window and whilst you’re at it, burn Capital Markets 101 materials too. If anyone starts telling you to start by studying p/e ratios and understanding earnings per share and blah, we suggest you say, thank you, I shall do that. But don’t. At least, not yet.  That stuff does matter but it’s not the primary driver of stock prices, whatever BoomerTwit tells you. 

Start by understanding the breadcrumbs. Breadcrumbs are free on the Internet courtesy of stock charts, and very specifically start by understanding either the S&P500 or the Nasdaq-100 – you choose, you can make money from both in good and bad markets. The S&P has less downside risk and less upside potential than the Nasdaq, so, choose your poison. Stock charts move in patterns and if you learn to recognize those patterns you can predict the next move to some degree.  You can also learn how to protect your capital in the inevitable event that you make a bad decision.  (You buy too high or sell too low).

There’s a chart of $SPY, the S&P500 ETF, below.  This is a real chart with real numbers but we can tell you it conforms to many types of pattern very very well.  We’ve appended some facts about the options market because nothing illustrates Opposite Day better than this. When you get good at this stuff you can use this kind of chart to decide where the market may move next and how to protect yourself if wrong. And if you assume you are going to be wrong often, and if you don’t just blow all your money on stocks right out the gate, there is every chance you can become a successful lifetime investor.  (You can open a full page version of this chart, here).

What this chart shows is that investor sentiment was peak wrong at every point the S&P changed direction.  At the Covid lows in 2020, investors had bought huge amounts of bearish option positions (“puts”).  At the 2021 highs, investors owned huge amounts of bullish option positions (“calls”).  And so on.  At each turn, Big Money simply executed the Rug Pull. No finer way to show you that it’s Opposite Day Every Day.  And hopefully no finer way to urge you to think for yourself, and do your own work.  Switch off CNBC, ignore FinTwit. Erin’s work here at Broke Millennial teaches you to think for yourself about personal finance.  We suggest you do the same with investing!

Thanks for reading our work and thanks once again to Erin for the opportunity to publish here.

For more from Cestrian Capital Research, Inc, take a look at our FREE newsletter right here on Substack, Cestrian Market Insight. 

If you want to learn about how to spot Big Money breadcrumbs, the best toolkit we have found is TrendSpider.  This is a charting site that offers a boatload of free stuff for anyone to use, then if you want to get serious, you can pay them a modest chunk of change for a paid plan, as part of which they will teach you how to build and use your own charts.  This isn’t a get rich quick scheme.  You have to put the work in.  But they will help you get good at it.  You can use this link* to get a 25% discount off their paid plans (use coupon code CC25 if requested). 

Cestrian Capital Research, Inc – 26 October 2022.

DISCLOSURES: 

Cestrian Capital Research, Inc staff personal accounts hold long positions and short positions in securities derived from the S&P500 and the Nasdaq-100.

*Cestrian Capital Research, Inc has an affiliate relationship with TrendSpider.  If you take out a paid plan with TrendSpider using the link above, we may earn a commission fee.