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Dear Whomever-You-Are,I wrote the article below about a year ago, and today I wanted to run it once again, anew and with updated commentary, to engage your minds with something so many of you enjoy this time of year... good ol' American football.
I'll admit, I'm not a huge fan myself, but since most of you are, I thought I'd write a few thoughts I hope you'll find it interesting to about the correlation between these two completely different things.
Live long and invest,
Jeremiah
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Shotguns, Hail Mary's, Investing, Oh My!
Well, it looks like college football season is upon us. A friend of mine chuckles at the fact that I can’t name even one college or professional football player.
Laugh if you want, I guess it's just the way I was raised.
I don’t know that I’ve missed much, because as I've been told, there's really only one game of the year worth watching, if you miss all the others: the Superbowl.It’s the game which is the culmination of an entire series of unlikely successes over the course of seventeen weeks. Call me a nerd, but what interests me most about the Superbowl is statistical anomalies.
That's what determines who goes to the bowl.
Year after year, tiny little mistakes or streaks of luck determine the fate of teams across America.
Year after year, tiny little mistakes or streaks of luck determine the fate of teams across America.
Let's say "Team Awesome" is the darling of the NFL. They're based in a big, rich city with lots of publicity. Because the team is such a large, money-making franchise, the team attracts most of the top talent... all the great players want to get drafted there, and get paid millions to catch and throw an inflated lemon.
With all the money the team makes, and all the talent it attracts, shouldn't this team have guaranteed win in the Superbowl, year after year?
With all the money the team makes, and all the talent it attracts, shouldn't this team have guaranteed win in the Superbowl, year after year?
Well, I guess even if you have lots of top talent, winning isn't as easy as it sounds. Lots of things can go wrong...
How likely is it, even for a great team, to not screw up badly at least once over the course of sixteen games? For example...
How likely is it, even for a great team, to not screw up badly at least once over the course of sixteen games? For example...
- How are the team's draft picks working out?
- What's the coach like? Is he an idiot, or does he bring the team together?
- Do the players get along? Do they have good team dynamics?
- Have there been any injuries to first string or star players?
- Has anyone been suspended for bad behavior, or implicated in scandals?
- How did the weather affect the team's season?
- Does the team have a case of the Superbowl Curse?
Considering all these factors, statistically speaking, it really takes an alignment of the stars for any given team to win the Superbowl year after year, even if all the money in the world is thrown at the team. Teams who won the year before just don’t win it again the next time. They revert from a star back to an average team, or second-place-loser.
But, what if you happened to notice that early in the season, all of these factors adversely affecting team performance were fading away to nothing... wouldn't it be easier to predict the winner? And, wouldn't you feel much more confident picking the right odds, when you put your money into the pot for the winner?
Like good football teams, all kinds of investments—commodities, stocks, bonds, real estate, you name it—all have times when their stars align...when all the factors which could negate positive performance have melted away.
All types of investments have times when prices, valuations, and market sentiment all seem to indicate that something interesting is about to happen... a market anomaly is dropping into your lap.
All types of investments have times when prices, valuations, and market sentiment all seem to indicate that something interesting is about to happen... a market anomaly is dropping into your lap.
Win By Investing In High Probabilities
We should take advantage of anomalies. Just like you would bet 100 to 1 on the worst team in the NFL if you knew all the other teams were being paid off to throw the season.
These are the setups when we make a killing.
Baron Rothschild, of the famous banking family, is believed to have said, “The time to buy is when there’s blood in the streets.” His basis for the statement is literal. He made a fortune buying up distressed assets ensuing the Battle of Waterloo in 1815.The heart of this concept—Contrarian Investing—is the conviction that the worse things look for an industry, the better the opportunities may be for profit.
But how bad do things have to be, and how do we gauge this?
But how bad do things have to be, and how do we gauge this?
- General investor sentiment (opinion surveys) on the stock or commodity has to be very low—investors aren’t interested in it
- No one in the media is talking about it
- The majority of those trading the commodity should be bearish, or selling
- Selling volume will be extremely high of late, even peaked
- The asset has to be cheap by most historical standards
- Technical indicators (“charts”) should show that there is little else to drive the price lower
As an example of this concept, consider the price around this time last year of wheat, grain, and soybeans. Below is a chart of JJG, an ETF that tracks this commodity price movement.
What you are seeing is that from about May to November of 2014, the price of these commodities has been down by nearly 40%. Prices of grain hadn’t actually been this low in over four years. The tall red bars on the right indicate that basically everyone’s been selling the commodity over the past three months, or that the sellers are much more in control of the price than the buyers.
Back in mid-June of 2014, traders speculated that the weather wasn’t going to hold up as it had through the early season, and began to push prices up slightly. As you can see, they were very disappointed, as prices swooned even further for the next two months.
Not long after that, a public opinion survey reported that wheat hasn’t been hated by investors this much in nearly 15 years, and corn in over four years.
Needless to say, I personally haven’t seen any talking heads extolling the virtues of wheat and corn.
On a historical level, we should be seeing this commodity index trading at least 15-20% higher than it was back then.
As I write this now, prices are even lower. JJG is trading around $32.05. As we move into the winter months, price seasonality on this commodity should be kicking in.
As I write this now, prices are even lower. JJG is trading around $32.05. As we move into the winter months, price seasonality on this commodity should be kicking in.
Everything I’ve mentioned indicates that sometime within the next 4-6 months, we could witness a “snap-back” effect on the price of wheat, soybeans, and corn. In other words, supply is extremely high now as we approach the end of summer, and prices are low. But, prices should rise due to seasonality, and the price changes can happen almost overnight.
Looking at this ETF over the last year, we saw the price "whip-saw" between a price "floor", or resistance, around $32, and movements up near $40--a swing in price of around 25%!
As demand remains the same as it is now going into fall, supply will begin to drop, and cause some serious price action for these commodities—and the only direction it can basically go is up. Supply for corn and wheat don’t come out of thin air and cause unexpected supply gluts.
Looking at this ETF over the last year, we saw the price "whip-saw" between a price "floor", or resistance, around $32, and movements up near $40--a swing in price of around 25%!
As demand remains the same as it is now going into fall, supply will begin to drop, and cause some serious price action for these commodities—and the only direction it can basically go is up. Supply for corn and wheat don’t come out of thin air and cause unexpected supply gluts.
With this example, we’re viewing a classic scenario of extreme pessimism. Our take on falling asset prices is that we want to be standing far, far away while the price is falling, just as we would avoid a safe falling from the top of a skyscraper. Sure, there’s lot of money in the safe, but if you’re in the way as it falls, you’re not going to come out alive.
Rather, wait until the safe has fallen and cracked open, then walk over and pick up the money and give it a good home.
Following this strategy with all asset classes ensures that we won’t get our faces ripped off—in other words, we won’t get taken advantage of by investors on the other side of the trade.
The stars have aligned for us in this space. Everything is out of the way for this commodity to make a good comeback, even if it's only seasonal, at some point in the next 4-6 months.
Of course, just like in football, not all risk can go away in investing, especially with commodities. In football, a freak storm can turn the best team into losers in a single game. And in commodities, a strengthening US dollar, relative to other currencies, would cause commodities to sink even further.
But the dollar has been on a long winning streak over the last few years, and peaked last March. It is about 6% off its all-time. It's got almost nowhere to go but down.
Since the Fed decided it wouldn't begin to raise the overnight lending rate for banks just two days ago, it's safe to assume we won't be seeing a strengthening dollar before the end of the year.
This reinforces the scenario for commodities to enjoy a good run over the next few months, because, as the value of the US dollar erodes, commodities rise in price.
The easiest way to win at investing is to take full advantage of the highest-probability wins in the market. We will enjoy our profits as we watch for setups similar to the above in other assets.
I hope you’ll think differently about football going forward too. I bet you never thought investing and your fantasy football team were related, did you?
Live long and invest,
Jeremiah
Of course, just like in football, not all risk can go away in investing, especially with commodities. In football, a freak storm can turn the best team into losers in a single game. And in commodities, a strengthening US dollar, relative to other currencies, would cause commodities to sink even further.
But the dollar has been on a long winning streak over the last few years, and peaked last March. It is about 6% off its all-time. It's got almost nowhere to go but down.
Since the Fed decided it wouldn't begin to raise the overnight lending rate for banks just two days ago, it's safe to assume we won't be seeing a strengthening dollar before the end of the year.
This reinforces the scenario for commodities to enjoy a good run over the next few months, because, as the value of the US dollar erodes, commodities rise in price.
Conclusion
The easiest way to win at investing is to take full advantage of the highest-probability wins in the market. We will enjoy our profits as we watch for setups similar to the above in other assets.
I hope you’ll think differently about football going forward too. I bet you never thought investing and your fantasy football team were related, did you?
Live long and invest,
Jeremiah
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