Blowouts of the Week: An Example for Investors and Traders

Here at "A Dash" we believe that equity investors can learn from sports markets.  The major reason is that the cycle time is much shorter.  Predictions are made and results are rendered very quickly.

The market cycle is much longer, but the lesson is there.

The NFL Market

Each week in the NFL there is a market for those making bets on NFL games.  The point spread  is set initially by a Vegas expert who puts up a "number" that is expected to balance the betting action.  Since the bookmakers maintain a betting spread, they are guaranteed to profit if action on the two sides is balanced.  If the market jumps on one side, the price moves.

Market Analogies

There are several important market analogies.

1. It is a deep and liquid market, with plenty of action on both sides;
2. The sports punditry, including both free and paid services, engages in fundamental analysis, looking at the strengths and weaknesses of both teams and how they match up;
3. The pundits also engage in the equivalent of technical analysis, looking at how the teams have done versus the point spread, at home, on various playing surfaces, etc.

Blowout Results Seem Obvious -- After the Fact

Last weekend's blowout results included two games that (now) seem obvious.

The Lions lost again.  The line opened with the Saints as 6 1/2 point favorites and closed at 7.  The final score was Saints 42, Lions 7.  The hapless Lions are setting a record for inept play.  How could anyone think they could compete.  Or so it now seems.  Going into this game, the Lions were 6-8 versus the spread.

The Patriots crushed the Cardinals, 47-7.  You only had to lay eight points.  How could anyone expect a warm-weather team to play in the snow at Foxboro?  The Cardinals are crashing.  After the fact, it seems obvious.

Investment Conclusion

We repeat our warning that investing is not gambling.  In an old article we explain carefully why investors can learn from gambling. We look to this "market" to get meaningful lessons.

Should we follow pundits who predicted these two blowouts?  Or is it better to look to long-term records of success?

Comments

[belldirect]

The market is unpredictable we all know that. However, I still would like to read stock market analysis based on the market's trend, performance and long term record of success from a trading network.

[oldprof]

Mike C -- You are certainly asking the right questions and that puts you ahead of nearly everyone. Defined the way you are doing it, there are not enough cases to judge the accuracy of any investing method. That is one of the main points of the football analogy -- lots of cases and a fast refutation for most systems.

I have a destination in mind for this series, and future articles will answer more of your questions.

I suggest that you start with a couple of critical moments from last fall and ask whether the results were inevitable. Decisions about Bear and Lehman would be two good candidates.

Thanks for another thoughtful comment.

Jeff

[Mike C]

Should we follow pundits who predicted these two blowouts? Or is it better to look to long-term records of success?

Jeff,

Question for you, and I am very interested in your response to this. In your view, how would one go about *exactly* differentiating between pundits/strategists with long-term records of success versus the blind squirrel who predicted the blowout of the week. Isn't that a pretty fuzzy qualitative assessment that depends on where you select your starting and ending points?

For example, and I won't name specific names because you said you don't want to go down that road, but here it is.

You've got two very well-known, highly regarded (by others in the professional investment community, I suspect their writings/letters are #1 and #2 in terms of what other investment pros read and pay attention to) who both appear to have correctly predicted the "blowout of the week" as they were both bearish on the economy and stock market in late 2007/early 2008. Incidentally, they have both switched to being cautiously bullish on stocks.

Having said that, one could argue they both were very early, and looked wrong and stupid for some time. Can the unsustainable be sustained much longer then can possibly be expected. However, going back even further, one could argue they both nailed the long-term return of the broad stock market (7-10 years) if you go back to 1998-2001 at a time when most likely 95-99% of strategists were predicting the continued 10%ish annual returns.

When is the long-term the long-term? 2 years, 3 years, 5 years, 10 years? Does it matter if one is "right" for 2-3 years if ultimately the market takes that back and makes one wrong for 5-10 years?

Now you've got others who I truly would put into the perma-bear, financial Armageddon camp who appear to be basically calling for the total collapse of the U.S. economy and dollar, and are predicting that the worst is still yet to come for both the economy and the stock market. They also called the "blowout of the week" in terms of the economy and stock market in 2008. In fact, one has a very popular YouTube video that demonstrates the "brilliance" of his call, and is now a regular guest on just about every CNBC discussion of the market and economy.

Differentiating between long-term record of success and a lucky blowout call of the week is obviously critical, but I'm not sure how simple it is in practice?