Loud Silence: How Doing Nothing can Return the Most

A study done by professor Hendrik Bessembinder from earlier this year highlights the extreme disparity in net gains in the stock market: “When stated in terms of lifetime dollar wealth creation, the best-performing four percent of listed companies explain the net gain for the entire U.S. stock market since 1926, as other stocks collectively matched Treasury bills.” So, what Mr. Bessembinder states is that over the past ~92 years, the top returning four percent of publicly traded companies made up ALL (literally 100%) net gains for the ENTIRE stock market. To add insult to injury, the other 96% of companies on the market performed akin to U.S Treasury Bills. These Treasury Bills, for those who aren’t familiar, are widely heralded as the safest investments possible (least risk also means least reward), and only return about 4% profit on the year (in best cases).
Talk about living in Extremistan…
What surprises me most about this study is that this is not simply a snippet of the past 10-15 years, the time period which I (and many others, I’m sure) consider to be the most volatile and conducive to income inequality, but this hyper-concentration of wealth has shaped the market for the past century. Not to jump to unfounded conclusions, but if this has been going on for the past 100 years, then it is reasonable to assume that it will continue happening for the next 5, 10, 20 years as well.
I mention this because nowadays, the investing world (and the world in general) is becoming more automatized, more laden with competition, and more glutted with information. It is certainly easy to be intimidated by the surplus of data and potential opportunities, and portfolio managers, investment bankers who look ‘the busiest’ give the perception that they are the only ones who can truly grasp all that is going on. But, as with the stock data I’m training my neural networks on, this is mostly full of distracting, meaningless noise. Just because your portfolio is as diverse as possible, or has hundreds of different stocks from different sectors, or you change your portfolio on a daily basis, this doesn’t imply a superior investing strategy. You could invest into a thousand stocks that are all part of the bottom 96%, and break even, while your coworker holds onto only one stock that happens to be part of the 4%, and makes a killing over the next years.
One quote that really sums this up comes from Warren Buffet, who said: “I could improve your ultimate financial welfare by giving you a ticket with only twenty slots in it so that you had twenty punches – representing all the investments that you got to make in a lifetime. And once you’d punched through the card, you couldn’t make any more investments at all.”
Sometimes, it is best to stay vigilant and uninvolved, until you hone in on a single big investment opportunity. I visualize this as a day on a fishing boat: You can use all of your bait at once throwing lines in just to throw lines in, or you could sit with your single line until a big fish bites.
Now that I think about the algorithm I am building, this is definitely an interesting topic to keep in mind. My Word2Vec pattern mapping can’t possibly map similar stock events for all real-time data all the time. If my code could match similar stock events 24/7, then it means my code is broken. In my case, it would be best to run event-matching code all the time, but to only consider investing once the events match past a certain threshold of accuracy (for now, let’s call this Accuracy Threshold). If two events match with 100% similarity (which is extremely unlikely, I’m just using this as an example), then it means there is real potential that some recurring pattern will repeat. Once the code crosses the accuracy threshold, we then need to look at what happened after the data_embedding we matched with. In other words, if our real-time data maps closely to a data_embedding, and the data_embedding was followed by a price increase of 12%, then it is definitely worth investing. The matter is factoring-in percent similarity (which should translate to percent-likelihood that our real-time data will follow the same outcome of the data_embedding it maps to) with expected gain. A very high percent similarity with a high expected gain is best case scenario, while a low percent similarity with a high expected gain is more ambiguous.
So, my question for today is, how should I factor both these percentages into my algorithm to decide whether or not I should go for the investment? Because after all, I need to be able to identify the big fish when they are biting.

Picturing Panic

Today marked day two of stock annihilation in America. After yesterday’s bloodbath, many fearful investors were desperate to sell their stakes before they lost more value. This turmoil sent the entire stock market into some sort of panic mode, where the majority of high-flyers continued losing up to 10% of their worth. If you’re interested in finding out just how bad things got in the midst of the craziness, here are some charts taken from yahoo finance showing change in value of puts for SPY, AAPL, and NFLX.
Here’s some inspiring motivation: Some guy out there got a 2,200 percent return on an investment in a single day.
Luckily though, the opportunities are not gone yet. In fact, some would say that the best chances to make money have just arrived. Like I stated in my previous post, the market should see a rebound sometime next week as the confident economists will be hard at work this weekend convincing the masses that all is well and that the markets can’t continue crashing. If such a rebound doesn’t occur, then things could get really bad.
Oh well, at least calls are cheap.

Crash Clues–The Implications of Today’s Sudden Stock Carnage

Here are some numbers to take into account:

TWTR down 1.61 (5.83%) to a below-IPO 26

NFLX down 9.57 (7.84%) 

ANFI down 1.77 (38.06%) 

MCUR down 9.07 (75.27%)

S&P 500 down 43.88 (2.11%)

DJI down 358.04 (2.06%)

TSLA down 13.07 (5.12%)

TWC down 3.86 (2.02%)

It seems as if many investors today collectively realized that most stocks are overvalued and have been inflated to the point where they are no longer sustainable. Although a large portion of the market suffered noticeably large losses, what we just witnessed was not a full-fledged crash, but is a hinting to what is awaiting us in the future. For the first time in a while, the world got to observe what consequences come as the result of an unjustified bull-run that has brought the majority of stocks to record highs and gave tiny burger chains billion dollar valuations. However, things could have been much worse. Sadly, a day is going to come when things do get much worse. And by the looks of it, this infamous “doomsday” that has been fantasized about so much by conspiracy theorists is not very far away. At this moment, the entire stock market (and the entire world, for that matter) is teetering on the brink of an unavoidable cliff, supported only by those who believe that  stocks are going to continue to grow and meet Wall Street’s ridiculous expectations.

What this signifies:

One day, things are going to catch up with us and we will all have to face reality. My prediction is that, like always, stocks are going to make one final hail-mary leap before crashing to the ground. Just be alert for sudden, unexplained price increases.

Stock Market Crash - Stevan Noronha

The Golden Future Of China

A few weeks ago, the People’s Bank of China revealed the contents of their gold reserves for the first time since 2009. The report, indicated that China’s gold holdings had increased by 1,943,000 ounces in the month of June. This increase of roughly 600 tons put total Chinese gold holdings at 1,658 tons.
Firstly, it is obvious that such a massive increase couldn’t have happened in a single month because such an increase in such a short amount of time would have caused a major disruption in the market. Secondly and more importantly, this misleading number is merely a side story for what is really happening with China’s gold supply. After seeing that the PBOC had given the world fraudulent data, one would appropriately ask the question “who knows what else they are lying about?” Now, I’m attempting to avoid venturing too deep into the subject of who’s lying about what, but I am going to make a statement that most of the world would agree with: China has a lot more gold than 1,658 tons.  Why? Read this. How much does “a lot more” signify? I don’t know, and neither does anyone as of know (well, except for the PBOC). However, this is not the point I am seeking to address. There is a saying that everything happens for a reason, and this applies in this case. I say this because there is a very good –good for China, that is– reason for concealing data concerning their gold. As I previously stated, if the PBOC were to suddenly disclose the fact that they are holding over five thousand tons of gold, then the price of the precious metal would surge to incredibly high levels. An event of this sort taking place is inevitable, but it is likely that it won’t take place very soon. China knows all of this and is using the calm before the storm to its advantage by secretly expanding its gold reserves while hoping to not draw too much attention to itself. Once the country has generated a large enough supply, it will drive up the price of gold by revealing how much of it they have amassed and in doing so will have generated massive profits and will encourage people to put their faith into bullion rather than fiat currency.