How to Apply the Art of Lego to Trading and Investing
We live in an ambiguous paradoxical world. Would you have bet that with record unemployment and losses that the Nasdaq would exhibit v shape recoveries and even all time highs? If not for the Ceo of Amazon Jeff bezos talking down their stock, it would not have even dropped.
The important case to learn is is that as a principle: Chunking and making small consistent bets is effective.
Most winners is not always a tale of shrewd foresight and bold strategic moves. This is not in our view. Although anyone knows that Amazon is a poster child for a winning company and any trader can buy amazon at 1700. Not everyone can know that buying even at 2000–2100 would result in them being able to sell at 2400.
It was a series of pragmatic actions. It was to make each problem manageable. In order to get a string of practical tasks done right, the underlying principles are what I’d like to call Building LEGO portfolios:
Power of small
Power of chunking
Breaking things up
Keeping it fluid
Test and test and test
You have to have the Experimenting mentality in business
The cost effectiveness of trying something is an alternative to analysing everything
Experimentation is a form of cheap learning for most of the excellent companies. It proves less costly and more useful than sophisticated market research or careful planning.
A master move
Heads I win a lot
Tails I don’t lose a lot
Even masterful (the one who adds on winners)
Heads I win a lot
Tails i don’t lose at all. (You’re so ahead of your original cost that averaging up makes it easier to either win more or just have your win trimmed to at most half.)
If you consider the biggest winners in a month, some of them aren’t even in the best “Stay at home” sectors. They even are “stay out of home names”
We illustrated some casinos running 300% moves from the lows such as SGMS and PENN only because they’ve been pummelled forcefully to the ground. With adequate short covering and sentiment swings, they’ve rallied on hopes and not on data. The point here is that all trades must start at low costs. Your experiments even when trading a bad company like a Sientra at 1.90 is worth it or a bad company like Jumia at 2.73 is worth it, same as whether a victim Of crisis such as Planet fitness, Match group, livenation and so forth were worth it. We mentioned that we saw a risk of 1 and a reward of 17 in many restaurant spaces when we included buying Jollibee at 95–99 and MAXS at 4.50 and Pizza at 4.50. In the end our “buy carnage” ideas have truly gone up just as much as our “buy resilient.” Ideas
(Our carnage picks were JPM or JFC pizza MAXS and the overall restaurants in the USA such as MCD SBUX QSR SHAK YUM YUMC Pzza DPZ dnkn)
Sometimes experimenting is so cheap, the cut is too low anyway and yet the reward is too large that it makes sense. The most important ingredient in our success lies in our small experiments approach. We bought MRSGI at 1.5–1.55 even when it has rallied because we knew there was still a substantial upside to be had. So was the reason to buy TEL at 1120. Wasn’t it a case of an experiment such as buying more SHOP at 400–490 even when we purchased at 374 precisely because buying AMZN at 2000 would have worked out nicely anyway? Shopify eventually went to 640s back to their all time highs just as predicted due to the “Amzn” follower effect as well as its own individual news flow of consumer shopping mobile apps.
Our point is that trading is about building a position and accumulating small bets in a higher low manner. It is averaging up and also not making bold all in bets even when we believe that a certain position is likely to be good. The results first approach means to listen to whether the markets agree with us and this changes your view on why you’re supposed to average up or accumulate in a range. The beauty of trading globally is that we get almost a cheat sheet of the rivercards had we been playing poker. We have advantages because the best stock movements aren’t always going to be easy to know in the onset. You won’t go ALL IN immediately and even if you were right, you would have not known how high it would have gone. Everyone knows Puregold and Amazon are going to do well in Covid, that’s precisely why they were the first to recover in the lows. We published the companies we’ve wanted but when us buying Puregold at 33 meant that we had to buy more at 26–28 when it eventually bottomed out there. (See our March 16,2020 article “How to trade in a bear market” where we identified pldt globe Pgold as our ideas to buy and to contrarian enter JFC and Sm foreseeing them to drop at certain levels)
How everyone uses their knowledge and executes them are different. Lastly the reason why small chunks are better is you can manage your risks and fold faster when wrong. Assume we made a bet on Zoom video, frustrated that we can’t get it low but the stock drops 10–20% next few days, then we’d have incurred unnecessary losses, but we would experiment a small position and even a loss would be a cheap cut to see whether it was really too hard to buy a winner in a market that’s supposed to have Great Depression volatility.
Of course zoom video turned out very well, poster child indeed of the covid crisis. We won’t stop until the market proves us wrong and any drops at 125–100 would be a reentry to that name.
This is the same thing with our SDC (Smile Direct Club) idea to buy 6.6 which ended up hitting 7.70 in 2 days. We’ll view any drops near 6 to see gaps filled and a bottoming out reversal play for Teledentistry.
No matter how many charts you draw, what you really are getting is just more information every single day. All you’re buying is more information. You never know for sure until after the fact whether it’s worthwhile. Moreover as the stock gets traded, each major step becomes more expensive as the last one if you’ve been waiting for so long for an entry. The point is to break up a planned size into small chunks and buy in small tranches. This is true for all kinds of markets whether bullish or bearish. The easiest way to cut losses is when you have such a cheap cut which happens mainly because you experiment with a small size to begin with. Once you’re already committed largely, your ego and sunk costs makes it harder for you to roll and cut losses. The major reason for people unable to cut a loss is their size, they’ve over concentrated and unable to go back to just being in the experimental phase. In order to think clearly, always have small chunks. This is the true power of trading and investing.
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Topic on May 1,2020:
Why do some companies hundred fold? And why do “bad stocks” become great trades? (Free Friday Live Stream)
May you live an awesome10x life,