Will Rogers, the old-school American actor and humourist, once advised:
“Don’t gamble; take all your savings and buy some good stock and hold it till it goes up, then sell it. If it don’t go up, don’t buy it.”
What all investors wouldn’t give to know for sure which “good stocks” were going to go up ahead of time. The High Frequency Trading (HFT) crowd do this by littering markets with small caches of stock for sale, at the cheapest market price.
When large players like pension funds come to market with a shopping list, they buy those small caches up first, and the HFT guys with their much faster network connections can then buy all of the outstanding supply of that stock and sell it to them at a higher price.
It pays well. One of the pioneers of HFT, one Kenneth Griffin of Citadel, earned about $870 million last year… and got about blowing it as hard as he could come January. First up was the most expensive home ever sold in the US, in “billionaires’ bunker” by Central Park in NYC for $238 million. Not one for slowing down, he then purchased a 20,000 square foot townhouse near Buckingham Palace for £95 million – within the same month.
Get ahead of market “whales” like pension funds, and you’ve got yourself a licence to print money whenever they make a trade. Nice work, if you can get it.
Of course, such a lucrative trade only stays niche for so long. The HFT space became so crowded, that some of the big players quit conventional markets entirely to pursue high frequency strategies in areas where few dare to tread. One of these, I was informed by a man deep in the space, was crypto.
The immaturity of the crypto space led to a lot of inefficiencies which could be exploited by the experienced and cunning HFT folks. The same digital asset could be selling for substantially different prices on different exchanges at the same time, allowing for significant risk-free arbitrages to be made, among many other “dark arts”.
While today’s short note is not about HFT specifically, it is about figuring out when “good stock” is going to go up, crypto, and pensions for that matter.
If you could know for sure which stocks were about to go up ahead of time, you’d probably go for the riskiest one with the most capacity to move upwards. After all, if you were sure it was going to go up, well, you may as well make the most of it.
With that in mind, well, options, small caps, or crypto would maybe be the ones you’d want to own – if you could divine their future, of course.
Pension funds are owning increasing shares of the first two, funnily enough, courtesy of the desert of low interest rates. And there are two pension funds in the States now into crypto as well. I wonder how long it will take, how much yield starvation will be necessary, before some of the most traditionally prudent and cautious investors take to the riskiest asset class on earth.
The seemingly inevitable arrival of big money to the space will be a strongly bullish force. However, we may have to wait quite a while before it arrives – and as you may well have noticed, the crypto market can go to hell in a handbasket in no time at all, with journalists calling it dead for the umpteenth time before it returns, phoenix like from the ashes.
Which makes knowing when to buy Will Roger’s “good stock”, a trickier problem to solve. But with a little Dutch courage, it may be easier than previously thought…
A shot of Génépi
Charlie Morris, the fund manager who writes The Fleet Street Letter Wealth Builder, used to run just two portfolios for his subscribers to follow: Whisky, and Soda.
As you would imagine, it’s in Whisky that he puts his riskier trades on – it’s for capital growth, and for those happy to make rapid changes based on market conditions.
Soda, meanwhile, is for capital preservation – a safer strategy for those who want to “fire and forget” their trades and constantly return to reshuffle the portfolio. Both are doing very well – as of last week, Soda was up 12.2%, and Whisky 14.2% year to date.
But there are some investments that are simply “too risky for Whisky”. Charlie’s been following and relentlessly analysing the crypto space since 2013, and has been fascinated by this new asset class, though very wary of its massive volatility. But as he thinks there will be a great buying opportunity for bitcoin in the near future, he’s bringing his vast expertise at valuing bitcoin to his subscribers. , his models for following bitcoin are about as close as one can get to knowing when it’s time to buy some of this “good stock” right before it goes up.
But bitcoin is much too risky for his carefully cultivated and smooth-running Whisky and Soda. So he’s adding a third bottle to The Fleet Street Letter’s drinks cabinet – a rich alpine liqueur he discovered on a skiing trip. It’s called Génépi (pronounced “jenepy”, I understand).
This third addition to The Fleet Street Letter Wealth Builder won’t have portfolio weightings or a cash reserve – it’ll simply have a “Bullish”, “Bearish”, or “Neutral” call on the assets within it, the first of which is bitcoin. And those calls follow some simple rules – rules which you can apply for yourself when deciding if bitcoin is a buy or not.
– whether you want to take a shot of Génépi or not.
Back tomorrow,
Boaz Shoshan
Editor, Capital & Conflict
Category: Market updates