The States of Swing

As long time readers of this blog will know, I burned my fingers not once, but twice, in 2016 betting on politics, but after four years the pain has eroded at least slightly, and the next US Presidential Election is fast approaching in November.

A few days ago, Joe Biden was 2.32 to become the next President, which seemed to me to be quite generous given the polling numbers. As we learned in 2016, being ahead in the polls, and even getting almost 3 million more votes than your opponent, doesn't guarantee anything, but it seemed like the market was overly concerned about the Electoral College and perhaps Joe Biden's age. At 77, six months is perhaps a long time, but the "Winning Party" market had the Democrats at around evens which also seemed a decent value bet.

Looking at the markets today, there has been a strong move against Trump and for Biden so that both are effectively now neck-and neck at 2.15 / 2/17 respectively, while the Democrats have shortened to 1.96 / 1.97 to be the Winning Party. 

As we learned the hard way in 2016, the national polls are interesting but taken on their own can be misleading. As of May 27th, Biden leads 46% - 41% here, but of the 270 Electoral College votes required to win, counting the "Safe, Likely and Leans" for each party, the Democrats lead by 232 - 204.

In the "Popular Vote Winner", Joe Biden is currently around 1.34 with Trump at 5.2, and although there is always the possibility of an Electoral College twist again, I'm not sure it is close to being as likely as implied by the prices available.

The "toss-up" states, in order of Electoral College votes, and thus importance, are Florida (29), Pennsylvania (20), Michigan (16), North Carolina (15), Arizona (11) and Wisconsin (10). (Nebraska splits their Electoral College votes which explains why the total isn't 538).

So the key would seem to be how the polling is looking in these swing states. 

In Florida, polls as of yesterday have Biden leading 49% - 46%. Clearly with 29 votes, this is a must win state for the Republicans, as if they lose here, the Democrats would need just one of the other swing states to push them over the 269 votes needed. 

Pennsylvania has Biden well ahead by 49% - 41%, although the polling data here is eight days old, while Michigan and North Carolina have Biden ahead 49% - 43% and 46% - 44% respectively. Biden also leads in Arizona (47% - 43%) and Wisconsin (47% - 41%) which all means that in a fair election, anything close to evens for the winning party to be Democratic seems great value.

Of course a week is a long time in politics, and five months is even longer, but it's hard to see where Trump is going to start picking up the voters he needs to turn this deficit around. Wooing swing voters doesn't seem to be his strength. 

Having layed Trump at 1.99 and backed Biden at 2.32 I'm happy to let both bets run. The Democrats have traded as low as 1.68 in the Winning Party market, and the current prices look good value to me, but as I mentioned at the start of this post, politics can be a dangerous market and polls can be flawed, so don't go too crazy. 

Lockdown Trading

Yesterday, I mentioned Dr C's plans to go full-time sports trading while unemployed, and from the pages of Yahoo!Finance - occasionally a good source of content, though not as often as in past days - comes this article on day-trading:

Quarantine brings out people’s inner stock trader. Here’s how to avoid their mistakes 

Many Americans, stuck at home because of the coronavirus pandemic, are putting federal stimulus checks and other money into online stock trading. Several leading brokerage firms have reported a surge in new accounts since much of the U.S. went into lockdown in March, and the stock market’s sharp recovery since the March lows, coupled with recent steps to reopen the U.S. economy, only fuels these newcomers’ euphoria.

Indeed, with zero-commissions, day trading seems like an easy way to make a quick buck. Unfortunately, most new traders make rookie mistakes that cost them real money.

Stock trading is a high-stakes game, so if you’re playing at least learn how to improve your odds. Here are seven common trading mistakes and how to avoid them:

1. Big, overconfident bets: Want to lose most or all of your money real fast? Make outsized stock-trading bets, like a roulette player betting it all on red or black. In fact, big trading bets are a form of gambling.

Steer clear by trading in small amounts — 100 shares or less — and, it goes without saying, don’t bet more than you can afford to lose.

2. Overtrading: Many day traders buy dozens of stocks that are moving up, hoping for a quick profit. Day trading too often and with too many stocks is a recipe for disaster.

Trade just one or two stocks a day. Trying to manage anything more is for jugglers, not traders. Although the pattern day trading rule is annoying (you are limited to three trades in a five-day period if you have less than $25,000 in your account), it forces you to trade less but more accurately.

3. Holding losers too long: Knowing when to sell losers takes experience. If you sell too quickly, you miss out on potential profits if the stock reverses. If you sell too late, you incur bigger losses. Most novice day traders typically hold their losers too long, hoping they will get back to even.

Remember, you’re trading, not investing. Don’t hold losers, and rarely keep a position overnight. Once it’s clear the loser is not coming back before the market’s close, sell and live to trade another day.

4. Selling winners too soon or too late: Managing your winning positions is as challenging as managing the losers. Many traders sell winners too early, missing out on bigger profits. Even worse, if they hold some winners too long, a profitable position can plunge to zero.

The solution: Plan in advance for when to sell and stick to it. If you land a big winner, sell it all. If for some reason you have trouble doing that, then scale out of a winning position by selling half of it now and the rest later.

5. Too many technical indicators: Many beginners believe the more market indicators they use, the better, as if indicators will lead you to the Holy Grail. Watching too many indicators is confusing and distracting, and prevents you from focusing on the only thing that counts: the market itself.

The fewer indicators you use, the better. Choose one or two that work best (you have to experiment to find which works for you) and master them. Day traders I know use VWAP (Volume Weighted Average Price), or the NYSE Tick, for example.

6. Panic buying the hottest stocks: Momentum trading has been the rage, and many traders did well with hot stocks such as Tesla, Nvidia, Netflix, and Beyond Meat.

The easy days are over for momentum trading, yet many beginners still focus on the stocks that have had the biggest runs. What typically happens to these momentum stocks is that they stall, then fall, taking day traders’ money with them.

Chasing hot stocks is risky and should be avoided because momentum can quickly turn against you. It’s all right to follow strong stocks whose price is trending higher — just don’t chase them. Day trading is enough of an emotional experience without you buying or selling in a panic.

7. Not enough practice: Read a book or watch a video about day trading and you might think you’re ready to clean up. You’re not.

Too much money and too little experience is a bad combination. Before staking a dime on a stock, practice with a simulated trading account to build your trading muscle. When you do venture in, trade with 100 shares or less until you understand how this part of the stock market works. (See tip #1.)

I'm not sure I understand the "100 shares" recommendation given that all share prices are not equal - there's a big difference between buying 100 "penny" stocks and 100 Berkshire Hathaway Inc. Class A stock - so I'd suggest position size is somewhat more relevant. 

One strategy that has worked well for me is to focus on a handful of stocks, and take advantage of big moves as markets often have a tendency to overreact to news. This can be a risky strategy when market volatility is high, but a semblance of normality seems to have reappeared in the past few weeks, and if you are buying a solid stock, and position sizing sensibly, the risk is fairly small. 

Tesla stock (TSLA) was mentioned here in June 2018 when the price was around $315, and at a little under $800 currently, that has been an excellent investment although I'd like to change my opinion from that post where I said:

I also happen to like CEO Elon Musk's sarcastic, flippant, sometimes rude, approach to those trying to spread a false narrative about him or his company.

Some of his recent comments have been anything but helpful to the stock price and very un-CEO like!  

NHL Playoff Qualifiers

The NHL has announced its plan for returning to play this season, although no dates have yet been announced. 

The Regular Season has been ended and play will resume with a modified play-off format with twelve teams from each conference (Western and Eastern).

The top four in each conference will play a round-robin tournament against each other to determine seedings one to four, and the next eight will play in four "best of five" series with the four winners facing the top seeded teams.

It's a reasonably fair solution. In the East, perhaps the Montréal Canadiens can consider themselves fortunate in making the twelfth spot despite being only three points ahead of both the Buffalo Sabres and the New Jersey Devils having played two games more, while in the West, the Dallas Stars make the top four despite being a point behind the Edmonton Oilers courtesy of their two games in hand. 

The games will be hosted by two cities, yet to be determined, so there will be no home advantage unless one of the chosen cities has a team playing which seems unlikely, and likely in front of empty seats. With all three California teams (Los Angeles Kings, Anaheim Ducks and San Jose Sharks) eliminated, I wouldn't be surprised to see that state hosting the Western matches.

Presumably one this Qualifying Round is complete and the seedings determined, the playoffs will resume in the traditional format. 

From the Eastern Conference, the four teams seeded into the first round are the Boston Bruins, Tampa Bay Lightning, Washington Capitals and Philadelphia Flyers. They will be joined by the winners of the following ties:

(5) Pittsburgh Penguins v (12) Montréal Canadiens
(6) Carolina Hurricanes v (11) New York Rangers
(7) New York Islanders v (10) Florida Panthers
(8) Toronto Maple Leafs v (9) Columbus Blue Jackets

From the Western Conference, the four teams seeded into the first round are the St. Louis Blues, Colorado Avalanche, Vegas Golden Knights and Dallas Stars. They will be joined by the winners of the following ties:

(5) Edmonton Oilers v (12) Chicago Blackhawks
(6) Nashville Predators v (11) Arizona Coyotes
(7) Vancouver Canucks v (10) Minnesota Wild
(8) Calgary Flames v (9) Winnipeg Jets

DH in NL Stadiums - Purists Aghast

Although life is anything but 'normal' right now, the funeral is over and on what would have been my Mum's 92nd birthday, an opportunity to catch up on what's been going on for the last few weeks, which is not a lot as far as sports are concerned.

I did see some news regarding when MLB might return, and buried in the details is one little nugget that may prove useful to investors which is that:

All teams would use designated hitters.

The rationale for this rule change, incidentally one that will upset baseball purists, who at least won't be able to be there in person to witness the abomination, is that this would appear to include matches played in National League stadiums, where pitchers have long hit for themselves and visiting American League sides have had to make the adjustment.

Baseball officials said the idea would simplify things, as teams limit their travel by playing more inter-league games against local opponents. Limiting travel certainly makes sense, but this rule change, if applied, appears likely to favour the American League teams. 

I'm not sure I understand why the current rules for inter-league matches shouldn't continue. The rules are American League rules when an American League team is the home team, and National League rules when the National League team is at home.

The MLB also plan to play in empty stadiums, although as with many sports, the advantage of playing at home has been reduced with the advent of challenges and reviews.

Over the past five seasons, 2015-2019, blindly backing home teams in regular season games (straight up) would have cost you 2.49% versus a smaller loss of 2.17% of road teams. 

I know what you are all thinking, and the numbers in inter-league matches for home teams are even worse with a loss of 6.1%. 

Clearly the edge historically is on the road teams, and especially when the visiting team is from the American League and as mentioned above, at a seeming disadvantage. 

The market doesn't do a great job of accurately evaluating the win probabilities here, because in this latter scenario, the profit on the road team (straight up) is 4.9% and 3.6% on the Run Line.

How will the market adapt to the American League now having an apparent advantage in these games? Something to look for if and when the revised schedule is released and something that will mess up the statistics in future seasons! 

Doctor C, mentioned in this blog a couple of times, tweeted that he had...

As a former contract programmer myself, although many years ago now, I can identify with this unsettling state of affairs, and certainly the income was always relatively high so any interruption in employment, even short-term, wasn't a good position to be in. 

However, I'm not convinced that replacing even half of that income by short-term full-time trading is as easy as it sounds and as I've written before, when you need to win to pay bills, the stress is incredibly high, which leads to poor trading decisions. 

I wish the good Doctor well in his endeavours, and it will be interesting to follow his progress, but relying on trading as a primary income seems like a recipe for disaster. Hopefully he has six months of money put aside to cover expenses during that time and a decent bank for trading. 

Passive Oversight

Readers of this blog will be familiar with the difference between passive and active investing and my preference for low cost index tracking funds, but for one company, this strategy last month turned out to be anything but low cost.

While I wasn't actually copying Bill Gates and reading company reports / financial filings for fun, I did catch this little gem of news yesterday.

Per an 8-K filing, something which is required by law in the US for disclosing a "major event relevant to shareholders", apparently Invesco (a large investment management company) missed the re-balancing date for two of its S&P 500 tracking funds on April 24th costing them $105 million to compensate for the resulting difference in performance:

The Company recently discovered and has corrected an error with respect to two funds: the Invesco Equally-Weighted S&P 500 Fund and Invesco V.I. Equally-Weighted S&P 500 Fund (the “Funds”).

The Funds are passive funds that are managed to track the S&P 500 Equal Weight Index (the “Index”). In March 2020, due to volatility in the equity markets, S&P Dow Jones Indices communicated the decision to delay, and ultimately to separate, the rebalancing dates for its indices and noted some indices would be rebalanced in April and others in June.

The Company noted this delay but not the separation of rebalance dates and omitted rebalancing the Funds on April 24, 2020 when S&P rebalanced the Index.

The Company discovered this omission and rebalanced the Funds on April 29, 2020. The Company will make a contribution to the Funds of approximately $105 million to compensate them for the performance difference that arose from market movements between April 24 and April 29.

Rather a costly mistake by someone there. A whole new meaning to the term 'passive investing' and I wonder if the person responsible was "working" from home. I'm sure a few senior executives weren't too 'passive' about the error when it was brought to their attention.

Dry Lockdown

With no sports, there's not much to write about these days, but I hope everyone is coping with the current situation and aren't too badly impacted financially.

It may not be a common point of view, but for me personally, this 'lockdown' isn't the worst thing. I'm fortunate that my primary income stream isn't impacted, in fact it's effectively increased as I'm not having to spend time or money commuting, although secondary and tertiary income streams have dried up completely.

With no temptations in the form of bars, pubs and dine-in restaurants, I have been dry for over eight weeks now, smashing a record that goes back almost 20 years. Spending on alcohol and petrol totalled zero in April, which must be a first since I turned 15, so there's an additional saving there! I suspect the unplanned dry run will come to an end in a couple of weeks time at my Mum's funeral.

Like many of us I suspect, I have had a lot more time to read over the past few weeks. I mentioned finishing "The Hot Hand" last week, and have devoured Michael Lewis' "The Fifth Risk" since then - highly recommended, as are all of Lewis's books.

I have a tendency to get distracted, and often have several books in progress at any one time, with the result that any one book takes months to complete, and often requires starting over because I've forgotten what I've already read - which is of course terribly inefficient. I justify this to myself by having books of different genres on the go at the same time. It's not unusual for me to have a novel, a book on markets or investing, a sports related book, a social economic book and a historical book all in-play at the same time. An isolation resolution is to be more disciplined with my reading.

The importance of reading has been known for centuries, with innumerable quotes about it. Some of the most successful men of our time have emphasised the importance of reading. Bill Gates reads 50 books a year, and Warren Buffett spends five to six hours a day reading five newspapers and 500 pages of corporate reports. (The latter might be a little dry). 

“In my whole life, I have known no wise people (over a broad subject matter area) who didn't read all the time -- none, zero. ..." - Charlie Munger

“Everybody can read what I read, it is a level playing field.” - Warren Buffett

“Reading is still the main way that I both learn new things and test my understanding.” - Bill Gates

My latest read is "Latticework" by Robert G Hagstrom which I acquired a while ago (it was written in 2000) and for some reason is a copy signed by the author.

In this engaging and challenging book, Robert Hagstrom outlines a new approach to investing based on the ideas of two highly successful investors: Charlie Munger of Berkshire Hathaway and bill Miller of Legg Mason. Both Munger and Miller believe in the latticework approach to investing, one that is based on a working knowledge of a variety of disciplines. Latticework is a true liberal arts approach to investing. It carries the reader from Ben Franklin's vision of education to St. John's College with its Great Books program to the cutting-edge Santa Fe Institute, a multi-disciplinary research center which brings together scientists from a variety of fields to address complex adaptive systems, including markets and economies. In helping readers develop the worldly vision they need to succeed financially, Latticework also points the way to a richer, fuller, more rewarding life.

Before opening it, I saw a question asking "Why does Robert Hagstrom have such a poor investment track record?".

"Poor" here is of course a relative term, but the answer provided was interesting:

Firstly, simply because you understand something doesn’t necessarily mean you will nor can apply it, especially in a (somewhat) competitive manner. I think of pro athletes and their coaches - I think you can see what I’m getting at.

Professors and pundits are another example, and it's the same in sports investing, where experts in the field of probability and statistics whom you would think should easily be able to parlay their expert knowledge into actual financial gains often can't. There's an art to the science, and not everyone has that artistic touch.

April was a record setting month for the spreadsheet, in both actual terms and percentage increase, although still down on the year to date and May hasn't started too well. As I mentioned before, considering we are in the midst of a global pandemic, that I am only down by 8.04% from February 19th and 3.82% year to date is quite surprising. I've done a little trading on some stocks that I am familiar with. Tesla continues to be my best performing individual stock, although CEO Elon Musk's comments don't always help, but there are some good opportunities in solid companies after large one day drops which are often over-reactions. 

I'm certainly pleased that I didn't decide to retire earlier this year with the goal of travelling. I'd have been sat at home with no steady income and no travelling opportunities, rather than sat at home getting paid for honestly not doing very much! It may be too much to hope for, but when this is all over, there may also be redundancy packages offered, which would be absolutely perfect timing for me, but we shall see. 

My July trip to Queensland to watch Crystal Palace has not surprisingly been cancelled, which is a little disappointing, and it'll probably be a few months before I am able to make any more travel plans.

So far as sports are concerned, still no news on when the ones I am interested in might resume, and in what fashion they might resume. For those seasons in flight, I'd suggest that the authorities forget the idea of it being an annual season, and say extend 2019-20 to a 2019-21 season. Finish the schedule when it is safe to do so, and if there are a few weeks left early next Winter or Spring, do like we did in the War (not that I am quite old enough to remember it) and come up with a one-off tournament, perhaps UK wide to add a little interest and the opportunity to visit new grounds. The Covid Cup has a ring to it.

Unfortunately it may well be a while before sports (as well as bars / pubs) as we know it come back.

Finally, many thanks to Ben who sent me the study on strategic and psychological momentum I referenced last month and was too cheap to spend $35.95 on. That will be my equivalent of Bill Gates' '500 pages of corporate reports'.

Stay safe. 

The Null and Void Line 1947

My recent post on sports being interrupted by unexpected events, often weather related, omitted one football season in England which was extended through June 14th, although in the end only two games were scheduled in that month.

The season was 1946-47, the first season of regular league football since the Second World War, and after a "harsh winter and a government push to end midweek sport to drive up post-war productivity" the Guardian reported that:

“The league are asked in effect to choose between abandoning this season’s championship, which would be a sore blow to the clubs at the head of divisions, or playing on halfway through the summer, or (perhaps the best solution) playing behind closed doors the games needed to conclude the league programme,”

In those days, the season started on the last Saturday of August, and the 1946-47 season used the same schedule that had been started in 1939-40 before it was voided because of the War. Many clubs didn't have floodlights at the time, rationing was still in effect, there were fuel shortages and so when bad weather hit in late January, some clubs soon faced a long backlog of matches. 

“Associated with the problem of completing the fixture list – which seems insoluble in the circumstances – is the question of whether to call the big issues of the season – promotion and relegation – off, or whether to award the prizes and hand out the penalties despite the differing number of fixtures fulfilled,” wrote JT Bolton in the Observer. “The null and void line is the one likely to receive the greatest volume of support.”

Nulling and voiding the League would have cost Liverpool the title, although in some contrast to this season, the only time they topped the table was after their last game on May 31st versus Wolverhampton Wanderers.

Had Wolves won that game, they would have been champions themselves, or had Stoke City beaten Sheffield United in their final game, the title would have been theirs. Stoke lost and ended up in fourth place, still their (joint) best ever final league placing. Losing Stanley Matthews during the season wasn't the best of ideas perhaps!

Voiding the season would have meant that promotions for Manchester City, Burnley, Doncaster Rovers and Cardiff City would have never happened, but on the plus side, Leeds United, Brentford, Swansea Town and Newport County would have avoided relegation, with Southport, Halifax Town, Mansfield Town and Norwich City being spared the indignity of applying for re-election.

Breaking Momentum

Back in 2010, I wrote about trading the NBA that:

The thing about runs is that they come to an end. Typically a coach will call a timeout when his team is on the wrong end of such a run, the idea being to break the momentum, and re-group, so if you're on the wrong end of a run, it's important to keep a clear head.

Interesting to see that a scientific study has shown this perception may well be correct. University of Technology Sydney Economics Professor Lionel Page tweeted:

The study was titled Separating psychological momentum from strategic momentum: Evidence from men’s professional tennis with the abstract containing the following:

In tennis, converting a break point potentially triggers both strategic momentum—due to a change in the relative position of the players—and psychological momentum—due to a change in the perception of the players. To distinguish between these two momentum types, we employ exogenously given interruptions. Interruptions are predicted to affect psychological momentum negatively, while leaving strategic momentum unaffected. Using 4,930 game-by-game observations from 141 Grand Slam men’s single matches, we show that the breaking players’ probability of winning a game increases after converting a break point, which provides evidence for momentum. Moreover, we show that this momentum effect is negatively affected by an interruption. Thus, psychological momentum seems to be the main trigger leading to a performance increase after a converted break point.

The study isn't free, and I am too cheap to pay $35.95 for it, but tennis traders might find it useful. I've never been a trader of tennis due to the prevalence of courtsiders, but if this is a sport you trade, it may well be that the idea outlined here is something you have noticed. 

From my own experience of trading NBA basketball, opposing a team that had the "hot hand" once a timeout had been called was a longtime profitable trading strategy.  

Earlier in 2010 I had written:

A similar strategy that I use in a few two-team sports is to lay an underdog that gets off to a strong start. Bettors have a tendency to panic (i.e. overreact, or on the flip-side get greedy - fear and greed drive the market) but in the long run, good teams, certainly in sports where timeouts or built in breaks are a feature, tend to come back.

As it happens, that post ended with a tennis observation, but I'm not sure the statistic would have been useful. When trading in-play, interruptions of any kind were always good opportunities to close out a position or take a new one. Injuries can impact games in a big way, and tactical changes and adjustments are also key. 

While sports such as tennis, baseball and American Football have natural breaks in play, ice hockey and basketball don't. There are actually several types of timeout in the NBA, with different rules for locally televised games and nationally televised games. There are mandatory timeouts, there are "full" timeouts, and there are "20-second" timeouts (which are actually 60 seconds) so not all timeouts are equal. 

Managing timeouts and the clock in the NFL is a key part of the game, while in the NHL, only one 30-second timeout is allowed per team, per game. 

I look forward to seeing a study comparing all the different timeouts!