What If You Only Traded One Stock?
This was an idea that came to me this weekend while watching Football. My two main passions are football and the stock market, so I like to relate the two as I always see similarities, in the end, both are about winning. Football is an intricate sport getting eleven men to work together on 120+ plays per game, and the outcome often decided by a single play, as little as stretching a ball over the goal line, or coming up inches short. The game can also be simplified, and I look at the success of Bill Belichick, who sort of applies Occam’s razor to the sport. If you simplify the game, you need 10 yards every 4 plays (assuming a willingness to go for it on 4th and short). That is just 2.5 yards per play, and considering a 6 foot man falling forward stretching the ball is roughly 2.5 yards, it seems very simple to accomplish this task. Belichick only concerns himself with winning, which is why watching the Patriots play is like watching paint dry. The constant WR screens, dink and dump passes, short drag/slant routes, dump offs to the RB’s, and so forth are not an exciting brand of football, but it is effective. It often feels like many coaches are more concerned with winning in style and pleasing the fans with overly complex game plans. Imagine watching an entire game of 2.5 yard plays, it would be just as effective, but painful to watch.
I was also thinking about applying this philosophy to football betting. Each week I look at every game and may bet 1/3 of them, but what if instead I just laser-focused in on a single game knowing that you can bet roughly 50 different aspects of each game between quarter/half/full-game lines, scoring totals, and player and game specific prop bets. If you studied all the player matchups of a game, all the conditions, the different coaching strategies, the next generation stats now available, and so-forth I believe you would have more success than attempting to determine the outcome of multiple games. It’s not as fun just zoning in on one game, takes a lot of studying/analysis, but it’s effective.
This same approach can be applied to investing/trading where at the end of the day the goal is the same for everyone, make the most amount of money in the shortest amount of time possible while minimizing risk. Imagine becoming an expert in a single company/stock and trading the name long/short on a day to day basis. The two conditions of this approach include not picking one of the mega-caps covered by hundreds of analysts on Wall Street, but also choosing a name with enough daily trading volume to minimize liquidity risk. You would also cover the stock with all different trading approaches, something I do with every name I invest, the more information, the better. On the fundamental side you would learn not only the company, but all the players in the industry, have relative and historical valuation models, know the customers/suppliers, learn about management and read the annual reports, 10K’s, conference presentations. You create custom metrics specific to the business and set up keyword alerts to catch any news related to the business that can have an impact. You gain access to weekly/monthly industry reports to stay on top of trends. You analyze daily correlations with movements in treasuries, currency, and commodities, and also study seasonal and time of day tendencies. On the technical side you can learn what indicators/levels price reacts to for determining intraday and daily trading levels. You keep a keen eye on short interest trends, and 13F filings. You study options flow to see where the smart money is positioned as well as implied volatility stats and skew. If you truly dedicated yourself to trading the same stock day in and day out, I would expect trading performance to be better than attempting to trade multiple names that you do not full understand. Markets are not efficient, especially with timely reactions to all available public information, but there is a direct relationship between time and efficiency, markets tend to become more efficient with the information as more time passes. Similar to Belichick and the Patriots, this mundane approach would be extremely boring, but effective, and at the end of the day if the true objective is making money, is it not an approach worth considering? It would take an extremely disciplined individual, I am to drawn to the daily excitement of covering a lot of stocks to do it, but it’s something that needs to be considered. And if you could put together a team of 1,500 individual stock experts each trading a single stock daily for a hedge fund, I imagine it would be very successful.
Our inherently distaste for boredom makes this an unlikely approach many will take, but in that, it is also why those willing to undertake this strategy, can likely see stellar performance.