Buoyed by another spate of strong corporate profits, U.S. equities continue to shrug off worries about everything from rising oil prices, European debt and slowing emerging markets to weaker housing, the battered U.S. currency and persistently high unemployment.
The S&P 500 posted its best gain in a month last week. Alas, Canadian stocks were less fortunate (blast you, RIM). But south of the border, for whatever reasons, a firm trend has taken hold. In simple gambling parlance, stocks are on a remarkable winning streak. And the question is whether to bet against it, go with the flow or stay on the sidelines.
The leading U.S. benchmark has retraced a big chunk of the ground lost during the Great Financial Crisis and could complete the recovery by early next year, says Thomas Lee, chief equities strategist with JPMorgan Chase. He bases his optimism on a study of previous recoveries from nasty bear markets.
Other analysts point to nine consecutive quarters of positive U.S. earnings surprises, stronger global expansion and the beneficial effects of the Federal Reserve’s aggressive but soon to expire stimulus efforts. Or maybe it’s simply the prospect of further political gridlock in Washington – which is not necessarily a negative for anyone but the sitting politicians.
Still, bullish sentiment among ordinary investors remains at a restrained 37.9 per cent, according to the latest online survey from the American Association of Individual Investors. That’s up from 32.16 the previous week, but scarcely a sign that small players are rushing back into the casino with their hands full of chips. The historic average for this sentiment gauge is 39 per cent.
The more bullish investors are clearly making a one-way bet that is increasingly fraught with risk. And no one knows that better than someone who has turned to the markets after a long career in the world of sports betting.
There’s an old saying among gamblers, Larry Humber was saying over lunch the other day. “A streak can go on and on, but it can only end once.”
He’s seen that in both worlds. “Well, it’s basically the same game, only on a much bigger level,” Mr. Humber says of investing, between bites of salmon teriyaki. “The same opportunities exist in both and the same pitfalls exist, too.”
His basic investing philosophy is the same one he used to make sports bets: Don’t follow the crowd, keep things simple and make sure you’re rewarded for the risks you take.
As in other types of gambling, “people get caught up in things that maybe aren’t such a good thing. They lose track of the reality that things are going to change.”
Mr. Humber learned all this from handicapping and betting on various sports over many years. His popular weekly NFL selections first appeared in The Globe and Mail in 1975, at a time when few publications paid any attention to sports betting. By the time he stopped picking games for the Globe in 1994, he had written off pro football as the worst of all sports betting propositions and increasingly focused on the markets.
“The NFL is the hardest sport to beat, as it’s the most unpredictable,” says Mr. Humber, author of Going For It!, a 1995 guide to successful sports betting. “Crazily enough, it’s the sport that’s most popular with bettors. What does that tell you about speculators? It’s not the winning that’s important, it’s the action. I wonder if that’s true in the markets?”
Most football handicappers end up batting about .500 on their picks. It’s all because of the point spreads set by the bookmakers – they are designed to ensure that about half of all bettors are on each side of every bet. This makes it tough to make money consistently, even if you get the winning teams right. “A team just has to win by one point, not 6.5,” Mr. Humber notes. But the bookmakers’ goal is to generate a split and make their money on the commission.
Similarly, if the best an investor can do is bat .500, only the brokerage will make any money.
There have been plenty of academic studies documenting the similarities and differences between sports betting and playing the markets. Mr. Humber hasn’t read any of them. What he knows comes from long experience.
Mr. Humber made his first foray into the market at the height of the 1990s tech stock bubble. “I guess it was pretty hard not to have a winner. It was easy not to win at the racetrack. It [investing] was kind of a no-brainer. Pretty much everything was surging.” He basically doubled his money over the course of a year, but has obviously had his ups and downs ever since, particularly during the financial meltdown.
Like most sports gamblers, investors typically cling to their favourites, even at unfavourable odds, creating opportunities to bet against them. “It’s not the winners you pick that make you a winner. It’s the losers you avoid,” Mr. Humber says. “Avoiding bad bets is the key to success.”
