Slope of Hope Blog Posts

Slope initially began as a blog, so this is where most of the website’s content resides. Here we have tens of thousands of posts dating back over a decade. These are listed in reverse chronological order. Click on any category icon below to see posts tagged with that particular subject, or click on a word in the category cloud on the right side of the screen for more specific choices.

Short What You Know

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Peter Lynch made famous the idea of using local information about changes in buying habits and behavior to "invest in what you know" to get ahead of professional investors.  The idea is that trends can be spotted "on the ground"  before earnings and stock prices have adjusted to the change in fundamental prospects for a hot product or company. A mirror of this concept in a bear market is to short what you know — find companies that are losing competitive stature and bet against them before the institutional investment community realizes circumstances have changed for the worse.  I had success with an example of these last year — betting against ANF based on insight I felt I had about how Abercrombie was losing "it" status with teens.  

Here are some things I "know" from my local environment:

  • Our household is filled with tweens and teens, and the various stand-alone gaming systems we own — PS2, WII — go basically unused.  The endless drumbeat of requests for new $50 titles to feed these systems has also tapered off.  No new Madden, no new Lego Star Wars, no new Sims.  We have a plastic bag of portable gaming devices — Gameboy Advance, Nintendo DS 2 — that are also dormant.
  • My kids spend more and more time online.  They don't play the Sims on the PS2 or after loading a CD Rom into a PC (we have both formats).  They play Farmville on Facebook, obsessively.  They play addicting games.  They watch Youtube videos.  The bottleneck in our household is access to the iMac and PC machines, not dedicated gaming consoles.  To the extent they play games on portables, it is apps on ipods (they crave iphones but know I'm not getting them).  I know I am not unique in this respect — I see this with other families as well.
  • We used to go to Gamestop quite frequently.  We have not been there in months.  I have been to the Apple store to buy a macbook.  We picked up a new a new Nano at Costco for a family vacation.  Apple, Facebook and Google are gaining share of mind, time and wallet in our household.

What's the big picture?  Video killed the radio star, and broadband is killing a host of high margin, consumer businesses based on expensive-to-build and expensive-to-deliver proprietary hardware and software.  Yesterday video game software sales for September were announced, and the results were lower than expectations.  Notwithstanding Tom's love of the product, Guitar Band Beatles or whatever it is called is a sales disappointment.  Who do you know who has bought Madden 10?  It is not that people have stopped playing games or seeking interactive entertainment, it is that they are getting access online and often for free.  Online access from a universal device is cheaper, better and faster than stand-alone, single function systems.

Gamestop, Electronic Arts, Activision and THQ all vulnerable.  They are also all overvalued. Activision was on Tim's list yesterday, no doubt because of his chart reading and chart reading alone.  It is on my list for fundamental reasons.  Do your own homework, read your own charts.  But this is a sector with tens of billions in market cap that is slowly losing relevance, and that market cap can go evaporate quickly once professional investors catch up to what is happening in households as we speak.  For now, portfolio managers think we are returning to an era where gaming companies are hot growth plays that deserve lofty multiples.  Economic downturn or no downturn, the tide is going out on these companies.- - 


Dow Channel and its Pullbacks

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Here is my first contribution to Slope. I prefer to use videos in most of my illustrations as I feel it's easier for people to watch a video rather than read a lengthy blog post…..albeit a lot less intellectually stimulating! 😉 If you've not already recognized this channel and its implications I hope it's of interest to you. This channel is the most clean on the DOW but can be seen on the SPX and NDX as well. Thanks Tim for allowing me to throw in my .02!

The Deep Dark Truthful Mirror

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One aspect of being a trader that is simultaneously appealing and nerve-wracking is that the results a trader generates are just about the purest reflection of whatever talent they might have. In other words, the talent is almost perfectly correlated with the result.

This is not the case with most other endeavors. Let's say you are a 5th grade school teacher. You have certain talents that are germane to the job – – patience, discipline, knowledge, a rapport with young people, a rapport with their parents, the ability to wake up and get to school on time, and so forth. There are dozens of attributes which factor into your potential success in that occupation.

How does one measure the result? That's a tough question right there – it could be measured by the change in test scores from the start of the year to the end; or by the relative performance of that class versus similarly-aged classes in the same school; or by the results of a satisfaction survey that the students fill out; or a similar survey by the parents. As you can see, even defining "success" in this occupation is very hard. 

Similar challenges would be seen in being a lawyer, a dentist, or a bricklayer.

In addition, what happens between "input" (skills) and "output" (results) is subject to the interaction of the person with the environment. In the case of the teacher, the "environment" is mainly the students and the school's culture; for a lawyer, it would be clients and co-workers; for a bricklayer, it would be the job site, the tools he has, and other sub-contractors.

But the perception of the success in any given occupation can by fudged quite a bit. You can be a lousy Congressman but still seem quite competent and get elected repeatedly. You can be a crummy teacher but thrive simply because your students like how permissive you are.

A trader, though, really just has one asset: his or her ability to apply their "edge", whatever it might be, in the never-ending turmoil that represents a given market. Their edge might be in the form of skillful charting, insightful fundamental analysis, a deep understanding of a certain industry, or – – as in recent newspaper headlines – – a broad network of contacts of non-public, material information.

But since a trader's measurement of success is simple – – their profit/loss statement – – there's no "fudge" allowed (unless you are outright lying, like Madoff did). All you've got is talent, and all you've got to show for it is a numeric result.

I think of this as a proportional split between time and talent, such as this:


On the extreme left is completely unskilled labor, and on the extreme right is "nothing but skills" labor.

So let's say you were hired to sit on a manhole cover in order to prevent zombies from coming out of it. You are being paid 100% for your time. You are applying no talent at all to this occupation - – the only asset you are bringing is your body's mass (it could be argued that some folks are more talented than others even in this respect, but let's keep it simple).

If you are a sales clerk at a high-end clothing store, you are being paid partly for your time (someone needs to be there to make the place look open for business and to make sure people don't just steal things) but also partly for your talent (your knowledge of clothes; what looks good on a particular person, etc.).

No one is going to pay for a trader's time. You can sit there all year long, working your tail off, and if the talent isn't there, you're not going to get a stipend. In fact, you are going to work very hard for the privilege of losing money.

Of course, the market's behavior has a direct relationship on what kinds of results your talent brings (which I know all too well!), but that is the biggest task of all: honing your skills so that the market's behavior becomes, ultimately, irrelevant to your ability to generate profits.