Why Hitting on 16 in Blackjack Can Make You a Better Investor
Enrique Abeyta is a 'make money' investor... From Arizona to Wall Street and back again... Why hitting on 16 in blackjack can make you a better investor… Plan the trade and trade the plan… Three keys to long-term success…
Editor's note: Today we interrupt our regular Digest fare to bring you an essay from Enrique Abeyta of our corporate affiliate Empire Financial Research.
Regular Digest readers may have noticed Enrique's perspective on the markets occasionally in our dispatches over the past few months. It's hard not to listen to what he has to say. "I'm a 'make money' investor," Enrique says of his approach.
In other words, he doesn't necessarily care precisely how he does it or if it's controversial, but he has a pretty good idea of what works in any given market environment... even if it's contrarian.
Enrique's made millions for wealthy hedge-fund clients through multiple crises... like the tech meltdown... 9/11... and the financial crisis in 2008. And he's led three different major hedge funds... One of which he grew by 130,000% in four years...
Today, Enrique, a dear friend and colleague of Empire Financial Research founder Whitney Tilson, shares a peek behind the curtain at his strategy and just a part of his one-of-a-kind and inspiring life story, which took him from Arizona to Wall Street and back again.
We hope you enjoy today's essay... And if you're interested in learning even more about Enrique and the world-class hedge-fund-style independent research service he recently launched, we urge you to check out this documentary-style video on him that was just released.
My parents met in a casino in Reno, Nevada in 1970...
My mother worked as a cigarette girl. My dad spent a lot of time in Nevada. Although he ran a chain of beauty shops in the area and worked as a hairdresser, he would tell you he was first a professional gambler.
When I (Enrique Abeyta) was a kid, this seemed to be a generous assessment of his "profession." He gambled every day – keno was his game of choice – and through the years, he had a few big winners, though he certainly gave that money back over the long run.
Having always loved numbers myself, I began to study the math of different casino games.
I always found blackjack to be the most interesting game...
What fascinated me about blackjack is that for every hand, there is a mathematical "answer" to what you should do next...
Depending on what the dealer is showing and what cards you have, you can know exactly what to do to maximize your chances of winning the hand.
Of course, the casino holds the advantage. Even if you play perfect blackjack, the casino always has a house edge of about 0.5%.
The single most difficult psychological decision for blackjack players is what to do when you have 16 and the dealer is showing a 7 or higher.
The correct answer is that you should "hit" (i.e., ask for another card)... But if you do, you'll "bust" (i.e., get a card that pushes you over 21, and therefore lose) nearly 77% of the time.
It's difficult to understand why math says you should knowingly make a bet if you know you're going to lose more than three-fourths of the time.
But the math says it's the right play, due to the high probability that the dealer is sitting on a 17 (or greater) – and therefore likely has a hand that will beat you unless you take a chance to improve it.
This example works equally well playing at the tables in Vegas and trading stocks on Wall Street...
Sometimes, the best decision may be to do something that seems like a losing trade – and perhaps it will be in the near term – but it's still the right move.
In October, I told my Empire Elite Trader readers to close out of our position in streaming company Netflix (NFLX). We bought the stock based on an extremely oversold condition, and it worked perfectly... Just 18 days later, we closed the position for an 8% gain.
The company was set to report earnings the next day. Because our original trade had nothing to do with earnings, we decided to take our profits off the table.
Following satisfactory earnings, NFLX shares skyrocketed higher in after-hours trading, at one point soaring 10%. One subscriber accused us of being "shortsighted." But did we make a huge mistake?
The next day, Netflix closed up 4%... And within a few days, it was trading 5% below where we sold. Though shares eventually turned back around and have since continued higher, the trade reiterates an important investing lesson...
If you have a plan, stick with it...
It's like hitting on 16 when the dealer is showing a 7: Sometimes your plan works, and sometimes it doesn't. But if you have a plan in place – and you stick to it – you give yourself the best odds of winning.
Of course, hopefully your trades have a higher chance of working out than a hand of blackjack. But investing does include a chance of losing your money.
That's why the most important thing you can do as an investor is to be disciplined.
Whether you're gambling in Vegas or investing in the stock market, one of the first things you should do is lay out your goals. When I play blackjack, I have two goals: to enjoy myself and to try to win money.
In investing, "enjoying yourself" is a valid goal, too. Investing can be intellectually engaging. It allows you to learn about new businesses, economics, and human behavior and psychology.
The difference is, you are not at a mathematical disadvantage when you invest (if you do the work and maintain your discipline).
When I walk up to the blackjack table, I make two decisions ahead of time: how long I want to play and how much money I'm willing to gamble (and potentially lose). Then, I either lose it all (and walk away from the table) or double my money (and walk away from the table).
That's an approach that has treated me well on the blackjack tables – and in the stock market – over the last 20 years.
In blackjack and investing, you'll do much better over the long run if you plan the trade and trade the plan...
This means you must do three things...
1. Never gamble (or invest) more money than you can afford to lose
This one is self-explanatory. Whether you're gambling or investing, it's never a good idea under any circumstance to bet your mortgage or rent payment. Enough said.
2. Stick to your bankroll
Position sizing is key. In the same way you shouldn't push all of your chips in on a single hand of blackjack, you shouldn't go overboard in any one stock.
Generally, I recommend taking larger positions in bigger, more liquid companies with long operating histories. The chances that you suffer a major loss with them is much lower, which means you can bet bigger on them. Alternatively, for smaller, more volatile stocks, you should size them smaller to help mitigate your potential losses.
3. Have an exit strategy
Your "plan" can take many forms, but the easiest exit strategy in the stock market is using stop losses.
It's simple math... If you set your stop loss, say, 25% below your entry price and you're disciplined about executing it, then you'll never lose more than 25% on any single position.
You can widen or tighten your "trailing" stops depending on the particular stock and its volatility. But the percentage itself is less important than actually sticking to the plan.
A losing position can be mentally overwhelming, which can cause you to make other mistakes in your portfolio. Using the blackjack example, imagine being so preoccupied by a previous losing hand that you then fail to make the right decision in the next hand.
Staying disciplined with stop losses also protects you during a market correction or an outright bear market...
The vast majority of the time – more than 90% – the stock market goes up. Several times a year, though, the market falls in what should be considered a "healthy" balancing of the sentiment in a bull market. Sometimes, these corrections aren't just a brief balancing of sentiment, but the start of an extended downturn. This is where investors can suffer massive losses.
Stop losses kept my hedge fund afloat through the major downturns over the last 30 years – like the historic collapse of Long-Term Capital Management, the bursting of the dot-com bubble, and the 2008 to 2009 financial crisis.
For 99.9% of the time, the market environment is one where using trailing stops in a trading portfolio is the right move.
These three principles are key to long-term investment success. They'll make sure you plan your trade and trade your plan... and help you maximize your winners and minimize your losers.
New 52-week highs (as of 5/11/20): ProShares Ultra Nasdaq Biotechnology Fund (BIB), Calibre Mining (CXB.TO), Dollar General (DG), DocuSign (DOCU), Lonza (LZAGY), MarketAxess (MKTX), Rollins (ROL), and Sea Limited (SE).
In today's mailbag, a variety of feedback on yesterday's Digest... Do you have a question or comment? As always, send it to feedback@stansberryresearch.com.
"Dear Corey McLaughlin, Interesting article today – I agree the recovery will begin to happen when people get over their fear but I don't see the majority getting over the fear because they are still being conditioned to be fearful by the media and their governments.
"This is not a viral pandemic, it is a fear pandemic that started in China and was promulgated by the WHO in cahoots with most governments and mainstream media that was used as a pretext for removal of liberties (social distancing and lockdowns, closure of 'non-essential' businesses). The notable exceptions being Sweden (no lockdown but social distancing) and Belarus (no lockdown and no social distancing).
"The leader of Belarus said the pandemic is 'psychosis' and 'it is better to die on our feet, than live on your knees.' He is so right.
"So which countries have the highest death rates per million? Looking at figures here (as of Monday evening), we can see: Belgium (751), Spain (572), Italy (508), UK (472), France (408), Sweden (322), Netherlands (318), Ireland (297), USA (247), Switzerland (213). But Belarus has only 14 deaths per million.
"You can't say Belarus has less cases per million. It has 2,530 per million, comparable to Sweden at (2,641) and France (2,718). You can't say it's demographics. Belarus has 14.2% over 65, Sweden has 20.2%, 6% fewer 65+ year olds does not explain a 95% lower death rate.
"The only explanation is fear and repression. Fear and lockdown and social distancing leads to more deaths than just carrying on as normal and letting herd immunity do its job, just as it has done for millions of years.
"Even given all this, the numbers dying of COVID do not look like a viral pandemic...
"How many deaths from COVID? 287,543 that's how many. This is less than the number of malaria deaths and just 63% more than the number of flu deaths. Does that sound like a pandemic?
"If people don't wake up and go back to normal and demand their governments end this madness then there will be a depression that makes the 1930s look like a walk in the park...
"The virus is nothing to be afraid of unless you are over 65 and/or have pre-existing health conditions (people in this group have weakened immune systems).
"We are all germ incubators and have evolved and flourished that way for 2 million years – that did not change because covid-19 came along.
"COVID-19 is not a danger to health because humans have an immune system that enables us to keep pathogens under control, in fact some bacteria are beneficial and strengthen our immune system (I am sure you have heard of probiotics).
"So long as we have a good diet, fresh clean air, daily sunlight (for vitamin D production) and are free from fear (stress), then our immune system can protect us from covid-19 or any virus.
"Vaccines on the other hand are unreliable and can be dangerous due to the presence of adjuvants such as mercury, aluminum, formaldehyde and 'live' attenuated viruses (it's true, look it up if you don't believe it).
"Viruses are constantly mutating but a vaccine only 'protects' against one or more strains of a virus – not all. This is why the flu shot changes every year.
"There are 500 strains of coronavirus. Do you want a vaccine containing 500 viruses?
"If you people at Stansberry would put this information out there, you could help pop this fear bubble and maybe we can all get back to normal." – Paid-up subscriber Steven I.
"Yes, when 'we,' the people, say so. Obviously not 'we, the Stansberry editors,' which is what I thought that headline said at first glance. Hah!
"And the point that PT Jones made about the difference in how Eastern and Western (esp. American) societies respond to a problem like this – that is Massively important! A group-focused society is going to beat an individual-focused society by light years when attacking a pandemic. Then, when Asia winds up with better numbers (illnesses, deaths, etc.) than we do, the 'leaders' here will look to anything BUT the real answer – the differences in our societies...
"But none of the 'leaders' here can see past the next election. I'm old enough to remember when it wasn't as bad as it is now. Oh, for the days of a Tip O'Neil. Heck, I'll even take Newt. None – and I mean NONE – of the 'leaders' today are worthy of the title." – Paid-up subscriber David B.
"The only thing the media and the 'experts' like Fauci are peddling is fear. We would all be better off to ignore them. They have a history of being wrong. Fauci said in January there was no reason for concern. Later he said there would be 2 million deaths; then he said 60,000. And what about those masks that he ridiculed as being unnecessary but, are now being mandated?
"The ONLY question that matters is this: What is the ACTUAL Case Fatality Rate from the virus?
"It does no good to know how many people have been tested because many more than that have not. That only tells you how much profit the test manufacturer has made.
"It does no good to know how many people have died WITH COVID-19 or with COVID-19-like symptoms. That is only so much baloney and the hospitals are being egged on by the government to over-report – essentially committing fraud on us all... $13,000 payment if a hospital treats someone with COVID-like symptoms; that jumps to $39,000 if the patient gets put on a ventilator. Gee. I wonder what the hospitals are going to do.
"The only question that matters is how many people have died FROM the virus?
"Only when we know that number can we compare COVID-19 to the regular flu. If it is about the same – and, it increasingly looks like it is – then we can make good policy decisions.
"If only 'we' will decide the future, as today's Digest asserts, then, if this [virus] is the same as for a regular flu, then we should immediately stop all this malarkey about social distancing and wearing masks. What are we protecting ourselves from? Getting a sickness that, for 80% of the sick amounts to only mild symptoms with a heavy bias of being asymptomatic? That is no reason to give up Constitutional rights. The Constitution is the only protection from tyrants...
"When I heard that 15% died from the first study out of Germany, I was freaked out. No one had heard of COVID-19 at the end of January because the name had not been invented yet. Then I heard those numbers were from an ICU. Well, that makes them less alarming. As more information came out I have become more and more convinced that this whole thing is a bunch of over-blown baloney foisted on us by a bunch of tyrants. They are no different from any other tyrants. They are just using bald fear about a disease instead of equality of workers, socialism, environmental disaster, etc., as their means.
"I'm 66. If I haven't already gotten the virus, I hope I do soon. Give me antibodies and I can look the tyrants square in the eye and tell them to go to hell." – Paid-up subscriber Bill S.
"You are 100% right. The stay-at-home orders are against our constitutional right. I'm 74 years old I did not stay at home. I'm sorry, I did not wear gloves or a mask. I treated it like any other flu season. Surprise, surprise, I'm still here. I am sick and tired of the government telling me what to do in my personal life." – Paid-up subscriber Judy B.
"From your Monday, May 11, Digest: 'So this begs the question... '
"... note the difference between "begs the question" (almost always used incorrectly) and "raises the question" (almost always what is meant when 'begs the question' is used. – Paid-up subscriber Richard B.
Corey McLaughlin comment: I beg your pardon, and I spy a missing parenthesis in your note.
Regards,
Enrique Abeyta
Phoenix, Arizona
May 12, 2020
Editor's note: Before you go, we urge you again to check out the documentary-style video on our friend Enrique Abeyta. You'll learn all about Enrique's fascinating background, life experiences, and his recently launched hedge-fund-style research service...
Enrique also gives away one of his favorite stock ideas just for tuning in... and shares the details on a "Charter Membership" to his service, which includes more than $2,200 worth of free bonuses.
But don't wait – the folks over at Empire Financial Research are offering memberships at this steep a discount for a few days only. Get the details here.