Turn Trivia into Your Gold

One of my favorite Wall Street stories is how the human greed in securitization of subprime mortgages caused the 2008 financial crisis. The book The Big Short describes it in what we now know but always fail to recognize then: A major event can always start small and go unrecognized. Smart investing is about identifying such seemingly trivial but influential trends and profit from them with the right timing and patience.

The trivia can be gold. History also sometimes repeats itself, but never in the same way. You must have sharp eyes/ears to separate opportunities from noises, identify long-term winners vs. losers, and be patient to get rewarded.

Bet Smart/Invest Long-Term

But How? What to watch for? A smart strategy is to invest in an index fund and hold it for 20 or 30 years. But if you like being rewarded for taking calculated risks, but not sink your time by day trading, you need to invest in individual stocks and adopt a long-term stock picking/trading strategy. In this arena, the playing field is levelled, because even the best portfolio managers can pick the wrong stocks at the wrong time, and an ordinary investor can turn opportunity into gold if he listens, does his research, and waits for the right moment to build profitable position. The market is not always efficient either, creating opportunities for smart investors to take advantage of four types of investment opportunities:

Grey Rhino: There are an abundance of signals for opportunities or dangers, but the market chooses to ignore. The best example is the what the Big Short story is about.

Fallen Angel: Wounded but well positioned for turnaround. Apple in the early 2000 is a good example. The market severely underestimates the company's ability to turn around and overlook its fundamentals by punishing its stock short term. This is a prime example of value investing.

Dark Horse: Unknown to the majority of investors but has the potential to disrupt an industry, displace the market leader, or both. Uber or Airbnb come to mind.

Soaring Eagle: These are the market darlings with high valuation/high risk. Its price movement can be volatile, and timing can decide everything. But if you believe its long-term potential and see what other investors miss, you can still profit long term by riding its ups and downs at the right juncture. Tesla is a good example, so is today's Nvidia.

Continue reading, think aloud, open your eyes, share and debate. Investment is fun if you play the trivia game long term.