The well-known Ned Davis, investment strategist and author wrote a very interesting book in 1991, called “Being Right or Making Money.” 

The synthesized concept of the book was that you can be right fundamentally but in the mean time you can lose your shirt. Does 2000 and the market bubble ring a bell? I had a close friend who was very short YAHOO! in 1999. He got fired. He was right, but unfortunately he ran out of time. “The best thing he could hope for is to die in his sleep.”

Let’s take another example. 2008. It was clear to some of us that the real estate market, the financial situation, was in jeopardy. So you go, all in. You short the market. You go long volatility. Your fundamental guys agree… There is a problem here. A real and significant problem, game on! 

Everyone in trouble, poor dummies

So now let’s just put on the positions. We got this figured out, now we wait and watch the show. Fannie Mae, Bear Stearns, Lehman Brothers, Merrill Lynch, AIG. You get the idea, everyone in trouble. For some it was clear, for others it was not so clear… Those poor dummies! The dummies lost so much money! Not so fast though, maybe there is something lurking behind us…

If you had this trade right you were a superstar… You were right, lick your chops! You were so darn smart and intuitive. As in the song by Kenny Rogers in 1978, “The Gambler” he said, “Son, I’ve made a life out of readin’ people’s faces and knowin’ what their cards were by the way they held their eyes. So if you don’t mind my sayin’, I can see you’re out of aces. For a taste of your whiskey I’ll give you some advice.” 

By the way while we are at it, Michael Vick used to wear a visor as a quarterback for the Philadelphia Eagles in the NFL. The visor was designed to eliminate the ability of the defense to watch Vick’s eye movements. If you are really (and I mean really) on top of your game, do it different, be a Tom Brady. You WANT them to see your eyes. Master of deception!
 
So it gets better, you were right! You predicted the 2008 financial crisis…

Fundamentals rule! We got this nailed!

Over to old timer Kenny please: “You never count your money when you’re sittin’ at the table. There’ll be time enough for countin’ when the dealing’s done. Every gambler knows that the secret to survivin’ is knowin’ what to throw away and knowing what to keep. ‘Cause every hand’s a winner and every hand’s a loser and the best that you can hope for is to die in your sleep.”

Never count your money when you’re sittin’ at the table

So how can our hand be a loser? We got this trade nailed! Margin calls, prime brokers panic, volatility spikes! Just awesome! Let’s count our money while we are sitting at the table! 

Know when to walk away, know when to run.” Just then as the crisis was setting in the Federal Reserve steps in. Everything was a low risk AAA-rated investment. Really? The Fed backs AIG at the last minute. The Fed floods liquidity for the market. Every remaining financial institution gives a huge sigh of relief. AIG was crucial as the insurer of almost last resort. “Money for nothin’, and your chicks for free”, Dire Straits, 1985, should instead we say: “Money for nothing and your checks for free?” No matter…

The Federal Reserve “saves the day!” All those smart people who may have been fundamentally correct were carried out. The “dummies” not only survived, they thrived… Those who thought they knew the fundamentals did not realize the “blind side”, the Federal Reserve…

Being smart or making money? Which do you want? 

Those short the market did their homework. They tried so hard to understand. They were so intent on being right they forgot to make money… “Know when to walk away, know when to run.” The Fed is coming! Sort of like the cavalry… Never trust the U.S. Government…

Indians run, short sellers run! If you believe the U.S. government is keeping it’s word, just ask an old Indian tribe, or a short seller. The landscape changes at the whim of the U.S. Government. Always has, always will.

Just make money, no need to be smart. Fundamentals are really that, just idiocy. Watch out for the ‘blind side.’

Being right or making money…