What Betting on Horses and Picking Stocks Have in Common

  
0:00
-3:24

The Pari-Mutuel System

From Poor Charlie’s Almanack, page 195:

The model I like — to sort of simplify the notion of what goes on in a market for common stocks — is the pari-mutuel system at the race track.

If you stop and think about it, a pari-mutuel system is a market. Everybody goes there and bets and the odds change based on what’s bet. That’s what happens in the stock market.

Any damn fool can see that a horse carrying a light weight with a wonderful win rate and good post position is way more likely to win than a horse with a terrible record and extra weight.

But if you look at the damn odds, the bad horse pays 100 to 1, and the good horse pays 3 to 2. Then, it’s not so clear which is statistically the best bet using the mathematics of Fermat and Pascal.

Amazon ($AMZN) vs. Carnival ($CCL)

Since news of the coronavirus hit, Amazon’s stock has fallen ~17% while Carnival’s stock has fallen ~84%.

Is Amazon a better business with better growth prospects? Absolutely.

Will Amazon be a better investment than Carnival over the next 3-5 years? That’s much tougher to figure out.

As dominant as Amazon is, it’s hard to imagine a scenario where their stock doesn’t crush Carnivals.

But I’m asking myself, who’s stock is more likely to double over the next five years? Amazon or Carnival? (assuming Carnival doesn’t go bankrupt)

Amazon would have to hit ~$2 trillion for a double. Carnival would have to make it back to $24 (currently at $12).

On the flip side, which stock is more likely to get cut in half or go to zero. Carnival.

Which scenario is more likely? I don’t know. But that’s the point Charlie was making. Once odds are introduced, it’s not always clear what’s the best bet to take.

And unlike horse betting, we don’t know, in advance, what the realized upside or downside would be for a stock. We can only guess.


Stocks to Watch: FAANG Edition + Microsoft

The next few issues will feature lots of charts.

Why is that? Well, we believe that prices move before the fundamentals become clear. And at this point, nobody knows how the fundamentals will shake out.

Charts are a visual representation of the market participant’s actions. Not opinions!

We use charts to find:

  • A place to enter long or short positions.

  • A place to exit if we are wrong.

  • And a place to take profits.

👉Read why we use technical analysis👈

Facebook ($FB)

What’s their chart telling us?

  • Their stock has fallen by ~30% after hitting $220 in January of this year.

  • Look for demand at $140.

  • If $140 breaks, look for demand between $120-$126.


Apple ($AAPL)

What’s their chart telling us?

  • Their stock has fallen by ~25% after tagging $320 in January of this year.

  • Look for demand at $220.

  • If $220 breaks, look for demand at $200.


Amazon ($AMZN)

What’s their chart telling us?

  • Their stock is holding up well. It bounced near the $1,600 demand level.

  • If $1,600 breaks, look for demand at $1,400.

  • Where we would get concerned: A monthly close below $1,400 would tell us the likelihood of a deeper drawdown has increased. The 50 MMA (month moving average) is around $1,400 (see chart). The stock hasn’t had a monthly close below that average since 2008.


Netflix ($NFLX)

What’s their chart telling us?

  • Their stock has traded in a $240-$385 range since February 2018.

  • We’re looking to trade the range until one side breaks. Our bias is towards the upside.


Google Class A ($GOOGL)

What’s their chart telling us?

  • Their stock has fallen by ~30% since tagging $1,500 in March of this year.

  • Look for demand at $1,000.

  • If $1,000 breaks, we’ll have to reevaluate our downside targets.


Microsoft ($MSFT)

What’s their chart telling us?

  • Their stock has fallen ~25% since bumping $190 in February of this year.

  • Buyers showed up at the $140 demand level.

  • Look for a move to $120 if $140 doesn’t hold the downside on a retest.


Thanks for reading, have a great day, and stay safe:)

Caleb