I had never played poker before, but my college roommates invited me to their game anyway. Maybe they thought I was an easy mark. What I lacked in skill was compensated by an old-fashioned poker face. I bluffed my way through knowing nothing and won. It was both a great and awful introduction to poker. It's a great feeling to win, but when it's pure luck, it likely isn't repeatable.
I thought poker was a silly game of chance, but I learned that poker can be a skill, not a gamble. The top 20 poker players have earned a collective $621.5 million. Brian Kenney stands at number one, taking home $55.5 million.
These players don’t make that in one game – they amass their fortune by winning again and again. I wanted to be an astronomer. Maybe I should have wanted to be a poker player instead! However, my favorite astronomer Andrea Ghez has a net worth of $84 million. So, if your kid tells you she wants to be an astronomer or a poker player, have an open mind.
Self-made trader Larry Hite said: "There are just four kinds of bets. There are good bets, bad bets, bets that you win, and bets that you lose. Winning a bad bet can be the most dangerous outcome of all, because a success of that kind can encourage you to take more bad bets in the future, when the odds will be running against you. You can also lose a good bet, no matter how sound the underlying proposition, but if you keep placing good bets, over time, the law of averages will be working for you."
In life and poker, you need to know your odds. When you're holding aces, you bet big. Even non-players know that. The odds are on your side, and you could win big. You may lose if someone else has a better hand on a fluke, but it's a good bet.
When you have nine-deuce, it's a low-odds hand. Why risk your stack on crappy odds? Would you advise anyone to cash out their 401(k) to buy lotto tickets? No, you sit and wait.
Right now, we got dealt a low-odds hand. Markets are heavily overbought. Buying in now for the long term should be fine, but the short-term odds say: don't expect greatness.
The following shows the Big Money Index (BMI). It measures all buying against selling over a 25-day moving average in terms of buying. When there's tons of buying and hardly any selling, it's a high number; i.e., all buying and no selling is 100%. In late December, we reached the red area of the Big Money Index – that's the warning that buying is extreme.
That doesn't mean to go out and sell stocks. The BMI will tell us when the wave of buying crests. When it starts to decline and the data changes, that is great information. Now we don't know when the massive buying will stop and the shift will begin. It might be today or in six weeks. It will eventually stop though.
When will the buying wave crest? They say: don't fight the tape. Well, don’t fight the BMI either. Generally, stocks are going up if the BMI is rising. When it's going down, stocks tend to follow. The BMI is accelerating right now. It makes sense given the one-way market the past three-plus months.
This is what a crest looks like. A few weeks ago, we talked about health care becoming overbought. That light blue line is the wave cresting. Buying has slowed, and we expect the index to fall soon.
The big money is made by holding the best stocks over long periods. The big returns are made by being patient and going all in when you get handed aces. Those who went in when the odds said it was a good bet are enjoying great gains now.
Watch the waves, and let them tell you what to expect. If it feels unnatural, just remember that investing can be seen as chance or skill – just like poker. You can learn to win at poker and investing. Just ride the wave. "You can't stop the waves, but you can learn to surf." – John Kabat-Zinn
The Bottom Line
We (Mapsignals) continue to be bullish on U.S. equities in the long term, and we see any pullback as a buying opportunity. Weak markets can offer sales on stocks if an investor is patient.
Disclosure: The author holds no positions in any stocks mentioned at the time of publication.