hi everybody Nick Coles from datatruck here hope you're having a good day this is our new video channel we're going to try something new here for a while and put out some of our work in video form see what you think see if you like it uh if uh it catches some tractional obviously keep up with it and the purpose of the videos are really just to give you a sense of how Jessica and I think about the market think about the issues going on and put some context around our daily work and perhaps a different format so the stuff that we'll talk about in these videos is just as much uh sort of longer term thinking as what's going on in markets day-to-day that we cover a lot of the data track morning briefing if you like the videos obviously so feel free to sign up for a trial at the datatrack research.com the topic I wanted to discuss today was kind of a simple format which is three things that I've learned over got 30 plus years of investing and working on Wall Street that I think might be of use to to you and I want to break it down in kind of a three bite-sized nuggets the first one is a very simple one but I think a lot of people still ignore and that is you gotta respect price momentum it sounds super simple but it is not I learned this working for Steve Cohen at the Old Sac as a PM and analyst and it really stuck with me over the years and it's very simple it's a very simple rule never sell a new high never buy a new low and it sounds kind of childish in its Simplicity but it is absolutely important to understand why it works and why it works is price momentum is a critical factor in how Capital markets behave both to the upside and the downside it's especially true in growth stocks if you look at the academic work on price momentum and other big factors in investing you're going to find that growth and pressure momentum are two of the most addictive factors for future stock returns so if a company is growing and the stock price is going up it tends to continue to outperform it shouldn't necessarily work that way but it absolutely does a simple example right now literally from today is the queues the NASDAQ 100 or the NASDAQ or big Tech most of those names are making two new 52-week highs their growth companies with price momentum it's very hard to step in front of that terrain you know I've seen a lot of people make this mistake over the years and think oh my God a stock is at a new high it's not going to go up anymore it's overextended it's overvalued by and large that thinking is wrong you got to wait for a pullback you got to wait for those prices to stabilize before you either start thinking about lightening up or shorting the stock so price momentum is the first lesson that I've learned it really has stuck with me the most of anything that I've seen in 30 plus years on Wall Street the second one is a little bit of a longer term or behavioral kind of concept and it's a prospect theory it's the first idea from a behavioral Finance to win a Nobel Prize uh Daniel Kahneman won it and Amos diversky his partner who passed away before the Nobel was offered um contributed a lot to the work and it's a very simple idea but again kind of counterintuitive and it basically says losses prospective losses hurt us psychologically about twice as much as equivalent sized uh gains so if you're worried about losing a hundred bucks you kind of have to be hope that you are going to make 200 in order to have kind of an equal amount of psychological impact but I'll give you a simple example let's say I offer you a coin toss game very straightforward but I'm going to offer you a hundred dollars to not play the game at all or I'll offer you a 300 prize if you guess the coin flip correctly now the expected value of the game is obviously 150 bucks 50 50 on 300 so you should take that but lot of people take the 100 sure thing and why is that because they sort of fast forward their lives and think huh if I had chosen the hundred dollars then I wouldn't have to have guessed the game correctly and if I lose the game I'm going to feel pretty stupid for having given up the hundred bucks so in practice people need to have a coin toss for like a 400 win or loss you know to offset the losing of say a hundred dollars so it's a two to one ratio and the reason I think it's important to investors is you really have to feel like your ideas have a two to one payoff ratio so if you're thinking about a stock that's a hundred you are going to really want to see 20 upside and only 10 downside otherwise it's just very hard to stay in the position so you have to have conviction and conviction really stems from that two to one ratio if you're thinking okay it's maybe got 15 20 points of upside but kind of an equivalent downside you're not going to stay with that position very long whether it be as a long-term investor or a Trader so prospect theory is again a really important idea to keep in mind as you go about thinking about new positions and new investment ideas the last one is something that's a bit of an anomaly and it basically says the Market's never wrong but the Market's also always wrong because obviously prices change every day and this comes from Efficient Market Theory which I learned to Chicago and business school you know from the folks who invented the gene Pharma and the rest of that crew and they were very clear to say efficient market theory doesn't mean that stocks are always perfectly priced correctly priced it says that there's no reliable way to figure out which ones are incorrectly priced and the reason that's important is you again back to the prior point you need High conviction ideas those are the ones that in concert with your research your thoughts and then analyzing if your information is not in the market give you an investment Edge and that's again a super critical point I'll give you an example here and it's one that I think people don't talk about enough over the last 10 years the S P 500 has compounded a 13 a year which is a great return kind of a little bit above average but a great return the rustles of eight percent compounded over the last decade again a solid return perhaps not as what it should be for being small caps but a solid return rest of world stocks are only up four percent on a compounded basis over the last 10 years and you might look at that and say huh that's got to be an anomaly right how can the rest of world be only half the Russell and a third of the s p they must be ready for a ketchup and a lot of brokerage firms are talking about that I look at it entirely differently what those returns are telling us is that there's something fundamentally different about the U.S economy and the U.S capitalism versus Europe or Japan or emerging markets and it's very simple U.S companies are just better allocators of capital they have Global opportunities in many cases look at big tech for example or any big Industrial company they're well managed and they have very strong competitive positions more than anything they focus on keeping returns High where rest of world simply does not and so I don't look at that spread in last 10 year returns as any kind of anomaly that the Market's got something wrong remember the Market's never wrong what you have to do is understand what the market is saying and what the market is saying is U.S companies are just better their valuations are higher and they should be their returns are higher over time and they should be and so that's one reason probably the major reason that a data Trek we recommend being overweight U.S stocks and really think long and hard about why you want to invest overseas and you had better pick companies that are very good at least as good as the average U.S company or those stocks are very likely to underperform so those are the three basic ideas that I wanted to outline today just to summarize respect price momentum never short or sell a new high or buy a new low wait for prices to consolidate before establishing positions that are contrary to Trend the second is remember that prospect theory says that loss is way much more heavily honest than gains so manage your emotions and manage a process around that fact and then lastly the Market's never wrong but when it is you have to really figure out what your Edge is before taking an investment position in a particular idea and our idea there is basically overweight U.S stocks so I hope those thoughts helped we'll come back with ideas if you have ideas for us to talk about shortly leave them in the comments subscribe if you like this this video and um we'll talk to you soon bye-bye