Gary Kaminsky is the cohost of CNBC's "The Strategy Session" and has been one of Wall Street's savviest money mangers in recent history.
In his new book, Smarter Than The Street, he brings more than two decades of experience to his low-risk, high return system, demystifying Wall Street for novice and seasoned investors alike.
While working for Neuberger Berman, Gary built his Street reputation overseeing nearly $13billion in assets. He and his team were able to grow record-breaking returns far above the S&P benchmark – and he says they didn’t do it by magic. Instead, they had a specific strategy.
Now he’s sharing that strategy with readers.
In his book Gary shares with readers how to:
- Develop the same habits, reflexes and practices of top market performers
- Create a proactive buy-and-sell strategy
- Beat the roller-coaster market trends-and focus on long-term returns
- Make smarter, more informed decisions – and more money!
Joseph V. Amato, president of Neuberger Berman has written the foreword in Gary's book and says, "Smarter Than The Street", should enable almost any reader to become more knowledgeable and disciplined, and ultimately, a more effective investor."
Continue on to the following pages to read a guest blog by Gary and an excerpt from his new book, Smarter Than The Street.
THE SIGNIFICANCE OF CONTRARIAN THINKING
Guest Author Blog:Smarter Than The Streetby Gary Kaminsky.
Guest Author Blog
It takes a great deal of fortitude to make it as an individual investor. Over the past two decades, I have witnessed too many of them fall victim to the Wall Street machine. The injustice concept led me to write Smarter Than The Street, a guide full of lessons learned and lessons I wish to impart. Providing tools to succeed through all market conditions is an achievement for which I have aspired in documenting my experiences.
In Smarter Than The Street, I specifically address the importance of psychology throughout every challenging episode of investing. Mental discipline might very well be the most important facet to master. I write in the book that, "passivity is the enemy," to counter the point made by Wall Street marketers who attempt to sell the contrary position.
But to be active, one needs to know the correct direction, and here's where my way of thinking separates from the pack.
Many times on CNBC's "The Strategy Session"and in my K-Calls, I have stressed the significance of contrarian thinking. This is where the fortitude comes into play. When the wisdom of powerful and influential Wall Street minds are instructing smart money to go one way, it takes courage and patience to go against the herd.
Am I implying that the masses are always wrong? Not necessarily. But overcrowded trades quite frequently reveal real truths. The majority of investors do not make the right decisions at the right time. If you believe this like I do, why would it not make sense to be a contrarian?
This is why I devoted an entire chapter to, "Taking The Other Side of The Trade." It takes a certain intelligence in anticipating trends, observation of market behavior, and quite simply, the right amount of guts. But if you consider the two sides of every trade in the capital markets, and why each side is chosen, contrarian thinking will make more and more sense.
EXCERPT-THE OTHER SIDE OF THE TRADE
Text copyright © 2010 from Smarter Than The Streetby Gary Kaminsky. Published by McGraw-Hill. Printed with permission of McGraw-Hill.
Chapter 4
Take The Other Side Of The Trade
Every Time You Buy a Share . . .
One thing people always forget is that every time you buy a share of stock, somebody else is selling it to you. And every time you sell a share, somebody else is buying it. While that may seem like a truly obvious thing, it really isn’t. There are very few places in commerce where that type of interaction takes place.
For example, when you go into a deli and buy a sandwich, the sandwich is made, you eat the sandwich, and at the end of the experience, the sandwich is gone. There’s an applicable example with food.
Let’s take another example. Assume that you are about to purchase a new computer. The computer has been manufactured and shipped to a retailer, and it is now purchased by you. That computer is now off the market, as you own it. That’s what makes the capital markets so unique: There is simply no end to the transaction. Every time somebody is buying, somebody else is selling. There’s no terminal value for that exchange. Each transaction is just one facet of the movement of that paper, which—barring some sort of extreme scenario, such as a bankruptcy filing or a merger or acquisition involving that company—goes on indefinitely.
Let’s look at a specific case. One stock that I have followed closely is a company called Lululemon, a company that makes athletic apparel for yoga, dance, running, and other activities for men and women. I am shorting the stock, and as I write this chapter, Lululemon is selling for about $26 per share. The stock is down a little more than $1, or 4 percent, in a 24-hour period.
One of the first things we know about this stock is that there are more sellers than buyers. How do we come to that conclusion?
With everything else being equal, meaning that everybody who is buying and selling theoretically has the same information, the stock is going down, so there must be more sellers than buyers. The opposite is obviously also true. If the stock price is rising, we know that there are more buyers than sellers. When there’s positive news out that may drive the price of that stock up, a seller will still be willing to sell you those shares, but only at a higher price. That’s because he believes that the news that is out there has created more value in the company, and the market has reinforced that belief.
And the opposite holds true as well; if there is bad news about a company whose stock you own, perhaps involving a new competitor taking market share away from that company, then the buyer will take that dislocation in the marketplace and use it to her advantage to entice you to sell her your shares at a lower price.
While this may seem simple and obvious, I argue that the majority of the time, people who are buying and selling shares are thinking only about what they want to do, as opposed to exploring the real underlying motivation of the person on the other side of the trade.
Let me use an analogy from the world of gambling. Great poker players don’t play only their own cards—they play the cards of the other players at the table. Only the weakest of poker
players plays only his own cards, and a player that does so usually ends up losing his shirt. He has dealt himself a huge disadvantage.
Alternatively, a strong poker player can win even when she doesn’t have the best cards at the table. By figuring out what the other players have, she may be able to bluff others out of
the hand, knowing that while she doesn’t have a strong hand, neither do any of the other players at the table. So her rivals may all fold their cards if she makes a really strong bet.
The game of blackjack offers a similar analogy. When you sit down at a blackjack table, you may think that you are playing only “the house.” But that’s not true. You need to pay attention to the behavior of the other players at the table. They are an important factor, especially if you are following a disciplined approach while at least one or two of the other players are novices who tend to do the wrong things at the wrong times.
Let me extend this blackjack example: Let’s assume that your strategy is that when the dealer shows a low card (a two through a six) and you also have a low card, you will never “hit” (take
another card). That’s your strategy, but other players at your table are not disciplined and instead take a card even when the dealer is showing a low card. In that scenario, the probability of that dealer’s “busting” (e.g., going over 21) based on normal circumstances has now gone down because the other guys are throwing probability to the wind and taking cards when they shouldn’t. It’s not random because you know that there are only
a certain number of face cards in the deck.
Let’s take the example back to investing. If you are not thinking about the factors that are motivating the sellers when you are buying, you’re putting yourself at a competitive disadvantage. Obviously you are buying shares when others are selling. But the
greatest way to take advantage of others’ missteps is to try to identify when sales are being made for nonrational reasons.
Apple Computer offers an ideal example of why it is so important to understand the motivations of others. In January 2009, Apple CEO Steve Jobs announced that he was about to
take a leave of absence because of health issues that were “more complex” than he had first thought. He told employees and shareholders that he would return in June, but that he would
“be around for major strategic decisions.”
However, skeptical investors who felt that Jobs was the greatest CEO around did not believe that Jobs would be back so soon, and many thousands of them dumped their Apple shares.
As a result, Apple lost about 8 percent of its value in after-hours trading on the day that Jobs made that announcement. Around five months later, at the end of June, Jobs returned to work—just as he had said he would.
Now, let’s look at what happened to the stock. When Jobs announced that he was taking that leave, the stock dipped into the 80s. A year later, Apple was making new record highs, trading
well above $200 per share. If you were one of the strategic investors who felt that Jobs would indeed return and that the company would not fall off a cliff in the interim, you might have
viewed that announcement as a buying opportunity. Had you bought those shares, you would have more than doubled your money, achieving a stunning return in excess of 150 percent.
That is why it is important to examine the motives of the guy on the other side of the trade.
Text copyright © 2010 from Smarter Than The Streetby Gary Kaminsky. Published by McGraw-Hill. Printed with permission of McGraw-Hill.
Email me at bullishonbooks@cnbc.com — And follow me on Twitter @BullishonBooks
