In school, statistics and probability were my favorite subjects. (Yes, I was thatstudent.) I couldn’t do much with trigonometry or algebra, but I loved odds.
In a prior issue of Hidden Profits, I relayed to readers the story of my first gambling experience. My Dad was so proud of me when I won the first horse race I ever bet on and decided to keep the cash rather than get my favorite jockey to autograph the back of my ticket.
That day started a life of laying some money on the line in anticipation of a payoff. For me, making a bet is just a way to take an advantage of a situation where the odds are in your favor. I didn’t use betting as a way to express any sort of emotion.
There’s little room for emotion when there’s money on the line!
Horse racing also launched my career in the stock market. Back in college, my Mom sent me about $200 a month for beer (even though I wasn’t old enough to drink) and the occasional meal away from the school cafeteria.
But I didn’t use the money for that. I went to the track. (Sorry, Mom!)
Just a few miles from campus was a dog track that also broadcast horse races. I blew off joining a fraternity and planned my classes around trips to the track where I parlayed $200 into much bigger sums.
While most everyone else was sleeping off a raging hangover from the night before, I was attending the very first classes in the morning. I scheduled time between classes to study my notes and usually finished up not long after lunchtime. As a result of not missing any classes and reviewing my notes daily, I never had to cram for an exam of any type.
I didn’t read books either. I took the book money and bet that too. (Mom, please remember that I am a happy and successful adult.)
I consistently grinded out a profit. Mostly, I bet the first three or four races in California and then headed back to campus to have dinner. My biggest day was the Breeders’ Cup in 1995. The Breeders’ Cup is the Super Bowl of racing. The very best horses race, and often with big fields. Lesser-known horses from Europe sometimes have attractive odds. Big payoffs are fairly common.
I won every race, including bets called exactas and trifectas that paid in the thousands of dollars. It was an epic day where everything went right and the payoffs were huge.
It was also my birthday. So, I capped it off with a great Italian meal and some fancy wine with my roommate. I still wasn’t old enough to drink, but this was Little Italy, no one asked any questions.
Worried that my Mom would wonder why I had a massive bankroll of cash, I gave it to my Dad and then opened a brokerage account and invested in the market.
That’s how I got my start in stocks.
Beating the odds led me to create some software to track the quality of earnings and accounting of public companies. Both in testing and in real time, my Forensic Accounting Stock Tracker (FAST) system has handily beaten the market and is statistically significant.
While I designed it for stocks to focus on as a short seller, the outperformance has been more pronounced buying stocks long.
My insights came from my No. 1 strategy for finding an edge in the public markets. I used to lock myself in an office for three to four days at a time and search SEC documents in a legal database looking for a needle in a haystack.
It’s tough, grinding work. You don’t need to be talented or very smart. You do need to be patient.
The truth is I know from experience that the overwhelming majority of investment professionals do not read the financial disclosures that are publicly available for anyone to see. I developed nearly three dozen searches to catch a company with their hands in the cookie jar. Many of those insights are built into the software.
And it’s paid off for members of my Hidden Profits research service. As of mid-September, nine of the 10 closed positions have been profitable, for an average return of 26.6% with a holding period of much less than a year.
I’m especially excited about October’s Hidden Profits recommendation. It’s a stock I once recommended to major hedge funds to short, and ultimately the stock cratered under the weight of poor fundamentals. Clients made a tidy profit.
I got it right that time… and I’m confident I will again.
I hadn’t followed the stock in many years until recently it popped up on my screens as a potential juicy long position. Just like in gambling, there’s no room for emotion in the stock market business.
What was once a compelling short idea could be the buy of a lifetime if the conditions are right.
Today, the company has a truly hidden asset that it acquired at a bargain price. The potential for 30% to 100% upside in the near-term is real and significant.
And what’s more, a recent catalyst (with the full support of President Trump) could help it run much higher in the coming years.