No Use Working Against the Odds

 | Jul 03, 2014 | 11:10 AM EDT  | Comments
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There are playbooks in this business the way there are playbooks in the NFL. When you are third and inches, you just might want to run the ball. When you are third and 10, you just might want to pass it.

When you get a strong employment number with low inflation, you just might want to own consumer cyclicals with good leverage from top-line growth. You might want to sell some of the strong utilities that don't have a lot of growth.

Now, you can pass on third and inches. There might be a big opening for a 10-year run when you are third and nine. Sometimes you can catch the defense off-guard. But the playbook says you shouldn't do it because the percentages are against you.

My recommendations today are to sell some of the fixed income that so many are in, including the junk bonds, and to move into some equities that have exposure to broad economic growth or an expansion of net interest margin -- e.g., the banks. These recommendations are based on that exact same kind of reasoning.

Alternatively, let's go to blackjack. When the dealer has a 16, you are usually sitting pretty, because he or she is likely to bust. Sure, if you count cards and know there are no face cards left, you may have to take a card on a 14. But that's like sticking with the utes at these levels. It can win, but it historically has not.

Or let's do baseball. Why do most players not get the green light in a 3-0 situation? Because, historically, it hasn't been a winning strategy. There are times, special situations, where you get green-lighted. We feel green-lighted to own Johnson & Johnson (JNJ), which is a total 3-0 swing situation.

But the playbook should be obeyed, and the playbook says to go for more leverage to domestic and worldwide growth after this employment number. I spent a whole chapter in Get Rich Carefully going over this exact playbook after truly exhaustive research about what has worked most of the time, and what hasn't.

Sadly, due to the democratization of critics, on places like Twitter these moments are all but impossible to reason with. That's because my view is being considered to be "leading lambs to slaughter, high momentum come in at the highs" illogic. What I am trying to do is get people out of what has traditionally slaughtered investors at these fulcrum levels, and to get them into what historically has worked, provided the fundamentals at the individual company are good.

Could I be wrong? I think a better way to look at it is to say, "If I play the odds, can I be wrong?" The answer is, that's always a possibility. But it is a lower-probability possibility, and not a "strategy," so to speak. If your strategy is to hit on 17 when the dealer has a 16 and you have drawn nothing but fours and threes and twos, I say, fantastic. You stick with that strategy. I want you to win. I want everyone to win. That's why I focus on the unemotional probabilities, as they win more often than not.

It simply isn't guesswork.

It's analysis.

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