The Game of Investing, Vol. 7
- Real Vision
- April 18, 2023
This Week…
We’re digging deeper into the art of contrarian trading and why, ultimately, bucking the trend will make you a better investor.
Our expert today is Jason Shapiro, principal of JS Trading and an “unknown market wizard” who has successfully navigated markets for over 30 years.
- “When the market loses 10%, I make 20,” says Jason. “That’s what I’m there for, but it took a lot of patience and mistakes.”
In this issue, we’ll cover 3 things:
- The risks of consensus investing.
- The power of contrarian positioning.
- And the value of understanding what is beyond our control.
Contrarian trading can be a useful tool as you build a diverse portfolio that can weather any storm.
Let’s dig in.
Welcome to The Game
The Game of Investing Newsletter…
…a bi-weekly newsletter where you learn from investing pros about how this game actually works.
Because learning about finance shouldn’t be boring.
LEVEL 1 — The Risks of Consensus Investing
When Jason moved to Chicago to trade at the Chicago Mercantile Exchange in 1999, the dot-com bubble was in full bloom.
- “It’s hard to avoid the craze when everyone else is making money,” he says. “But that’s where mistakes are made.”
As we’ve seen time and again, market momentum merely confirms our biases and sucks traders in before vicious reversals.
Rather than rushing in or constantly shorting the trend, Jason waits for the music to stop.
- “People who think they’re smarter than the market are bound to get railed,” says Jason. “We all have the option to only take trades that we believe in.”
When Jason doesn’t see a trade, he uses his time “on the sidelines” as an opportunity to research ways to profit from the next sea change.
Level 2 — The Power of Positioning
Jason applies the same contrarian approach — searching for “overstretched, consensus positions” and taking bets against them — to any asset he’s trading.
- “You’ll make money consensus trading sometimes, but you’ll lose money over time,” says Jason. “If you’re a contrarian, you’ll lose money sometimes, but make money over time.”
The only thing that changes depending on asset class is Jason’s position sizing.
- In illiquid markets like lumber futures, he sizes down.
- In more liquid markets like the S&P 500, Jason takes on more risk.
The takeaway: Our position size and trade makeup should change depending on the asset class, time horizon, and our ultimate goal. Understanding sizing is just as important as any fundamental research or analysis.
Level 3 — Beyond Your Control
Unlike positioning, many aspects of markets are beyond our control. Understanding that is the first step to finding longevity in markets.
You might think you have a firm grasp of markets, but what happens when the only cyclical macro environment you’ve ever known changes?
The ability to remain humble, coupled with learned experience, is a winning recipe.
- “Consistency is crucial,” says Jason. “Otherwise, any win is just luck… Repeating your system builds muscle memory and the confidence to repeat those results.”
✍️ Your Homework: Break out the journal. Spend the next few months tracking how an asset responds to things like volatility, macro news, and broader market developments. See if you can spot a pattern of potential entry points, failures, and trend reversals.
Next Time
Thanks for reading. In our next issue, we’ll be tackling the yield curve — how it affects global treasury markets and your portfolio.
See you then.
Have feedback on The Game of Investing? We’d love to hear it.
Just email us at essential@realvision.com to share your thoughts.
The Game of Investing Newsletter…
…a bi-weekly newsletter where you learn from investing pros about how this game actually works.
Because learning about finance shouldn’t be boring.