Turn Trivia into Your Gold

One of my favorite Wall Street stories is how the human greed in securitization of subprime mortgages caused the 2008 financial crisis. The book The Big Short describes it in what we now know but always fail to recognize then: A major event can always start small and go unrecognized. Smart investing is about identifying such seemingly trivial but influential facts and trends and profit from them with the right timing.

The economics are full of trivia. History also sometimes repeats itself, but never in the same way. You must have sharp eyes/ears to separate opportunities from noises.

How to turn trivia into gold?

Understanding market/stock-moving news and events requires greater sensitivity and judgment. Sensitivity means you can capture details that can truly move the market. Judgment helps you make the right bets that earn you greater rewards. So, what to watch for?

1. Regulatory and Legal: legislation, legal proceedings, decisions on patents or approval, etc. Some can have an immediate impact, but many others either have a long “incubation” period before their impact moves market, or can cause a 2nd-wave, or 3rd-wave impact on sectors and companies that are farther away from the current “eye of storm.”

2. Demand-Related: factors that cause demand to drop–these can be demographic shifts, macroeconomic factors (e.g., inflation), competition, quality, price being too high, new replacement options, or negative incidents that kill consumer’s appetite to continue buying products and services from the company (e.g., recall)

3. Supply-Related: positive or negative factors that impact a business’ ability to meet market demand. There can be logistical disruptions due to outside factors, raw supply shortage, price increase of major ingredients, worsening labor problem, supply chain efficiency gain, etc.

4. The Wildcards: Politics, Talents, Corporate Governance, and the "Grey Rhino/Black Swan" Events: Geopolitical events, the appointment and departure of major executives, or major acquisitions and mergers could change the dynamics of the market structure and cause ripple effect on companies not directly involved in these turbulences.

These factors, sometimes acting alone or in combined fashion, can be movers and shakers of a sector or a stock. I focus on those more subtle/long-brewing events that escape market’s attention. These gaps are our trivia, and your gold.