Irrational Investing – Profiting from Behaviors and Fundamentals

Breaking news. How does the exponential scale of data impact investing opportunities?

Screen Shot 2014-09-04 at 3.23.35 PM Screen Shot 2014-09-04 at 3.23.41 PM Screen Shot 2014-09-04 at 3.29.28 PMScreen Shot 2014-09-04 at 3.30.59 PM

Does this mean shorting the Euro or Pound? Exit equities on markets? Wait for nothing to happen. With billions of people with access to mobile phones and social networks, data proliferation today has lead to the opportunity to connect the disconnected. Connect open data and fundamentals that create behavioral  change and wrap algorithms around the same to create a market profit opportunity, that sustains on basics.

In 2008 when the stock market crashed in October 6th, the Dow fell almost 1,900 points, over 18%.   Why did the markets crash? Fundamentals? Behavior? Or both?

Both! Fundamentals were weak on the majority of assets, that had high inventory holding, low stock turns, high cash conversion cycles, low GM/Stock turn, high gearing ratios and behavior value of stock (read as PE) that did not reflect any fundamental. Why did the happen? Fundamentals and liability behaviors.

Folks who did not have the capability to pay for inventory were given access to capital for assets to buy homes that their time did not turn at the pace of the capital borrowed. This lead to a behavior that assets had suddenly increased in value that created the herd of buy-lend deals. Continue the pace and fast forward they became storms that had to finally wreak havoc on what came next. Implosion of capital, assets and most important, people’s lives. Foreclosure was the word of year(s) to follow. The rest they say is history that had taxpayer money that cost $1T!

We constantly hear about HFT, big data, analytics, models, et al. But the reality is that whether on stock exchanges or investing in multiple asset classes, the reality of all is that >99% follow the wind.  So what is Irrational Investing? Combining fundamentals + optics and then invest in the specific asset that is in the exact opposite direction of the “herd”. The two events exactly weeks apart have just the opposite behaviors and analytics. This is the opportunity.


Screen Shot 2014-09-04 at 1.26.20 PM                    Screen Shot 2014-09-04 at 12.59.23 PM

Irrational Investing is looking at Fundamentals of any asset class, whether equity, debt, real estate, etc. and combining these fundamentals with open data that when optically looked at either reflects “liability behaviors or negative news or “asset behaviors” positive news or information.

Sow what does Irrational investing do. It looks at fundamentals of a company, the profit pool presence, the inventory metrics (Stock Turns, CCC, GMROI) and then links “liability” or “asset” behaviors. This then combines the current fundamentals + optics and then invest in the specific asset that is in the exact opposite direction of the “herd”.

Screen Shot 2014-09-04 at 1.02.47 PM             Screen Shot 2014-09-04 at 1.04.17 PM

Screen Shot 2014-09-04 at 1.02.59 PM              Screen Shot 2014-09-04 at 1.04.12 PM http://www.usnews.com/news/business/articles/2014/08/03/asian-stocks-boosted-by-us-jobs-data                                                                                                      http://www.reuters.com/finance/markets

Looking at Google trends and mapping open source information or intelligence (OSINT) to fundamentals, the trends are clear. Adding a layer of algorithms that map Fundamentals + Behavior, we have an Irrational Investing engine.*

Screen Shot 2014-09-04 at 1.09.09 PM Screen Shot 2014-09-04 at 1.10.00 PM

Screen Shot 2014-09-04 at 1.10.21 PM

As you can witness events that occur evert minute, day, week or month constantly alter behaviors of investors across asset classes where greater than 90% plus of the time lead to losses. This has lead to new behaviors of being ahead of a buy-sell behavior where the perceived leverage is dx/dt, or time in milliseconds or microseconds.

Screen Shot 2014-09-04 at 1.17.31 PM   Screen Shot 2014-09-04 at 1.18.41 PM


‘Flash Boys’ startup IEX is one step closer to becoming a new stock exchange



Documenting our work around behaviors we are able to leverage our analytics linking fundamentals and behaviors and mapping profit and loss making opportunities. Simple screen shots from Google finance that link prices with events that occur are a very good indicator.

Screen Shot 2014-09-04 at 12.03.15 PM Screen Shot 2014-09-04 at 12.03.54 PM Screen Shot 2014-09-04 at 12.04.30 PM Screen Shot 2014-09-04 at 12.06.38 PM Screen Shot 2014-09-04 at 12.07.18 PM

What our analysis reveals is irrationality is increasing with the ubiquity of tech.  A simple example is fundamentals that are strong in a company (the way we created our analytical framework) based on changing news and stock prices (investor behavior) reacting and quite the opposite. Both reflecting irrationality, that has and only exploding exponentially with time.

Screen Shot 2014-09-04 at 12.18.55 PM Screen Shot 2014-09-04 at 12.57.39 PM

The brilliant work of Dan Kahneman, Amos Tversky, Dan Ariely, Sendhil Mulianathan and other pioneers of behavioral economics & finance have been of incredible fundamental value to what goes around us in our every day lives. Daniel Kahneman and Amos Tversky wrote “Prospect theory: An Analysis of Decision under Risk” in 1979 which laid the foundation of how psychological behavior and it’s impact on economics in decision making was a critical causal behavior.  This was seminal.

However it is clear that if everyone of us were rational in every market there would be no chaos on the roads, stock markets, contracts, products we buy, homes we fill with things, the food we eat, etc. The list goes on.

“In economics, the invisible hand of the market is a metaphor used by Adam Smith to describe the self-regulating behavior of the marketplace. Individuals can make profit, and maximize it without the need for government intervention.”

Screen Shot 2014-05-14 at 12.39.53 AM

Why is behavior such as critical pivot to look at? People. It is clear that people are #PredictablyIrrational.

#PredictablyIrrationality is the visible hand of economics as a behavior and that over 99% of the masses demonstrate this behavior. It is this very premise that has the opportunity to create value, disrupt value, transfer value or simple implode value ( most of the time). And the framework that we are working on is the #BehavioralAccounting of all that goes on in the linearity.

Our focus is #circularity and #prosumption. How do we convert to algorithms that enable us turn the pyramid on its head and create new opportunities which we believe we are in the midst of. Industries are getting disrupted around the visible hand of  #PredictablyIrrationality where behaviors are disrupting the very markets that defined the basis of capitalism.

Our work is capturing fundamentals mapping it to behavioral responses and then spotting investing opportunities globally is where we see our work being implemented. While it is still work in progress, we have seen over the years and in continuos testing, the ability to connect the disconnected is where the value lies and with technology ubiquity, even more. Maybe the start of an “Irrationality Fund”!





* Specifics not documented for want of IP and work in development




Categories: Uncategorized

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s