Momentum Monday – Poker, Investing, and Positive Expectancy….and Why I Continue to Bet Big on Web Video

I will be in Vegas on Thursday talking to some Canadian entrepreneurs and also meeting up with a great Stocktwits contributor Mercenary Jack for the first time. Seeing I will be in Vegas…let’s delve into a little poker.

Mercenary Jack loves to talk about poker and investing. Here are some good links from his blog to bookmark. This is his favorite pice on poker and investing.

Why bring all this up today? Read this great quote from the link above:

The point of forecasting is not to attempt illusory certainty, but to identify the full range of possible outcomes. Try as one might, when one looks into the future, there is no such thing as “complete” information, much less a “complete” forecast. As a consequence, I have found that the fastest way to an effective forecast is often through a sequence of lousy forecasts. Instead of withholding judgment until an exhaustive search for data is complete, I will force myself to make a tentative forecast based on the information available, and then systematically tear it apart, using the insights gained to guide my search for further indicators and information. Iterate the process a few times, and it is surprising how quickly one can get to a useful forecast.

Since the mid-1980s, my mantra for this process is “strong opinions, weakly held.” Allow your intuition to guide you to a conclusion, no matter how imperfect — this is the “strong opinion” part. Then –and this is the “weakly held” part– prove yourself wrong. Engage in creative doubt. Look for information that doesn’t fit, or indicators that pointing in an entirely different direction. Eventually your intuition will kick in and a new hypothesis will emerge out of the rubble, ready to be ruthlessly torn apart once again. You will be surprised by how quickly the sequence of faulty forecasts will deliver you to a useful result.

This process is equally useful for evaluating an already-final forecast in the face of new information. It sensitizes one to the weak signals of changes coming over the horizon and keeps the hapless forecaster from becoming so attached to their model that reality intrudes too late to make a difference.

More generally, “strong opinions weakly held” is often a useful default perspective to adopt in the face of any issue fraught with high levels of uncertainty, whether one is venturing a forecast or not. Try it at a cocktail party the next time a controversial topic comes up; it is an elegant way to discover new insights — and duck that tedious bore who loudly knows nothing but won’t change their mind!

Let’s take a look at a chart being passed around a lot on Stocktwits. There are thousands of charts shared and passed around Stocktwits each day. A handful get a lot of traction. This one stands out for me:


The chart only goes back 6 years, but I can dram some conclusions:

1. Large, sharp spikes in the $VIX Volatitility have been historically great buying opportunities if you have a one year horizon.

2. Really Low $VIX Volatility has been the norm since 2009.

So, as much as I want to be a hero and say this gap ‘WILL’ close and get out of the market, I only really feel sure about the opposite, buying ‘Spikes’ in the $VIX volatility and enjoying as best as I can the widening gaps and take my profits along the way.

It seems like the hedge funds today have been reading that gap between the $VIX Volatility and the S&P (blue line) and betting that the spread will close. This has led to massive underperformace. It may be why the spread just keeps widening.

It ‘feels’ to me like the gap should and will close again (probably soon), but I have no idea when to expect it. Especially from this one chart. Based on this ‘feeling’ and looking at this chart, I expect to get crushed when the gap closes, but since I do not know when, I will do my best to stay long (within my risk comfort zone) and let the market take me out.

This brings me to bigger bets/investments, like the ones we have made since 2006 in Web Video. Web Video is a category where I feel I have an edge and if you read the poker posts, you will know what I am talking about.

I have participated as a user and investor in the early stage web video for a long time, I see a lot of startups and entrepreneurs pitching these deals early and am enthused to see as much as possible, and I believe that based on the actions of the leaders ($GOOG $$CTXS $MSFT(skype) $CSCO) and following certain investors and trends that a larger bet has been in order.

I have chronicled it along the way on this blog.

Which brings me to SQWIGGLE and today’s ‘Momentum Monday’ with Eric one of the cofounders. The product is awesome, it is being dragged through this giant hole that Skype and Google Hangouts are creating in the video communications world and it has huge ramifications on many mega cap stocks which I discuss at the end of today’s show. I hope you enjoy it.